Question/s about paying into small pot SIPP in retirement

dunroving

I recently retired early due to health reasons, and am now 61 yrs old, 18 months post-retirement. The health issues aren't likely to drive me to an early grave, I just am unable to work full time. I have taken on some basic work, but am unlikely to earn more than a couple of £k per year. I'm currently living off a defined benefits occupational pension and pay a small amount of income tax on that.

I already have a SIPP with Fidelty, from which I withdrew the 25% TFLS, as I needed the capital to fund the purchase of my retirement house. That SIPP has therefore been crystallised (correct term?) and I don't plan to touch it for two reasons: (1) it might help me/my beneficiaries to avoid IHT; (2) I realise that dipping further into the crystallised fund will trigger MPAA.

From what I have read, even if I earn nothing, I can pay £2,880 into a SIPP each year and receive a bump of £720 from HMRC - even if I don't pay that much in income tax.

My current plan is to start a small pot SIPP to take advantage of the above, and maybe start a new one every couple of years, to keep them all under £10k. My rationale is (a) this will enable me to cash them in without triggering MPAA, and (b) silly, really, but it seems simpler to keep this separate from my crystallised Fidelity SIPP.

Does this idea look OK, and if so, do you any recommendations for a low-cost, easy maintenance SIPP? I'd probably just invest in one or two low-risk funds and let them sit until I am ready to withdraw, if that ever happens. Or am I missing something?

Thanks for any suggestions or criticism of this idea. My head has been largely out of pensions mode for 18 months. When I was earning, I was immersed in it, as I maximised my contributions in my final few years because I knew I would retire early. But now, my brain is very much in retirement mode (La La land)

Albermarle

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his will enable me to cash them in without triggering MPAA,

As I understand it if you take just £1 in income from a crystallised pot the MPPA is triggered .
However as you would still be able to add the £2880 each year.
For choice of SIPP , you want one with a % charge ( not a flat fee) as this is better for small amounts .
The ones usually mentioned on here are HL & AJ Bell but there are other similar ones .

AlanP_2

Using small pots as you suggest avoids the MPAA trigger. Maximum of 3 small pots I think.

MK62

dunroving wrote: »

(2) I realise that dipping further into the crystallised fund will trigger MPAA.
....
....
My rationale is (a) this will enable me to cash them in without triggering MPAA,

Can I ask, in your position, why you fear the MPAA so much?

Sure, it would be better if it didn't exist, or was at it's original level of £10000pa, but in your position, would being subject to the current MPAA actually affect you all that much, in the grand scheme?

dunroving

MK62 wrote: »

Can I ask, in your position, why you fear the MPAA so much?

Sure, it would be better if it didn't exist, or was at it's original level of £10000pa, but in your position, would being subject to the current MPAA actually affect you all that much, in the grand scheme?

Good question, considering the profile I painted earlier. The current MPAA (£4k?) is not an issue while my earnings are so low, but there's always the possibility that my earnings could be higher than £4k if I get some well-paying contract work, in which case I'd like to keep the opportunity to plough all my earnings into a SIPP.

However, in the big scheme of things I am increasingly liking the flexibility of not working, so it may remain a non-issue. But for now, I am just trying to keep my options open.

Aiki

dunroving wrote: »

From what I have read, even if I earn nothing, I can pay £2,880 into a SIPP each year and receive a bump of £720 from HMRC - even if I don't pay that much in income tax.

My current plan is to start a small pot SIPP to take advantage of the above, and maybe start a new one every couple of years, to keep them all under £10k. My rationale is (a) this will enable me to cash them in without triggering MPAA, and (b) silly, really, but it seems simpler to keep this separate from my crystallised Fidelity SIPP.

Does this idea look OK, and if so, do you any recommendations for a low-cost, easy maintenance SIPP? I'd probably just invest in one or two low-risk funds and let them sit until I am ready to withdraw, if that ever happens. Or am I missing something?




I joined this wonderful forum in the New Year since in the summer my 55th Birthday will arrive and I will have some decisions to make with respect to pensions. I have found some great information, had some clarity, sometimes followed by confusion and plenty of questions with some apparently contradictory information. This morning I was thinking about the 'small pot' rule and a search led me to this thread.

I was thinking along the same lines. Open a SIPP in year 1 and over 3 years add my own money upto to £2880/year so that 3rd year balance is less than £10000 with the tax relief and then withdraw under small pot rule. Repeat that process 2 more. This would appear to maximise the available tax relief. This appears to be possible irrespective of any income I take from my DB and/or DC pension.


I have been corrected on my understanding, so the above paragraph is not correct. Seemed too good to be true. Feeling a bit silly but I am now wiser. Thanks for the feedback.

dunroving

Aiki wrote: »

I joined this wonderful forum in the New Year since in the summer my 55th Birthday will arrive and I will have some decisions to make with respect to pensions. I have found some great information, had some clarity, sometimes followed by confusion and plenty of questions with some apparently contradictory information. This morning I was thinking about the 'small pot' rule and a search led me to this thread.

I was thinking along the same lines. Open a SIPP in year 1 and over 3 years add my own money upto to £2880/year so that 3rd year balance is less than £10000 with the tax relief and then withdraw under small pot rule. Repeat that process 2 more. This would appear to maximise the available tax relief. This appears to be possible irrespective of any income I take from my DB and/or DC pension.

I think the flaw in your thinking is that the £2880 each year will be supplemented by a tax bump (what you are referring to as "tax relief") up to £3,600. Without growth, this will therefore be over £10k after 3 years (£10,800). With growth (hopefully) this will be even more. Your plan will work if you open a new SIPP after 2 years, rather than 3. You'd then have £7,200 plus any growth in each SIPP.

etienneg

No. The flaw in your thinking is that you will save tax by using small pots. This is incorrect.

The small pots rule (up to 3 in a lifetime, each up to £10,000) is about not triggering the MPAA, and that's all. So in principle your plan would achieve this (but the detail would need to be implemented precisely).

However, even small pots are subject to income tax. If you already receive income (such as pension) above the personal allowance, then 25% of the pot would be tax free and you would pay income tax on the rest as normal (at 20%, 40% or whatever, according to your circumstances). It makes no difference if it's a "small pot".

dunroving

etienneg wrote: »

No. The flaw in your thinking is that you will save tax by using small pots. This is incorrect.

The small pots rule (up to 3 in a lifetime, each up to £10,000) is about not triggering the MPAA, and that's all. So in principle your plan would achieve this (but the detail would need to be implemented precisely).

However, even small pots are subject to income tax. If you already receive income (such as pension) above the personal allowance, then 25% of the pot would be tax free and you would pay income tax on the rest as normal (at 20%, 40% or whatever, according to your circumstances). It makes no difference if it's a "small pot".

Not sure who you are responding to, but regardless ... I'm not sure anyone in the thread said that small pot withdrawals are "tax free", but please quote whatever post says this if possible.

Regardless, there are tax advantages, besides avoiding triggering MPAA:

One tax advantage is that the tax paid on withdrawal will, other things being equal, be less than the tax that would have been paid on the earnings. For easy calculations, consider £10k of earnings. For most people, this would be taxed at 20%, so would yield £8k net of tax. If paid into a SIPP, when withdrawn, only £7.5k would be taxed (i.e., £1.5k tax) and the rest would be tax-free. So, the £10k would yield £8.5k net.

The other potential advantage is that in retirement, tax is more likely to be at the 20% level. In my situation, earnings I paid into a small-pot SIPP this tax year would have been taxed at 40% (long story, but I transferred over large sums from a US 401k). When I withdraw it, I'll only pay 20% tax.

Aiki

etienneg wrote: »

No. The flaw in your thinking is that you will save tax by using small pots. This is incorrect.

The small pots rule (up to 3 in a lifetime, each up to £10,000) is about not triggering the MPAA, and that's all. So in principle your plan would achieve this (but the detail would need to be implemented precisely).

However, even small pots are subject to income tax. If you already receive income (such as pension) above the personal allowance, then 25% of the pot would be tax free and you would pay income tax on the rest as normal (at 20%, 40% or whatever, according to your circumstances). It makes no difference if it's a "small pot".

Ahhh, a light bulb moment. I clearly didn't understand, even though I had read it several times. I thought I did but even then it 'felt' wrong. I guess I must have been reading what I wanted to see. I have been confusing 'taking a small pot as a lump sum as cash' with tax-free lump sum. Feeling a little silly, but wiser. Thanks for this forum and its contributors.