Taking DB pension and putting it into SIPP

Dazed_and_confused

It is my understanding that I can put this into a SIPP and claim the tax back. I'm sure I read this on this forum a while ago.

Could you explain how you think this would work?

If your pension is £11,500 then it will be £6,900 after higher rate tax is deducted, even less if you Scottish resident for tax purposes.

Assuming you are eligible to contribute the full £6,900 into the SIPP this will have basic rate tax relief added by the pension company so you would have £8,625 in your pension fund.

There is no extra "pension" tax relief due however the £8,625 would increase the amount of basic rate tax you can pay.

Assuming the £53.5k "salary" is all taxable (it often isn't) then you have at least £65k taxable income so you would receive the full benefit of the increase to your basic rate band, saving you £1,725 in personal tax.

So you end up with pension fund of £8,625 plus £1,725 less tax to pay = £10,350. Which is 10% less than the pension payment of £11,500.

Or am I missing something?

Pursuit

here is a thread I recently read on MSE on recycling pensions


https://forums.moneysavingexpert.com/discussion/5627777/recycling-pension


Here is one of the statements from the thread.


"1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?"


To maximise the £11500 is this the way to go i.e. pay £40k from my salary into my workplace pension then claim the tax back on my pension from HMRC.

Dazed_and_confused

I think you are getting confused.

Contributions to a SIPP are usually paid on a relief at source basis and that means they do not reduce your taxable income.

If your salary is £53.5k and you pay £40k into your pension through a net pay scheme your taxable salary would be just £13.5k (same if you use salary sacrifice and the employer contributes the £40k for you).

Add in the £11,500 pension income and you wouldn't be paying any higher rate tax so there would be nothing to claim back from HMRC.

The problem with a lot of these type of threads is it isn't clear exactly what you intend doing.

There are (at least) four different ways of contributing to a pension and they all have different consequences from a tax perspective.

Salary sacrifice
Net pay
Relief at source
Gross contribution with no tax relief at source

Pursuit

I would like to put £40k into my salary sacrifice pension (35k from me 5k from my current employer). I want to use the £11.5k DB from my previous employer to make up for some of the loss of earnings. I can only afford the 35k contribution if minimal tax is paid.


What is the most tax efficient way to achieve this goal?


How does my DB pension scheme know what tax deductions to take?

jamesd

What is the CETV? A transfer might be a better approach. That's because commutation factors for DB lump sums tend to be around half of a quarter of the CETV, meaning there's the potential to double your tax free lump sum. While you couldn't take any income from the personal pension after the transfer without triggering the MPAA, cutting your allowance to 4k and scuppering your plan, it might be a better deal. If you're willing to give up the guaranteed income.

Chances are that the recycling five year rule will be most beneficial to you but to evaluate that it'd be good to have say five years of contribution history so we can see how your expected contributions look and whether your total planned increase in the five year window will be more than 30% of the lump sum or not. And after allowing for the increase from the DB income which you're not restricted on at all.

Yes you'll get full tax relief. The DB income is taxable but if it's a relief at source scheme HMRC will increase your basic rate band to give you the half of the relief that doesn't end up in the pension. The effect is to make a quarter of the 11.5k tax free when you take the tax free lump sum. The rest ending up taxed as income when ever you take it again. Assorted differences for the other ways but you always get the 40% relief somehow.

HMRC will give the DB place a tax code and they will run PAYE on it as usual but without any NI deductions.

Messenger3k

It doesn’t seem on the money to take the DB pension early. Have you spoke to friend who knows about this yet?

Lancelot6

here is a thread I recently read on MSE on recycling pensions

Here is one of the statements from the thread.


"1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?"


To maximise the £11500 is this the way to go i.e. pay £40k from my salary into my workplace pension then claim the tax back on my pension from HMRC.

Hi Pursuit,

This was my thread. And I did follow my plan.

Everything is working as I expected and it was definitely the best move for me.

The only difference I can see it that my Defined Contribution SIPP was with the same employer as my DB scheme. I just began to take the DB pension, and swapped into the SIPP for my contributions. Your SIPP is not with your employer is it? I Don't know how that affects salary sacrifice.

Also I pay basic rate tax on all of my pension, but I pay basic rate tax and NI on my salary after my allowance is subtracted. I don't have to claim any tax back as I suggested I might, though the tax office are not very good at calculating my salary, and I tend to have to correct them from time to time .

The only restriction on contributions is the £40,000 pension contribution limit, and the fact that you cannot make contributions from your salary that drop you below the minimum wage.

Lancelot6

jamesd

You can only use salary sacrifice with contributions from pay or benefits into a workplace scheme. The system relies on reducing pay and the employer making employer contributions. In theory an employer could make those to any scheme but in practice it's unlikely.

DT2001

Posters have picked up a number of points so I apologise if you’ve already responded/sorted any of the following.

Xylophone’s link seems to indicate that if you take the lump sum you will be recycling (following the flowchart) but not if you just take a higher annual pension.

Have you done a budget for when you retire? I like the idea of the split between required and desired income and the former being covered by guaranteed income and the latter by variable.
If you can do what you want with a variable income then you can gamble more in a SIPP.

If you are using salary sacrifice already will the FS payments be taxed at basic rate? If so no need to claim extra tax relief.

Is any part of your FS pension GMP?
If it is Xylophone will guide you through the consequences (good and bad).

Does the FS scheme increase in deferment at the same rate as in payment?

All or some of the above will affect your calculations. Having read threads on here for the last couple of years I now realise that my original assumptions were O.K. however there is mine of information from posters to reduce the potential shocks from complex pension rules/laws down the line.