Paying £2880 into pension when retired

fifeken

I'm in the process of planning my first shot at this for the start of the next financial year. From what I've read here I planned to open a Virgin Sipp with £2,880 on April 6th, wait until it's topped up and take £300 out monthly.
From reading the Ts and Cs it appears Virgin don't allow that and I must withdraw it all at once, which is OK as I'll put it in a separate account and drip feed my living expenses account at £300 per month.
Can anyone who is familiar with it go over the process and what to look out for?

Audaxer

fifeken wrote: »

I'm in the process of planning my first shot at this for the start of the next financial year. From what I've read here I planned to open a Virgin Sipp with £2,880 on April 6th, wait until it's topped up and take £300 out monthly.
From reading the Ts and Cs it appears Virgin don't allow that and I must withdraw it all at once, which is OK as I'll put it in a separate account and drip feed my living expenses account at £300 per month.
Can anyone who is familiar with it go over the process and what to look out for?

Why are you restricting yourself to using Virgin? They are costly and not usually recommended on here for investing in their S&S ISAs, so it may be costly for their SIPPs as well. If you are leaving it in as cash it would be as well drawing it all out at once and putting it in a separate account that can earn interest while you pay yourself £300 per month. Hargreaves Lansdown are good for SIPPs as there are no charges for holding cash and no fees for drawing out the cash - you just need to leave £1,000 balance in it to keep the SIPP open.

fifeken

Audaxer wrote: »

Why are you restricting yourself to using Virgin? They are costly and not usually recommended on here for investing in their S&S ISAs, so it may be costly for their SIPPs as well. If you are leaving it in as cash it would be as well drawing it all out at once and putting it in a separate account that can earn interest while you pay yourself £300 per month. Hargreaves Lansdown are good for SIPPs as there are no charges for holding cash and no fees for drawing out the cash - you just need to leave £1,000 balance in it to keep the SIPP open.

I thought I'd read recommendations on here for Virgin as they only require £1 left in to keep it open, but not restricting myself if there's better options.

Drawing it all out and drip feeding as you say is my plan.

Dorian1958

This forum has helped me a lot, I can't thank you all enough for your opinions and suggestions. Hopefully an expert can answer this as I think I can take advantage of this tax break, but I don't recall seeing examples of anyone paying into a pension in the same tax year that they retire. Apologies if it has been, but it is a long thread!

A bit of background: I worked part time and "retired" (hate that word, much prefer "having a period of refocusing") and started taking a modest LGPS DB pension on 30.4.18. (I have another pension, armed forces War Pension attributable to service and therefore thankfully not taxable) and savings to bridge the gap until 66, plus a DC pension not currently in drawdown as I don't currently need it. I have checked my state pension forecast and will receive the new full state pension regardless of whether or not I make any further NI contributions. My taxable income this tax year is within my personal allowance, my tax code is 1185L - M1 (living in Scotland). So, in this tax year from my last pay slip:

Gross taxable income: 1760.76

tax paid to date: 24.13

Employee pension conts to date: 100.81

Employer pension conts to date: 353.42

AVC contributions to date: 540.00

The pension payments received from 1 May 18 until the end of the tax year will amount to: 6473.50 (strangely I paid 37.60 on my first pension payment on 15.6.18)

So, to the questions:

1. Is it worth me opening an HL Sipp with the intention of drawing it down to use up my unused tax allowance, is this even possible prior to the end of the tax year? Will the State tax top up be there in time?
2. If worth doing, how much would I be allowed to contribute given my taxable income and pension contributions already made this tax year?
3. If it is worth doing and I make the necessary contributions as calculated in Q2, How should I go about using the Sipp to make the most effective use of my personal allowance this tax year and subsequently, prior to getting my SPA at age 66 (April 2024)?

Sorry for long post, hope I have provided enough info, cheers Dorian

drumtochty

As you earned less than £3,600 gross 2018 / 2019 you can only pay in £3,600 gross / £2,880 net to your intended HL SIPP.


I assume your pension payments at work were gross and amount to 108.81 employees contibution plus £363.42 employers contribution and £540 AVC. I assume that the employers contribution does not come in to the equation unless someone knows better. Therefore you paid in £648.81 gross. That leaves a gross space of £2,951.19 gross. Net that is £2,360.95 you can contribute from your savings.


As you are earning a very small amout of money from that pension, yes it is worthwhile to put the money in and get the tax relief.


First thing on Monday sign up for a HL SIPP and pay in £2,360.95 and you will probaly get the tax refief before April, do the same on 6 April if you have the cash but pay in £2,880 that time.


Phone HL up on Monday to confirm that the employer payment from April 2018 is not counted in the £3,600 gross. Remember to leave £1,000 in the SIPP when you take the first payment in order not to get a charge for closing the SIPP.


When you crystalise the SIPP the first time that £1,000 should be left as uncrystalised but it is not a big issue.

Dorian1958

Thanks Drumtochty that is very helpful, I will do that. Hopefully I am not too late to get the tax relief before the end of the tax year.

DeepSporran

A cautionary observation for those basic rate taxpayers who use this scheme just to get the benefit of the minimum £180 balance left from subtracting the £540 extra tax paid from the £720 top-up from HMRC.


For the vast majority of basic rate taxpayers (and indeed non taxpayers), this will work just fine and the minor effort involved in setting it up will be worth it for the minimum £180 benefit.


However (and please feel free to check and dispute my calculations if I'm wrong !) for anyone who has a LOT of savings interest (more than £1000 per annum) and who benefits from the starting rate 0% band for savings interest (which can cover as much as £5000 per annum, in addition to the £1000 personal savings allowance) there could be a problem which means that your benefit is less than £180 and you could actually be worse off


An example:


BEFORE


Income from pension (state and/or other pension) : £14150
Savings Interest : £1900
Personal Tax allowance : £11850
Taxable pension income = £14150 minus £11850 = £2300
Tax due on pension income = £2300 times 20% = £460
Tax due on Savings Interest = ZERO. The excess pension income over and above the personal tax allowance has reduced the available amount of the £5000 0% band for savings interest by £2300 to £2700, but that easily covers the entire £1900 interest, so no tax is due on this.


AFTER


Income from pension (state and other pension) : £14150
Additional taxable pension income (once you ignore the £900 tax free cash) : £2700
Savings Interest : £1900
Personal Tax allowance : £11850
Taxable pension income = £14150 plus £2700 minus £11850 = £5000
Tax due on pension income = £5000 times 20% = £1000
Tax due on Savings Interest = £900 times 20% = £180


The increased excess pension income over and above the personal allowance has now reduced the available amount of the 0% band for savings interest from £5000 to zero (£5000 - £2300 - £2700 = 0), but the £1000 personal tax allowance for savings interest now covers the first £1000, leaving £900 taxable at 20%


Total tax due = £1000 plus £180 = £1180


Thus the tax due has increased from £460 to £1180 which is £720, completely wiping out the 'free' £720 uplift on your original £2880 contribution.


That's not all the bad news. In my example only £900 worth of tax-free interest started to be taxed. The extra £2700 taxable income removes £2700 of the starting band. Thus it could mean that another £2700 of your savings interest now attracts 20% tax – that's £540. So your free £180 turns into a LOSS of £360 (ie. £180 minus £540)


How likely is this problem ?


Well as I said at the start, you need a lot of savings interest. The personal savings allowance for a basic rate taxpayer is £1000, so with an interest rate of 2% (reasonable assumption for a fixed rate bond at present) you would need to have £50000 tucked away in non-ISA savings before the interest started to impinge on the 0% starting rate band. My example above, with £1900 of interest would require £95000 of savings. The worst case I think, where you lose £360 rather than make £180 would need £3700 of interest, or savings of £185000.


There will undoubtedly be a small number of people with both high levels of cash savings AND pension income low enough to be making use of the starting rate bands, and these people need to do the calculations carefully and not just assume that there's a free £180 for all basic rate taxpayers.


I'd welcome any comments, particularly if you can see an error in my calculations !

Shedman

Dorian1958 wrote: »

Thanks Drumtochty that is very helpful, I will do that. Hopefully I am not too late to get the tax relief before the end of the tax year.

If you pay it in to HL before 5 Feb the tax should be in the account on 21 March. However could be be tight getting the withdrawal paid out before end of tax year so you might want to call & speak to HL after you've made the initial deposit and clarify timings for withdrawal.

You will have to leave £1000 in to avoid 1st year closure fee anyway so as you will only be drawing out around £1950 this time you will have enough in the account to do that and have it paid in the March payment run (HL usually like instructions before 17th and pay out around 28th from recollection). The tax relief will get added back to the account when HL collect it from HMRC and that will bring the account back over the required £1000. I don't think HL would levy a closure fee in those circumstances as they know the tax relief is coming but worth checking that with them.

Dorian1958

Thanks Shedman, account now opened and info received that the tax relief will be added on or just after the 21st March. I will do as you say and speak to HL about timings for the withdrawal and mimise the possibility of account closure.

sparkiemalarkie

Hi I could do with a bit of help please.
I have £2000 left in my HL drawdown and have just contributed another £2880 for this tax year.
I still have £1700 of my personal tax allowance left for this year.


I know that I need to keep £1000 in my account for 1 year to avoid fees...
Can the new £2880 count towards the £1000 or does it have to be the initial payment?


I was looking to take out another £1600 to use up my pa.


Just noticed that my first payment into the sipp was 30/01/18
and drawdown was 07/08/18


tia


sparkie