Is a sipp ok for me.

SeeMe

Age 62 retired with small 10k pension, none taxpayer.
Most of my savings are in cash ie isa, current accounts, and have around 18k in s&s ISA with the VLS40 fund.

I am quite cautious so do not feel like adding anymore if i am honest to the VLS40.
I know cash in isa will be eroded over time but i cant get past that at the minute.
Does it make any sense to put £2880 in a sipp and have it topped up to £3600 and keep it in cash?
My fault but also have a mortgage for life (rent) so any help appreciated.

Dazed_and_confused

Depending on the exact amount of your existing pension you may see quite a good benefit as you would be able to take (ignoring the 25% tax free lump sum) up to £1500 from the sipp without your total income exceeding your personal allowance in this current tax year (£11500).

So 20% tax relief paying in and (potentially) no tax to pay taking the money out

kidmugsy

SeeMe wrote: »

Age 62 retired with small 10k pension, none taxpayer.
Most of my savings are in cash ie isa, current accounts, and have around 18k in s&s ISA with the VLS40 fund.

I am quite cautious so do not feel like adding anymore if i am honest to the VLS40.
I know cash in isa will be eroded over time but i cant get past that at the minute.
Does it make any sense to put £2880 in a sipp and have it topped up to £3600 and keep it in cash?

You could do the following.

Contribute £2880, and wait a couple of months until HMRC have paid their £720 tax relief to your provider. Withdraw £900 tax-free lump sum and £1500 tax-exposed drawdown. The latter will be taxed at an emergency rate; you'll phone HMRC and they'll refund the tax.

(Some people suggest you can avoid this fuss by making a small drawdown at first (say £100) and then withdrawing the other £1400 once your provider has received your non-emergency tax code from HMRC.)

This leaves you with £1200 in the SIPP. Now you could invest it in the VLS40 fund and simultaneously sell £960 of that fund in your S&S ISA, and withdraw it. (£960 because that's the after-tax value of the £1200 in the SIPP when you draw it down some day in the future.)

So you've spent £2880 and received £900 + £1,500 + £960 =£3,360 while the VLS40 in the SIPP balances the reduction in VLS40 in the ISA. So, a profit of £480, less any costs involved (which I'd expect to be small). You will be able to make a larger profit in future years if the Personal Allowance against income tax grows faster than your pension. And the "risk profile" of your investments hasn't changed at all.

This procedure will become much less profitable once your State Pension begins.

The other thing you could consider is switching your cash around to try to earn maximum interest. It's tedious but doesn't involve worrying about the stock market.

SeeMe

Dazed_and_confused wrote: »

Depending on the exact amount of your existing pension you may see quite a good benefit as you would be able to take (ignoring the 25% tax free lump sum) up to £1500 from the sipp without your total income exceeding your personal allowance in this current tax year (£11500).

So 20% tax relief paying in and (potentially) no tax to pay taking the money out

Pension is just 10k+ £2 no more, also SP forecast is £144 having been contracted out for a number of years, so i can buy a few more years to up the SP which i will do.
As i mentioned its the rent which will always eat into my income going forward, and living in the north i could buy a flat or small house but most of my savings would go, although i would love to get away from where i am now.
Thanks

SeeMe

kidmugsy wrote: »

You could do the following.

Contribute £2880, and wait a couple of months until HMRC have paid their £720 tax relief to your provider. Withdraw £900 tax-free lump sum and £1500 tax-exposed drawdown. The latter will be taxed at an emergency rate; you'll phone HMRC and they'll refund the tax.

(Some people suggest you can avoid this fuss by making a small drawdown at first (say £100) and then withdrawing the other £1400 once your provider has received your non-emergency tax code from HMRC.)

This leaves you with £1200 in the SIPP. Now you could invest it in the VLS40 fund and simultaneously sell £960 of that fund in your S&S ISA, and withdraw it. (£960 because that's the after-tax value of the £1200 in the SIPP when you draw it down some day in the future.)

So you've spent £2880 and received £900 + £1,500 + £960 =£3,360 while the VLS40 in the SIPP balances the reduction in VLS40 in the ISA. So, a profit of £480, less any costs involved (which I'd expect to be small). You will be able to make a larger profit in future years if the Personal Allowance against income tax grows faster than your pension. And the "risk profile" of your investments hasn't changed at all.

This procedure will become much less profitable once your State Pension begins.

The other thing you could consider is switching your cash around to try to earn maximum interest. It's tedious but doesn't involve worrying about the stock market.

I will look over this post slowly so i can take it all in.

Thanks.

stoozie1

Fidelity add your tax relief next day.

Ed-1

stoozie1 wrote: »

Fidelity add your tax relief next day.

Aviva add it same day.

kidmugsy

Do Aviva and Fidelity allow investment in VLS40?

kidmugsy

SeeMe wrote: »

As i mentioned its the rent which will always eat into my income going forward, and living in the north i could buy a flat or small house but most of my savings would go, although i would love to get away from where i am now.

Would anyone give you a mortgage for house buying? You can now find mortgages that run to age 85, and generally speaking borrowing is historically cheap at the moment. Once your SRP begins you would presumably find it fairly easy to repay the loan.

if nobody would give you a mortgage now, perhaps they would once your SRP has begun.

SeeMe

kidmugsy wrote: »

Would anyone give you a mortgage for house buying? You can now find mortgages that run to age 85, and generally speaking borrowing is historically cheap at the moment. Once your SRP begins you would presumably find it fairly easy to repay the loan.

if nobody would give you a mortgage now, perhaps they would once your SRP has begun.

Thats an idea i thought of just a few weeks ago, so you have read my mind there lol, so i will look a bit deeper into this, maybe its not so easy but i will try to get hold of family members to see if they can suggest things along these lines.

Thanks again.

kidmugsy

SeeMe wrote: »

I will look over this post slowly so i can take it all in. Thanks.

I've thought of two possible refinements/simplifications.

A: avoid the trading costs for VLS40 as follows.

(i) Choose a provider who will charge only a little for your closing a pension soon after opening it (or you could even leave some minimal sum behind and thus not close it). You could ask for suggestions on this board for suitable providers.

(ii) Contribute the £2880 as discussed and wait a couple of months. Then as discussed withdraw a £100. Then once they've received the right tax code for you withdraw all the rest, closing the pension (or even leaving some minimal sum behind and thus not closing it).

You should receive £900 tax-free, £1500 tax-exposed drawdown taxed at 0%, and the rest - £1200 - taxed at 20%.

So your profit = £900 + £1500 + 1200 x 0.8 - £2880 = £480.

In other words your profit is unchanged but you will have avoided the charges for buying and selling VLS40. Would that save you money compared to any charge for closing the pension? You must do the sums.


B: here is what I think I'd fancy in your shoes.

(i) Year 1, do what I suggested in my earlier post: Contribute £2880, and wait a couple of months until HMRC have paid their £720 tax relief to your provider. Withdraw £900 tax-free lump sum and make a small drawdown at first (say £100) and then drawdown the other £1400 once your provider has received your non-emergency tax code from HMRC.)

This leaves you with £1200 in the SIPP to invest in the VLS40 fund [actually I'd leave a small sum as cash, say £20, to cover any charges that will arise over the year. You can check for yourself how much cash to leave]. I'd simultaneously sell about £960 of that fund in your S&S ISA, and withdraw it. (£960 because that's the after-tax value of the £1200 in the SIPP when you draw it down some day in the future.)

(ii) Year 2 and subsequently: contribute another £2880 and wait a couple of months. Then as discussed withdraw a £100. Then once they've received the non-emergency tax code for you withdraw all the rest, except for the £1200 left in VLS40 from year 1, and, say, £20 or whatever to cover you for charges during the year.


The point of Refinement B is that you could use it with the provider I am familiar with, Hargreaves Lansdown, whose service is excellent and whose charges are OK for small SIPPs. As long as you leave behind more than £1000 (I think it is) you won't have to pay charges for closing the SIPP. Note that after year1 you are avoiding the buying and selling costs for VLS40.

Other people might be prepared to suggest other providers but our SIPPs are with HL so I am not personally familiar with the others.