Setting up a SIPP for OAP

Bravepants

Good evening,

My MIL is 71, she is on SP and earns much less than the £12,500 annual allowance.

My partner and I were thinking (a bit late to be honest!) about setting up a SIPP (cash only) for her to take advantage of the tax relief.

If we lend her £2880 to pay in this would become £3600 with the tax relief - immediately making her £720.

Can the new SIPP be immediately put into drawdown?

Also, presumably it is better to draw out the funds £300 per month and not a big one-off £3600 lump?



Or is the lump drawdown possible?

Thanks for any help on this.

Audaxer

The way people normally advise on here is to use HL for the SIPP as no drawdown costs, and pay in £2,880. When the £720 tax relief is added, draw out £2,600 (in the first year) by UFPLS (Uncrystallised Funds Pension Lump Sum) as you need to leave in £1,000 to keep the SIPP open. In the next and subsequent years up to age 75 she can pay in £2,880 again, and then when the tax relief is received she can draw out the full £3,600 by UFPLS, always leaving £1,000 in the SIPP.

BoGoF

Does MIL receive pension credit? Or other means tested benefits?

Bravepants

BoGoF wrote: »

Does MIL receive pension credit? Or other means tested benefits?

I shall check everything she gets. Thanks for the question.

Dazed_and_confused

she is on SP and earns much less than the £12,500 annual allowance

Do you mean she is on SP and earns much less than the £12,500 Personal Allowance or did you mean her only income is SP, which for her is less than the Personal Allowance?

If she goes ahead with this she should be aware the emergency tax code will be used on the first withdrawal. This means upto £1042 of taxable income can be taken with absolutely no tax deducted. Once she goes above that then she will pay some tax and will have to either claim it back or wait for HMRC to refund it (which should happen automatically, just takes longer).

And if she's married you might want her to look at Marriage Allowance. This will reduce her Personal Allowance to £11,250 but depending on his circumstances could save your FIL £250 in the current tax year.

Bravepants

Dazed_and_confused wrote: »

Do you mean she is on SP and earns much less than the £12,500 Personal Allowance or did you mean her only income is SP, which for her is less than the Personal Allowance?

If she goes ahead with this she should be aware the emergency tax code will be used on the first withdrawal. This means upto £1042 of taxable income can be taken with absolutely no tax deducted. Once she goes above that then she will pay some tax and will have to either claim it back or wait for HMRC to refund it (which should happen automatically, just takes longer).

And if she's married you might want her to look at Marriage Allowance. This will reduce her Personal Allowance to £11,250 but depending on his circumstances could save your FIL £250 in the current tax year.

Yes, sorry her income is SP and, I just found out, she gets Pension Credit too. I need to confirm more precise figures with her.

I thought there would be emergency tax issues hence my question about how to withdraw.

She's married but separated. I will discuss all these implications with her.

When you say "first withdrawal" do you mean first of the year if drawing monthly, or first ever lump sum withdrawal of a series of lump sum withdrawals one per year?

Also, how did you come to the £1042 figure?



Edit: It's OK I figured it out. You are assuming monthly drawdown and £1042 = 12500/12. I think she is well under that figure, but if she draws as much as the SIPP allows at once, then she will be liable for tax as though the sum is 12 times the drawndown amount!




Thanks.

Bravepants

Audaxer wrote: »

The way people normally advise on here is to use HL for the SIPP as no drawdown costs, and pay in £2,880. When the £720 tax relief is added, draw out £2,600 (in the first year) by UFPLS (Uncrystallised Funds Pension Lump Sum) as you need to leave in £1,000 to keep the SIPP open. In the next and subsequent years up to age 75 she can pay in £2,880 again, and then when the tax relief is received she can draw out the full £3,600 by UFPLS, always leaving £1,000 in the SIPP.

Yes, HL was on my mind just for that reason!

Dazed_and_confused

Pension credit isn't taxable but the pension income may impact the pension credit.

She doesn't need to think about Marriage Allowance then, she can work on the basis of having the standard Personal Allowance of £12,500.

First ever withdrawal. Once that has been reported to HMRC by the pension company HMRC should send a tax code to the pension company and this should take into account her State Pension.

The emergency tax code is 1250L. And on the first payment it will be used on a non-cumulative basis which means the pension company will allow 1/52nd or 1/12th of the tax code allowances when calculating the tax to be deducted.

Most pensions referred to on here seem to be paid monthly so expect it to be 1/12th. £12,509 ÷ 12 = £1,042.

sleepless_saver

She's going to have to inform DWP every time she does it, and the money will be taken into account in calculating her benefit entitlement. If it amounts to enough to lose her the pension credit it may not be worth the hassle. See link https://www.pensionwise.gov.uk/en/benefits .

Edited to add: note that the whole amount in the pot is taken into account, not just the income. Unless she has an Assessed Income Period for her pension credit in which case it would all be ignored until the end of the period.

BoGoF

So if she has pension credit then chances are gets council tax benefit?

A private pension (which this would be) is likely to affect entitlement to these.

xylophone

As she is on PC (a means tested benefit), she may need to be careful about this.

https://www.ageuk.org.uk/globalassets/age-uk/documents/factsheets/fs48_pension_credit_fcs.pdf

https://www.gov.uk/government/publications/pension-freedoms-and-dwp-benefits/pension-freedoms-and-dwp-benefits