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Tax loophole with SIPP, advice please

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Can anybody guide me with this http://www.telegraph.co.uk/finance/personalfinance/pensions/11012663/Tax-loophole-boost-your-pension-by-88pc-a-year.html
information please from the Telegraph newspaper and tell me if it can work for me. I’m not sure how to interpret it, i.e. is it ethical, acceptable, possible in reality or at least my reality. I have Googled a lot but there are several holes in my knowledge still.


First my situation, I am 56 with 2 kids and my wife is nearly 56. My wife is a part time caterer in a primary school and grosses just over £10,000/year. I am a non-tax payer as I am an amateur self- taught investor, investing in equities and funds mostly, and have strived to contain all my investments within ISA’s and a SIPP, effectively producing non-taxable income. I don’t find it easy but we do manage, so no flash lifestyle but not too terrible either. I am always looking at how to improve my portfolio to increase our income so that we can do more, holidays with kids and just basically improve our lifestyle. Most of my investments are with Hargreaves Lansdown and some are with Barclays.


So with the above article I have a few questions. I am aware of the £3600 (£2,880) and I have about £20,000 in my SIPP having put in my limit for this year but nothing at all in the last tax year.

1.
Can I still use last year’s allowance, I read somewhere about going back 3 years does that apply with my SIPP?

2.
With my wife only earning about £10,500 and so being usually under (every year) the personal allowance, is she classed as a non- tax payer or do they see her as a tax payer because of her job that doesn’t pay any tax due to not earning enough (I can hear it sounds a bit silly as I type but hopefully you get my meaning). Do I count her as only being able to contribute the same as me? I am guessing yes from looking at the rules about how much tax you pay in your job relates to what you can contribute to a SIPP so probably a silly question.

3.
Could I/is there a way to draw 2880 as a lump from my SIPP to give to my wife and still keep the rest of my SIPP running as an investment(remembering I am 56) as it is now?

4.
Could she then invest it and get the tax and withdraw it afterwards for me to do again the following year?

5.
Does anything change with the SIPP if you take money out, effectively classing it as a “pension taken” I assume or can it stay as an investment vehicle?

6.
Would taking any money from a SIPP change anything for me otherwise outside the SIPP, changing my status, i.e. I don’t think I am taking enough to affect my status as a non-tax payer only taking 2880 income,……. But

7.
For my wife I see it would take her past her personal allowance to about £13380, is this good or bad for us in any way (I am struggling here to see if I am missing anything)?

I would be really grateful for any help or guidance with this?
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Comments

  • MyOnlyPost
    MyOnlyPost Posts: 1,562 Forumite
    25% of any money your wife draws from a SIPP will be tax free, the rest will be taxable. Add together her income from work pre tax and 75% of the withdrawal amount, deduct her personal allowance and you are left with the taxable amount.

    You can give your wife 10% of your tax allowance which will increase her PA to £12,100 this year (and will back date last years if she paid any tax)

    There is a thread here which answers your questions

    https://forums.moneysavingexpert.com/discussion/5580163
    It may sometimes seem like I can't spell, I can, I just can't type
  • zagfles
    zagfles Posts: 21,495 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    This isn't a "loophole" at all, it's how tax relief on pensions works. Putting money in and taking is straight out just illustrates immediately how good the tax relief is, but putting it in and leaving it for a time (like you're "supposed" to do with pensions) is just as good, if not better.

    Watch out for the MPAA (google it) which will restrict how much you can put into a pension in the future to £4k if you take more than the tax free element out.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 29 January 2017 at 4:16PM
    1. The annual allowance is £40k per year and you can carry forward unused allowance from the last three years, oldest first. This is of no use to you because you also need sufficient qualifying, normally earned, income in the tax year of the pension contribution, or £3,600 gross if less than that. So you are restricted to £3,600 gross.

    2. She can pay in the whole £10,500 gross because this is her qualifying income and it is less than the annual allowance. She gets the tax relief anyway. How much tax you pay in your job is irrelevant unless higher rate income tax is involved.

    3. Easy, give HL a call and tell them that you want to make a "UFPLS withdrawal of £2880" and they will tell you how to do it. They will also in a letter explain to you that because you have flexibly taken taxable money from your pot your annual allowance for pension contributions is going to be reduced to £4,000 a year for the rest of your life and carry forward will no longer be allowed. Remember this for your wife, who will be hurt by it.

    4. Only if you're daft. It will reduce her limit from £10,500 gross to £4,000 gross. Instead you should withdraw £8,400 and she should pay that in, which will be grossed up to her £10,500 limit. Then she can withdraw a tax free lump sum of £2,625 and place three times as much into a flexible drawdown account. She must not use UFPLS or flexibly take any of the 75% because even a penny of that being taken will reduce her annual allowance to 4k. Repeat this until she's no longer working or you run out of money and credit, then she can start on the taxable 75% and accept the 4k limit.

    The 4k limit is called the money purchase annual allowance. It's currently 10k but the government is consulting on reducing it to 4k from 6 April 2017.

    5. As described above.

    6. You aren't taking £2,880 of income. With UFPLS you are taking 25% as a tax free lump sum and 75% as income. So only £2,160 as income.

    But you should take more to fund more for her. If this causes tax issues for you, don't use UFPLS, instead put enough of your pot into flexible drawdown so that the 25% tax free lump sum plus your remaining personal allowance band of taxable money equals the £8,400 needed for her. The unused taxable bit can be left in the drawdown account for later. The portion you don't take the 25% from will stay in the original pot.

    7. She should not take any taxable money while still working because it will trigger the 4k MPAA.

    The £3,600 each a year is nice but £3,600 for one of you and £10,500 for the other is better. :)
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    It's ethical and acceptable. Those with more money can just pay the money in and leave the 75% for later. This just lets those with lower means get the same tax benefit year by year. It's a nice bit of reducing the relief difference between the least well off and others. You can afford some of the wait until later for your wife.
  • xylophone
    xylophone Posts: 45,633 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Is your wife employed by the school/the local authority and contributing to an occupational pension scheme?

    Have you both obtained new state pension forecasts?

    https://www.gov.uk/yourstatepension?utm_source=Mail-Online&utm_medium=Partnership&utm_campaign=GTKY
  • happyhero
    happyhero Posts: 1,277 Forumite
    Part of the Furniture 500 Posts
    edited 31 January 2017 at 3:09PM
    Thank you so much for all the help, and sorry for delay getting back but been reading the long link I was given still trying to understand it all properly so have some new questions.

    If at the beginning you only take the 25% tax free part and avoid the £4000 limit being applied, can you take 25% of what is left every year as a tax free lump sum or is it a one off thing?

    Also jamesd can you explain this line
    Then she can withdraw a tax free lump sum of £2,625 and place three times as much into a flexible drawdown account.
    from number 4 to me, I understand that the £2,625 represents the 25% tax free amount but not the part about placing 3 times the amount in into a flexible drawdown, doesnt she just take the 25% and leave the rest in the SIPP to avoid the £4000 limit being applied?

    Also am I right in thinking that as soon as my wife or I take the 25% tax free part, even if we leave the rest invested that we will start getting involved with tax forms and dealing with the HMRC?
  • greenglide
    greenglide Posts: 3,301 Forumite
    Part of the Furniture Combo Breaker Hung up my suit!
    If at the beginning you only take the 25% tax free part and avoid the £4000 limit being applied, can you take 25% of what is left every year as a tax free lump sum or is it a one off thing?
    Once you take the 25% the other 75% of the pension is "crystallised" and you can't take a further 25% tax free from that. What you can do is to crystallise part of the pension so you take the 25% of that part, crystallise the 75% and leave the rest crystallised for later.
    Also am I right in thinking that as soon as my wife or I take the 25% tax free part, even if we leave the rest invested that we will start getting involved with tax forms and dealing with the HMRC?
    Why should the HMRC be bothered about a tax free payment when it is, after all, tax free? So there is not problem here. Even if there was would it be a big issue?
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    There is no involvement with HMRC just for taking a tax free lump sum.

    When you take benefits and leave some money in the pension it's normal practice for a new account to be set up. The 75% would go into that drawdown/crystallised account. This makes it easy to track how much you can still take 25% from because it's still in the original account.
  • happyhero
    happyhero Posts: 1,277 Forumite
    Part of the Furniture 500 Posts
    Quote:
    If at the beginning you only take the 25% tax free part and avoid the £4000 limit being applied, can you take 25% of what is left every year as a tax free lump sum or is it a one off thing?
    Once you take the 25% the other 75% of the pension is "crystallised" and you can't take a further 25% tax free from that. What you can do is to crystallise part of the pension so you take the 25% of that part, crystallise the 75% and leave the rest crystallised for later.

    Thank you again, so am I understanding you right here

    we start with £10,500 from which my wife takes 25% (£2,625) tax free leaving £7,875 which gets crystallised

    She can then take 25% from the £7875, so £1968.75 tax free leaving £5,906.25 in the crystallised account.

    how many times can you do that and how often, until its nearly empty?

    What if you wanted to put more money into a SIPP, would you start a new SIPP with HL, ie if she still had a salary of £10500 put in another £10,500 the second year?
  • MyOnlyPost
    MyOnlyPost Posts: 1,562 Forumite
    edited 31 January 2017 at 8:22PM
    happyhero wrote: »
    Thank you again, so am I understanding you right here

    we start with £10,500 from which my wife takes 25% (£2,625) tax free leaving £7,875 which gets crystallised

    She can then take 25% from the £7875, so £1968.75 tax free leaving £5,906.25 in the crystallised account.

    how many times can you do that and how often, until its nearly empty?

    What if you wanted to put more money into a SIPP, would you start a new SIPP with HL, ie if she still had a salary of £10500 put in another £10,500 the second year?

    I think you've got that wrong. You can take 25% of the £10,500 tax free and after that tax will always be charged on the remaining 75%. I think greenglide was saying you can crystalise a proportion of the pension (say £5,000) leaving the rest invested and take 25% and then at a later date crystalise the rest and again take 25% tax free
    It may sometimes seem like I can't spell, I can, I just can't type
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