SIPPs queries re contributions and drawdown

Audaxer

My wife is thinking of opening a SIPP. She is working part-time with a gross salary of around £14.5k. Am I right in thinking that the maximum she can pay in this year by lump sum would be 80% of her gross salary – around £11,600 less any pension contributions she has already made (she enrolled for a NEST pension at work a few months ago)? Or can she only pay 80% of what she has earned to date this year and pay the rest of the £11,600 after she receives her salary each month until March 2018?

When she is 55 and decides to drawdown from the SIPP, assuming she has retired and has no other taxable earnings, presumably she won’t be taxed on any amounts she draws down because with no other taxable earnings she will be well below the personal tax threshold?

If she had say £50k in her SIPP at 55 and wanted to withdraw a £2,000 lump sum every year, could she actually withdraw £4,880 (not taxed as within the personal tax allowance) and then pay £2,880 back into the SIPP, which would then be increased by another £720 by HMRC? It sounds too good to be true – is it?

Linton

The pension contribution limit is only applied over the full tax year. The date(s) when the payments are made during the tax year are irrelevant.

If drawdown is the only income and is below the tax allowance then no tax is due.

Recycling of pension to gain a double tax refund on the same money in the way you propose is against HMRC rules.

Audaxer

Linton wrote: »

The pension contribution limit is only applied over the full tax year. The date(s) when the payments are made during the tax year are irrelevant.

Thanks Linton. If for example she lost her job during the year, and her earnings for the full year turned out to be less than £14.5k, and she had already contributed the full £11.6k and received £2.9k tax relief, would some of that tax relief be claimed back from HMRC?

Recycling of pension to gain a double tax refund on the same money in the way you propose is against HMRC rules.

Fair enough, I was just asking if it was allowed as I thought it sounded too good to be true. I'm sure I read that if you are drawing money from your SIPP, the maximum annual allowance for contributions is reduced from £40k to £4k. So as you are allowed to pay in up to £4k the same year as you are withdrawing money, is that not effectively recycling?

kidmugsy

Linton wrote: »

Recycling of pension to gain a double tax refund on the same money in the way you propose is against HMRC rules.

Are you sure? The anti-recycling rules are designed to stop recycling of tax-free lump sums, aren't they?

Heavens I draw a pension income and also contribute to a SIPP. That's perfectly normal as far as I know.

Let's ask dunstonh, eh?

Mnd

I think you can take up to 7500 without breaking recycling rules

Audaxer

Mnd wrote: »

I think you can take up to 7500 without breaking recycling rules

I think that is correct according to the page below:
http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/
So in my example above withdrawing only £4,880 (none of which would be subject to tax) in a year would mean recycling has not happened, irrespective of how much is paid back in contributions as far as I can see.

zagfles

Audaxer wrote: »

Thanks Linton. If for example she lost her job during the year, and her earnings for the full year turned out to be less than £14.5k, and she had already contributed the full £11.6k and received £2.9k tax relief, would some of that tax relief be claimed back from HMRC?

She could reclaim the excess contributions from the SIPP. This is one of the few circumstances where a refund of pension contributions is allowed.

See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm045000#Refundecls

Though best check the SIPP provider allows it.

Mnd

Regarding the recycling question, that was the advice I received on this site, 6 months ago, and recently I did a flow chart thing that the first question was, is the withdrawal more than 7500. Answer no..recycling has not taken place.
Had the reply been yes there were more question concerning level of contribution increase but the final one was basically did you withdraw the money with the intention on recycling. If not then it's not recycling. How they monitor if you just change your mind I don't know

Malthusian

Drawing taxable income from a pension and then paying that income back into a pension plan is completely within the rules. Normally it would be tax-neutral because (e.g.) you pay basic rate tax on the way out and get basic rate tax relief on the way in.

If you are a non-tax-payer then of course you don't pay tax on the way out and still get basic rate tax relief on the way in. However, the fact that you can only get tax relief up to your earned income or £3,600pa, and now we have the Money Purchase Annual Allowance as well which restricts you to £4,000pa, means the tax rules view this as small potatoes.

Even if it is taxable income you are recycling and not the tax free lump sum, it is still best to check the tax free lump sum recycling rules and make sure you can't be accused of recycling the latter.