Paying £2880 into pension when retired

saver861

Linton wrote: »

Yes but you have more remaining in your drawdown pot than otherwise so there is a net gain.

Yes it would be marginal tho. In other words, if you don't take untaxed £2700 from drawdown but instead take it from the SIPP to get the £720 benefit, when you do eventually take it from the drawdown it will be taxed.

nxdmsandkaskdjaqd

As the OP on this thread I thought I would check my understanding of the rules and procedures for this.

So I am 60, just transferred my company pension to a SIPP with HL, plan to live of cash till State Pension age and have no other sources of income.

So for me, deposit £2880 into the SIPP and allow it to gross up £3600.

Then withdraw £11000 (tax year 16/17) using UFPLS and transfer this to my ISA, this being the most tax efficient wrapper.

Is this the most tax efficient method for me?

bowlhead99

nxdmsandkaskdjaqd wrote: »

So I am 60, just transferred my company pension to a SIPP with HL, plan to live of cash till State Pension age and have no other sources of income.

So for me, deposit £2880 into the SIPP and allow it to gross up £3600.

Then withdraw £11000 (tax year 16/17) using UFPLS and transfer this to my ISA, this being the most tax efficient wrapper.

Is this the most tax efficient method for me?

Assuming the fact that you don't currently have any other sources of income also means you have had no earned income since 6 April 2016 and therefore do really have a full £11,000 of annual personal allowance for 2016/17 which the SIPP drawdown would fit into... and you have not made any pension contributions at all since 6 April 2016 so you do have a full £2880 of pension contribution allowance... then yes , it works.

However, remember that when you draw money out of a pension you can take 25% tax free and 75% taxable. So if you have not already crystallised the SIPP and taken the 25% from it, then when you draw this year's slice of income you will effectively be taking an Uncrystallised Funds Pension Lump Sum, of which 25% is tax free and 75% taxable.

This means you can actually tell your pension provider to give you not just £11,000 now, but £14,666. This gives you £3666.50 tax free lump sum, and £10,999.50 of taxable income to use up the 2016/17 personal allowance.

Putting it all immediately into an S&S ISA allows you to keep the £14666 invested in the same type of assets it was invested in within the pension, but safe in the knowledge that there will be no further tax on it no matter what growth or income you achieve.

You can keep pulling the £14666k out of the SIPP in that way and reinvesting in an ISA in each future tax year without paying any tax, until you start taking state pension or any work pension or part time jobs or other things that use up your personal allowance and restrict the space to take SIPP drawdowns entirely tax free.

As a 'heads up' for your planning, for the 17/18 tax year the £11,000 goes up to £11,500 so you will be able to get more taxable income and can draw £15333 of which 25% tax free and £11,499.75 taxable. The annual ISA allowance will be £20,000 by that point so plenty of space.

Obviously keep paying in the annual £2880 net to the SIPP in 2017/18 and later years to get the £720 free gross-up, that figure has been same for a while and isn't currently slated to go up.

k6chris

bowlhead99 wrote: »

As a heads up for your planning, for the 17/18 tax year the £11,000 goes up to £11,500 so you will be able to get more taxable income and can draw £15333 of which 25% tax free and £11,499.75 taxable.

So if I have this correctly too (insert sound of another penny dropping) then for someone with no other income, from tax year 17/18 you could drawdown £15,333 from a SIPP (£1,277 pm), using UFPLS and in effect pay no tax on that. Anything above that from the SIPP would be taxable on the 75% and tax free on the 25%, so (assuming you remain a basic rate tax payer) the net additional tax would be 15% (on the amount above £15,333 pa). The implication of this (that sound again) is that a SIPP and UFPLS is VERY tax efficient for modest pensions, especially if you have been receiving 40% tax benefit on the way in?

saver861

k6chris wrote: »

So if I have this correctly too (insert sound of another penny dropping) then for someone with no other income, from tax year 17/18 you could drawdown £15,333 from a SIPP (£1,277 pm), using UFPLS and in effect pay no tax on that. Anything above that from the SIPP would be taxable on the 75% and tax free on the 25%, so (assuming you remain a basic rate tax payer) the net additional tax would be 15% (on the amount above £15,333 pa). The implication of this (that sound again) is that a SIPP and UFPLS is VERY tax efficient for modest pensions, especially if you have been receiving 40% tax benefit on the way in?

With UFPLS each drawdown amount is treated as 25% tax free with the rest taxable. So any residue left in the SIPP above the £15,333 would be treated as 25% tax free and remainder taxable.

Best way of doing it to spread over a period of time.

nxdmsandkaskdjaqd

bowlhead99 wrote: »

As a 'heads up' for your planning, for the 17/18 tax year the £11,000 goes up to £11,500 so you will be able to get more taxable income and can draw £15333 of which 25% tax free and £11,499.75 taxable.

Thank you for your detailed reply.

Just to confirm as I am living of cash for the next 7 years the SIPP will remain uncrystallised and no tax free lump sum has been taken from the pension.

So for next tax year I will deposit £2880 into the SIPP and allow it to gross up £3600. Then withdraw £15333 which will all be tax free because my personal tax allowance is £11500 (£15333 of which 25% tax free and £11,499.75 taxable).

I think I have this right, but would just seek your confirmation.

Thank you

juju17

I have read and re-read this thread trying to get my head around this, and think i have understood correctly. I appreciate all the posts, as this is not an area I have known much about, so it has been very interesting.
I would appreciate someone confirming I have this correct please.
My only income is from my civil service pension which I received early due to ill health retirement.
So, I can put £2880 into the sipp, the HMRC add £720. When I am 55 next year, I can then take out 25% tax free each year, plus the difference between what I receive from my pension and the personal allowance of £11000....correct?
Thanks

roxy28

bowlhead99 wrote: »

In your Dad's situation he should try to create and draw enough pension income to keep using up the full £11,000 personal allowance (which increases to 11,500 in April, which might give him a bit more space on top of the work pension, if the other pension doesn't increase as much by as much as £500).

Beyond that, there is scope to make some more free money, but some tax is inevitable - 25% of the money which you end up with in a pension can come out tax free but the rest will be taxable to the extent it can't fit into his annual personal allowance.

So how it works is:

When he gets the £3600 in his pension (from paying in the maximum £2880 and getting the £720 free gross-up) he will be able to take out 25% entirely tax free, which is £900.

Then the remaining £2700 out of the £3600 is classed as new pension income and would be potentially taxable, depending on whether it fits inside his annual allowance.

His annual allowance is £11,000 so after getting his work pension he has £1000 of space to take some of the £2700 new taxable pension money. It would leave him with £1700 that couldn't fit into the annual allowance.

As a little aside at this point, the £1200 interest income - which always sits 'on top' of the earned income and pension income - will no longer fall into the annual allowance because now the new pension income is using that space. But that's fine, because on top of his £11k personal allowance there is a nice fat band of special tax rate for interest income for low earners: the starting rate of tax on interest income is 0%. So no tax to pay on the interest (even ignoring the fact that everyone gets a £1000 tax free interest allowance if they're below the 40% tax threshold...)

So, getting back on track, we said he would have £1000 of the new £2700 taxable pension fit into the annual £11k personal allowance, and another £1700 that doesn't fit. The £1700 is taxed just like employment income or other pension income, i.e. it doesn't qualify for the special 0% rate for interest income on low earners. He would pay 20% on this £1700.

20% tax on the £1700 is £340. Effectively he gets given £720 free by the government inside his pension pot, but when he withdraws it later that year he only pays £340 of tax when he takes it out. Nice work if you can get it.

Of course, getting out ALL of the money this tax year to access the full (£720-£340) of profit would require closing the account he just opened. As that will incur fees, and he doesn't need more than £1000 of taxable income on top of his work pension to utilise the rest of his annual allowance, if he doesn't need the money for something else he could just leave most of it invested in the pension for now, and just draw out say £1300 in March (25% tax free, remaining £975 fitting neatly inside his 2016/17 personal allowance).

He could draw another £1300 out after April to use up the capacity in his 2017/18 allowance. Then with the two lots of £1300 received tax-free back into his bank account, and £1000 still in the pension, he'd almost be able to afford another full £2880 contribution for the 2017/18 tax year, which would get turned into a fresh £3600 and sit alongside the remaining £1000 undrawn from earlier. So, £4600 at that point.

Invested sensibly that £4600 would allow £1200 to be drawn out tax free in each of the next three tax years (i.e. 2018/19, 19/20, 20/21) by using up the 'spare' space in his personal allowance. Alternatively he could take out the whole balance (taxable) at any point (less account closure fees), or just take out enough of it to help with ongoing new contributions of £2880 going back in again. Lots of options and few restrictions other than some simple rules and some tax rates and allowances to keep an eye on.

Thanks for the detailed reply. There is a lot to look over and some will find it very easy to follow, but still a bit confusing for me and dad to follow. Will keep going over the post. Thanks again.

saver861

nxdmsandkaskdjaqd wrote: »

Just to confirm as I am living of cash for the next 7 years the SIPP will remain uncrystallised and no tax free lump sum has been taken from the pension.

With UFPLS - 25% of each withdrawal is the lump sum part. So you are taking a portion of the 25% tax free lump sum each time.

nxdmsandkaskdjaqd wrote: »

So for next tax year I will deposit £2880 into the SIPP and allow it to gross up £3600. Then withdraw £15333 which will all be tax free because my personal tax allowance is £11500 (£15333 of which 25% tax free and £11,499.75 taxable).

Yes - though as you have paid in £2880 to gain the £720 tax relief, the £15,333 includes that £2880. In other words, you are drawing down £12,453 extra monies.

saver861

OK - so I have an income of say £5000. I am over 55.

My personal tax allowance is £11,500 in April 17.

I'm not using £7,500 of my allowance.

If I'm not working I can pay £2880 into a SIPP - the Gov will pay and extra £720 tax (usually within two months) - totalling £3600.

I can then withdraw that £3600 - as UFPLS - i.e. 25% tax free i.e. £900 and remaining £2700 taxable. But as I have not reached my PA of £11500 I dont pay tax on any of it. Effectively I have gained £720 for nothing.

Remember 25% is tax free so you can ignore that for any withdrawals. If you want to maximise for tax efficiency, then next year £15,333 would give you 25% tax free lump sum of £3833. Remaining amount is £11,499 which is taxable but inside your PA so you pay no tax - assuming you have no other taxable income.