SIPP calculation

Noodling

Hi everyone


I'm hoping to take early retirement within the next year or 2 and for the last few months have been feverishly working out THE NUMBER and checking finances to support it.

I have only just discovered the tax benefits of paying into a SIPP, but am struggling to understand how much I can shovel in this tax year (to receive max tax relief) - I'm hoping someone can explain how to do the calculation.

My details are:-
Age 55, employed on £36,000 and in a company pension. This pension is mixed DB and DC.
DB contribution is 4% of salary, paid by me, (taken pre tax) and accrues in 100ths - IE one year = £360 pension.
DC contribution is 2% paid by employer. I have also paid into this voluntarily this year to max out the 25% tax free lump - gross amount by me = £3750.

So, what 'figure' from my £36,000 gross income remains for me to tuck away in a SIPP?

Thanks in anticipation.

bigadaj

In terms of the annual allowance limits then it should be 20x your db accrual plus your gross dc amount. So this means around £11k used, so that would leave you £29k.


You also have the limit of total earnings for this year, and assuming last year was similar then you should have carry forward in terms of annual allowance.


I'm no expert but that's my thoughts, you also need to remember to contribute 0.8 of the desired amount as the provider will gross the amount up by reclaiming tax, at least for a personal pension or sipp.

Noodling

Ah, so the DB is valued at 20 x annual accrual amount! That was the bit I couldn't uncover.
And, I can ignore the company contribution to the DC - bonus.
Thanks.

bigadaj

Noodling wrote: »

Ah, so the DB is valued at 20 x annual accrual amount! That was the bit I couldn't uncover.
And, I can ignore the company contribution to the DC - bonus.
Thanks.

Yes, I think the employers contribution counts towards the annual allowance figure of £40k but it looks as though you have plenty of carry forward available so it will still be your earnings this tax year that will be the limiting factor.

This is my understanding and I'm no expert of course.

Noodling

Yes, I understand I can't get at the carry forward amounts in previous years because I have never earned the maximum allowance IE £40k.
Something else that seems too good to be true with this tax treatment - do you get tax allowance on top of tax allowance?
What I mean is, of my £38k, I've already received £11,500 of it tax free - yet I am allowed to pay this into the SIPP and get a further tax allowance on it?
Am I completely missing something here?

Dazed_and_confused

There are two different things involved here,

Your personal tax - as your salary is either £36k or £38k then there is not going to be any tax benefit into paying into a SIPP/private pension as far as your own tax is concerned - it will make no difference to the tax you have to pay on your £36/38k.
NB. This assumes you have no other taxable income

Pension fund - providing you keep to the contribution limits you will be entitled to basic rate tax relief which will be added to your pension fund by the SIPP/pension provider

bigadaj

Noodling wrote: »

Yes, I understand I can't get at the carry forward amounts in previous years because I have never earned the maximum allowance IE £40k.
Something else that seems too good to be true with this tax treatment - do you get tax allowance on top of tax allowance?
What I mean is, of my £38k, I've already received £11,500 of it tax free - yet I am allowed to pay this into the SIPP and get a further tax allowance on it?
Am I completely missing something here?

No, it's a slight anomaly, the reason for which is primarily not to penalise low earners.

So if you earn less than the personal allowance and so pay no tax then that low earner wouldn't be able to claim tax relief. This is seen to be unfair, so tax relief is still available, I suppose it makes it easier for providers as well as they don't have to check whether tax has been paid as they automatically credit the tax relief.

So you get the benefit of tax relief on money you haven't actually paid any tax on, assuming you can afford to contribute which many may not.

You need to take this into account in your calculations, and only conTribute 0.8 of the sum you want to go into the pension.