Lump sum into a pension

susieb

Partner is 56, exfirefighter, on a half pension.
Has just received a lump sum from overpayments made. He paid for 32 years, max pension is 30 years and a group took it too court and resulted in 2 years premiums being refunded.
This isnt a vast amount of money, but it was an unexpected windfall.
We havent got any plans for this and wondered if it would be possible /worth it to put into a sipp. Do you get 20% tax relief on lump sums.
I can see two advantages if so, 1, it would increase the value by 20% and due to his age could drawn down next year?
Or keep it there and in 11 years its a little bit extra pension. (He lost half due to divorce settlements)

Linton

Does your partner have any income from employment? Is he a taxpayer?

In any one tax year you can contribute up to your earned income to a pension and get tax relief. There are other limits for high earners but I assume that doesnt apply here. Note that pension income isnt classed as "earned". If you are a non tax payer you can contribute £3600 comprising £2880 from you and £720 from HMRC.

susieb

Hi thanks for your reply Linton. He does currently have income from employment, part time. He pays tax both on the pension and the earnings. Allowance is used on the pension.
However does the fact that he is intending to stop work by the end of july affect this, I'm guessing he could only then invest up to the earnings from employment from april to july, is that correct?
Spliting it over two years of lump sums would be enough at £2880 a year. But would this amount make it worthwhile due to the fees involved in setting up a sipp?

mgdavid

no fees in setting up a SIPP.
It's DIY and can be done simply and online.

kidmugsy

It's a bit of a toss-up whether it would be better to contribute to a SIPP or to put it into high interest current accounts/regular savers. He can get interest tax-free up to £1k p.a.

Has he got a decent amount in a cash emergency fund at the moment? Any debts to pay off? Any imminent large expenditures? House? Car? Any stocks-and -shares investments?

Linton

Assuming your partner is a basic rate tax payer when he stops work the benefit of using the £3500/£2880 feature comes from the tax free allowance: 20% X 25% X £3500= £175 which equates to about 6% of your original £2880, you having lost use of the money for more than a year. Whether that is worth the effort is up to you.

If you choose the right provider there should be no fees beyond the annual charge and closure fees. A good one for this purpose is H-L who dont charge for taking drawdown payments, others may charge fixed amounts of around £100. HL fees amount to 0.45%=£16. There is also a closure fee of £25 BUT this is increased to £295 if you close within a year, so dont!

For the rules on the £3500 deal see here. You will note that it says nothing about what happens if you have unearned income (eg a pension) making you a tax payer. However, in practice it appears that the £2880 payment has the desired effect.

susieb

kidmugsy wrote: »

It's a bit of a toss-up whether it would be better to contribute to a SIPP or to put it into high interest current accounts/regular savers. He can get interest tax-free up to £1k p.a.

Has he got a decent amount in a cash emergency fund at the moment? Any debts to pay off? Any imminent large expenditures? House? Car? Any stocks-and -shares investments?

Thanks
Has a small emergency fund, but thats about to become alot larger with an inheritance. No debts, no large expenditures that arent already covered
No house (he rents), car is on a pcp, still with 18 months before final payment, no investments at all.

susieb

Linton wrote: »

Assuming your partner is a basic rate tax payer when he stops work the benefit of using the £3500/£2880 feature comes from the tax free allowance: 20% X 25% X £3500= £175 which equates to about 6% of your original £2880, you having lost use of the money for more than a year. Whether that is worth the effort is up to you.

If you choose the right provider there should be no fees beyond the annual charge and closure fees. A good one for this purpose is H-L who dont charge for taking drawdown payments, others may charge fixed amounts of around £100. HL fees amount to 0.45%=£16. There is also a closure fee of £25 BUT this is increased to £295 if you close within a year, so dont!

For the rules on the £3500 deal see here. You will note that it says nothing about what happens if you have unearned income (eg a pension) making you a tax payer. However, in practice it appears that the £2880 payment has the desired effect.

Yes thats exactly it, the extra tax free against losing the use of the money, however am I correct that due to age that he could draw down on that almost immediately. However the HL closure fee means this would have to be at least over a year. Is that correct?

xylophone

If you are a non tax payer you can contribute £3600 comprising £2880 from you and £720 from HMRC.

You can be a non taxpayer but still contribute more than £3,600 provided that you have "relevant income".

Suppose that your only relevant income is £11,500 a year from your part time job.

You do not pay any tax because your PA covers your salary.

You could contribute £9,200 to the SIPP/other personal pension and receive tax relief of £2,300.

kidmugsy

susieb wrote: »

Thanks
Has a small emergency fund, but thats about to become alot larger with an inheritance.

Then when the inheritance is safely banked he might like to think about contributing to a pension. Is he happy to continue to rent?

susieb

kidmugsy wrote: »

Then when the inheritance is safely banked he might like to think about contributing to a pension. Is he happy to continue to rent?

Yes, as we are getting married next year and he will move in with me then. I own my own home.
Our goal really is to give up work and enjoy life, simply, not expensively.
He has a decent pension, but as this refund of payments was an unexpected bonus we thought maybe a seperate one with this money to benefit from the 20% might be worth considering. (as the refund is less the 20% that went into the fund of course). This also if he died before me would give me a little fund, whereas the firepension stops on his death.
As to the inheritance, thats a whole new dilema to consider, toying around with ideas for that, but until its safely banked we wont get too carried away.
Investing is new for him and hes risk adverse. So something safe like premium bonds for a lump sum (and a bit of fun) then maybe spread some around high interest accounts and NS and I fixed bonds.