Max into SIPP with Drawdown

Theta101

Age 61, retire when 65, full time employment, salary sacrifice £18K (plus £3.6K employer).

Can I put the gross maximum of £40K per year into pension fund via increasing my salary sacrifice.
At the same time drawdown from my personal SIPP approx £20K per year.
For the next 4 years?

Thanks.

Linton

mmm excellent question. At first thought the answer is no because the annual allowance drops to £4K (or is it still £10k?) if you access any money from a DC pension beyond the 25% tax free but on the other hand if it's Salary Sacrifice it's an employer contribution and so the sanction of losing your tax relief has no affect.

It would seem that an employer paying excess into a pension may give raise to "tax consequences ", possibly related to the deduction of pension payments when calculating corporation tax. However the whole area seems complex. So it's possible that your employer wont permit it.

Malthusian

Linton wrote: »

mmm excellent question. At first thought the answer is no because the annual allowance drops to £4K (or is it still £10k?) if you access any money from a DC pension beyond the 25% tax free but on the other hand if it's Salary Sacrifice it's an employer contribution and so the sanction of losing your tax relief has no affect.

£4k. And it does have an effect, you would lose the tax relief which you wouldn't have done if you'd avoided drawing on the SIPP. I suppose it could still make sense if you still get the National Insurance benefit, and if you can't spare enough income to do salary sacrifice in the normal way. However, you would need to save enough National Insurance on the recycled income for it to make sense to give up £36k worth of tax relief.

It depends on the OP's tax bracket, his other income and whether his employer pays their 13.8% National Insurance saving into the OP's pension, on top of the OP's NI saving.

Alexland

If the OPs pensions are large enough could the 4 years of 20k actually come from the tax free lump sum? If so that wouldn't limit contributions to £4k.

Linton

Malthusian wrote: »

£4k. And it does have an effect, you would lose the tax relief which you wouldn't have done if you'd avoided drawing on the SIPP......

The OP is apparently paying all his pension contributions via Salary Sacrifice, ie they are all employer's contributions. so he doesnt have any tax relief to lose. He is simply charged less tax in the first place.

sandsy

Doesn't the MPAA apply to all contributions, including employer contributions, just like the normal annual allowance?

How much is in the SIPP? You can access the tax free cash without triggering the MPAA.

Linton

sandsy wrote: »

Doesn't the MPAA apply to all contributions, including employer contributions, just like the normal annual allowance?

How much is in the SIPP? You can access the tax free cash without triggering the MPAA.

MPAA does apply to all contributions. The key question is the sanction that is applied if you exceed it. If an employee pays in personal contributions that exceed it then the employee loses most of his entitlement to a tax refund, so it becomes pointless.

However if an employer contributes more than the MRAA and the employee doesnt contribute anything (which is what happens in the OP's scenario where he pays all his contributions by Salary Sacrifice) the employee never gains from a tax refund and so doesnt lose by the sanction. Employer contributions are irrelevent to an employee's tax.

Presumably there must be some sanction against the employer but it is difficult to see what this is as the whole area of company tax and employer pension contributions seems very complex. This issue must come up when very highly paid CEOs for example are sacked and rewarded with large pension contributions.

It would be interesting to know the answer.

jamesd

Linton wrote: »

MPAA does apply to all contributions.

And so does the Annual Allowance Charge. The employee is required to declare contributions over the Annual Allowance to HMRC. HMRC then adds the gross value of the excess contributions to taxable income and tax it accordingly.

The individual is required to promptly notify all schemes receiving contributions that they are subject to the MPAA.

The result is no income tax saving on any employer or employee contributions above the MPAA.

jamesd

Theta101 wrote: »

Age 61, retire when 65, full time employment, salary sacrifice £18K (plus £3.6K employer). Can I put the gross maximum of £40K per year into pension fund via increasing my salary sacrifice. At the same time drawdown from my personal SIPP approx £20K per year.
For the next 4 years?

Yes, but it depends on the size of your existing pots and it might not be achievable.

MPAA first. This causes you to have to pay income tax on all defined contribution pension contributions into pensions in your name, from the time the MPAA is triggered Contributions before the trigger event aren't affected so with careful timing you can do 40k plus available carry forward in the year you trigger it.

MPAA trigger events are:
1. taking an uncrytallised funds pension lump sum (UFPLS)
2. taking any taxable money via flexi-access drawdown, the usual taxable withdrawing from a pot which has had the tax free 25% taken..

Events that do not trigger the MPAA include:
3. taking a pension commencement lump sum (PCLS), the usual 25% tax free amount. This is subject to the PCLS recycling limits, though.
4. taking a small pot payment. Three allowed per person in their life from non-occupational schemes (typical DC isn't occupational). Limit is £10k a time and it must take everything in the pot. You can transfer first to get within the limit. 25% tax free, 75% added to taxable income.

So, how to do it?

The easiest case is if you have lots of existing PCLS available. Just take sufficient PCLS to do it within the recycling limits. The limit which is most likely to be relevant is the five year one. Add up all the pension contributions in the two tax years before taking the PCLS, the tax year it's taken and the following two tax years and subtract the expected contributions, in the simple case five times the three year earlier contribution level. If the answer is no more than 30% of the lump sum the recycling is within the limits and it's fine.

Say contributions have been steady at 21.6k for at least three years. All in your name by you or employer into all DC pensions combined. The total five year value would be 2x21.6k + 3x40k = 163.2k. Expected contributions would be 5x21.6k = 108k. That's an increase of 163.2k - 108k = 55.2k. 55.2k / 30 * 100 = 184k PCLS to take to be within the limit. If you can take that much PCLS you're fine, just get on with it.

The expected contribution level isn't quite that simple. Pay rises, inheritance and a range of other things can affect it.

If you can't do it within that recycling limit, the small pot rule and the alternative of £7,500 of PCLS per rolling twelve month period (not tax year) can be used. That's £17,500 a year for three years. The fourth year, you've established an expected contribution of 40k and no longer care about the MPAA so use any convenient mixture of PCLS and withdrawing from a crystallised pot.

If the numbers still don't work to let you do it, say why and we can probably tweak things to make it work.

Malthusian

Linton wrote: »

The OP is apparently paying all his pension contributions via Salary Sacrifice, ie they are all employer's contributions. so he doesnt have any tax relief to lose. He is simply charged less tax in the first place.

Semantics. If you go over the annual allowance and pay an Annual Allowance charge it cancels out the tax saving, whichever way it was obtained.

Alexland

I agree if the limit on combined contributions reduces to £4k then that's the limit and you wouldn't want to get your employer into trouble.