SIPP - Too good to be true?

coyrls

jamesd wrote: »

Also ignore anyone who warns about pension lump sum recycling. An inheritance is not a pension tax free lump sum and is specifically mentioned as something that is exempt from consideration for those rules.

Don't know if you meant me but I said she should check and I made the point that the fact it was an inheritance would actually help because the additional contribution being made could be explained by the inheritance. I wasn't confusing an inheritance with a pension tax free lump sum, I was thinking about the test for increased contributions just prior to retirement.

jamesd

fairleads wrote: »

Because the op cannot get taxrelief on the the full value of the inheritance unless the earned income is of equivalent value. Therefore, in this case,the source of the income is relevant.

The earned income is £50k. The inheritance to invest is £20k. The current contributions are £12k per year. So how does that make it possible with the specific numbers we have for there to be no tax relief available for any part of the money?

jamesd

coyrls wrote: »

Don't know if you meant me but I said she should check and I made the point that the fact it was an inheritance would actually help because the additional contribution being made could be explained by the inheritance.

Sorry, I didn't mean anyone in specific on that aspect. I was just getting it in prophylactically because it's the sort of thing that often comes up when lump sums going into pensions is mentioned...

You're entirely right about the inheritance source being helpful if HMRC was to wonder about recycling of a pension commencement lump sum, if one is taken in the next five tax years or so.

jimi_man

Presumably she wouldn't get higher rate tax relief on any of it because she is already using that on £7k of her £12k contributions?

AnotherJoe

coyrls wrote: »

Don't know if you meant me but I said she should check and I made the point that the fact it was an inheritance would actually help because the additional contribution being made could be explained by the inheritance. I wasn't confusing an inheritance with a pension tax free lump sum, I was thinking about the test for increased contributions just prior to retirement.

There is no such test.

RuleTheWorld

Stick it into the works pension over however many years (three?) by removing all 40% earnings (ie increase pension contributions to this level).

Best return for least hassle.

Save the rest while it waits in TSB classic plus and other similar ones Santander 123 etc

bigadaj

RuleTheWorld wrote: »

Stick it into the works pension over however many years (three?) by removing all 40% earnings (ie increase pension contributions to this level).

Best return for least hassle.

Save the rest while it waits in TSB classic plus and other similar ones Santander 123 etc

The way the OP reads she is contributing £12k out of a £50k annual income and so there is no further 40% tax relief available. It could of course be the case that it is all employers comtribution or the £50k is after the contribution, in which case you're plan would work, however it doesn't read that way.

pjread

I must admit if it weren't for higher rate relief I'd probably find a different home for any investments, obvious one being ISA.

BR relief on way in and BR relief on way out cancels out so personally I discount it as a benefit, the lump sum is useful of course but who knows if they'll monkey around with that before we get there.

Maybe with 3 years to go the extra lump sum is worth it (20k -> 25k with BR relief, lump sum 6.25k versus 5k if you just keep it) but it's a short horizon so I wouldn't rely on investment returns to make that look any better. Or maybe if there's some salary sacrifice and NI savings to be made, crank up employer contributions that way to get a bit more out of it.

coyrls

AnotherJoe wrote: »

There is no such test.

[FONT=&quot]There is indirect recycling where “a transaction, or series of transactions, satisfies the conditions of being both pre-planned and a means of using the tax-free cash itself to significantly increase pension contributions” (http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0289) , the most clear example would be “Taking out a loan to fund increased contributions prior to, and in anticipation of, taking tax-free cash that is then used to pay off the loan” (same source). So where there are increased contributions just prior to retirement there is a test to determine if those contributions are essentially being financed by the PCLS.[/FONT]

jamesd

pjread wrote: »

BR relief on way in and BR relief on way out cancels out

There is the £1.25k gain via the tax free lump sum that you mentioned . But a concern is whether she'll still be working and making £50k a year? If so she'd end up paying 40% on the taxable portion and losing money instead of making money.