Using PCLS to fund SIPP

JuliusCaesar

I will shortly be taking early retirement at age 57 with a final salary pension. My salary for this tax year will be £7500. My annual pension will be £7200, with £4200 received this tax year. I will receive a PCLS of £21,600. My wife is continuing to work, we have no mortgage, and joint savings (mainly from an inheritance) of over £100,000. Until I receive my State Pension in 10 years time my annual income will be significantly below the £12500 tax allowance. I therefore propose to transfer £1250 of my tax allowance to my wife.


It has recently dawned on me that I could invest some of my PCLS (and some of my savings) in a SIPP to take advantage of the unused tax allowance. I therefore propose to pay £2880 into a SIPP in future tax years when I have no earned income, which will be worth £3600, until I reach State Pension age. During this period I will take the maximum available UFPLS withdrawal each year that will not incur any income tax.



My questions are:
(1) Since I have earned income of £7500 this tax year, how much can I put into a SIPP this tax year?
(2) Can I take advantage of the unused allowance from the previous three tax years, and if so, how much?

cloud_dog

JuliusCaesar wrote: »

My questions are:
(1) Since I have earned income of £7500 this tax year, how much can I put into a SIPP this tax year?

Your gross salary earnings minus any contributions this tax year or, as mentioned, the benefit increase of your DB scheme for this year (your administrators should be able to give you this number).

JuliusCaesar wrote: »

(2) Can I take advantage of the unused allowance from the previous three tax years, and if so, how much?

The maximum you can contribute in any one tax year is the smaller of your gross salary (minus aforementioned elements) or £40k. So all your calculations need to be based on £7.5k.

Spreadsheetman

(1) £7500 (i.e. a £6000 net contribution that gets grossed up by the tax reclaim to £7500)
(2) No - contribution limit is the salary for this tax year (or £40k whichever is smaller).

Spreadsheetman

(note: good clarification by cloud_dog - I hadn't spotted that there have already been DB contributions)

JuliusCaesar

Thanks very much cloud_dog and Spreadsheet. Very helpful.

Just to clarify - suppose I have already paid DB contributions of 6% of £7500, i.e. £450, the maximum amount would be £7050, so £5640 net contribution.


However, I'm not sure what you mean by ' benefit increase of your DB scheme for this year' and how this might affect things. Further clarification greatly appreciated.

Dazed_and_confused

My salary for this tax year will be £7500. My annual pension will be £7200, with £4200 received this tax year. I will receive a PCLS of £21,600. My wife is continuing to work, we have no mortgage, and joint savings (mainly from an inheritance) of over £100,000. Until I receive my State Pension in 10 years time my annual income will be significantly below the £12500 tax allowance. I therefore propose to transfer £1250 of my tax allowance to my wife

Depending on where you are resident for tax purposes this will leave you with a tax bill of either £85.50 or £90. If your wife is paying more than this in tax it's worth doing for the current tax year but if not it will cost you more than it saves.

Albermarle

,

and joint savings (mainly from an inheritance) of over £100,000

Just on a different track.
This is quite a large amount of cash savings . You may be aware that cash savings rates are typically below inflation, so every year the value of your savings goes down a little and cumulatively over 10 or 20 years it can be significant .
If you do not need the money now , have you thought about investing some of it , in the hope of beating inflation in the long run?

JuliusCaesar

When I say 'savings' a significant proportion is already in stocks and shares ISAs. I am gradually reducing the cash element by giving my two children £4000 per year for a lifetime ISA so that they can eventually buy a property, rather than them waiting for their inheritance.

Audaxer

JuliusCaesar wrote: »

I will shortly be taking early retirement at age 57 with a final salary pension. My salary for this tax year will be £7500. My annual pension will be £7200, with £4200 received this tax year. I will receive a PCLS of £21,600.

Is taking the PCLS from your final salary is an option along with taking a higher pension and no lump sum, or is it mandatory in the scheme rules that you take the lump sum? The reason I ask is that if you are taking it as an option, I think using it to fund a SIPP for the amounts you say, could be classed as recycling. If it is mandatory that you take the lump sum, I don't think recycling applies. You might want to check the HMRC guidance to be sure you are okay:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDAMCQQB

cloud_dog

JuliusCaesar wrote: »

Thanks very much cloud_dog and Spreadsheet. Very helpful.

Just to clarify - suppose I have already paid DB contributions of 6% of £7500, i.e. £450, the maximum amount would be £7050, so £5640 net contribution.


However, I'm not sure what you mean by ' benefit increase of your DB scheme for this year' and how this might affect things. Further clarification greatly appreciated.

For DB schemes you do not count the value of your DB contributions in the calculation, you count the value of the increase, i.e. you may have contributed £450 but the increase in the value of your DB scheme may have been £250 (or £500), it is this figure you need to use in your calculation. Contact the scheme administrators and they will be able to provide you with it. Some people have mentioned that the 'number' is sometimes included in statements they have received but

a) you will not have a statement for this tax year and
b) it may not actually be in the statement.

JuliusCaesar

Audaxer wrote: »

Is taking the PCLS from your final salary is an option along with taking a higher pension and no lump sum, or is it mandatory in the scheme rules that you take the lump sum? The reason I ask is that if you are taking it as an option, I think using it to fund a SIPP for the amounts you say, could be classed as recycling. If it is mandatory that you take the lump sum, I don't think recycling applies. You might want to check the HMRC guidance to be sure you are okay:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDAMCQQB

Taking the lump sum is mandatory. It is possible to increase the lump sum by reducing the pension, but not the other way around.



In any event, presumably I could simply fund the SIPP from savings before my retirement date.