SIPP in Drawdown whilst contributing to another DC scheme ?

0779mike

I have one scheme from a previous employer that I have requested to transfer to a drawdown SIPP.

I am still in other employment (paying 40% tax) and I have realised that I can reduce my total income tax if I make a substantial Additional Personal Contribution to the DC plan held with my current employer - I will soon retire and I will take 25% tax free and stay under the 40% tax band when drawing down.

Is one allowed to make a contribution to one's current employment plan whilst one has a separate SIPP.

I have not taken tax free lump sum or any drawdown from the SIPP, I only set the transfer in motion about 1 week ago and haven't heard back since.

SonOf

I have not taken tax free lump sum or any drawdown from the SIPP

Yet your title says SIPP in drawdown and your first line says you are transferring to a drawdown SIPP. So, we have a contradiction in what you are saying. Can you confirm what you are doing?

0779mike

Maybe I am using incorrect terminology.

I am in the process of transferring one DC pension into a SIPP. I intend to draw funds as income from the SIPP when it is up and running.

Dazed_and_confused

That has the potential to limit further contributions to £4k/year.

What type of contributions are you paying on your current employer scheme? Most common would be net pay or relief at source.

0779mike

I am paying monthly deductions from salary and the employer pays in their share as well. I would like to pay in a one off sum maybe £25k to reduce my tax bill this year. I hope to retire in a few months and will then
transfer this into the SIPP and take 25% tax free and draw down regular income to use up all of he 20% tax band.

LHW99

I think if you take any of the non-tax free part of a DC pension in this financial year it cuts the amount you can pay in to another pension to £4k for this FY also

jamesd

No problem to be taking money from one pension while taking money from another.

As soon as you flexibly take taxable money from the pension your annual allowance is reduced to the lower of the 4k money purchase annual allowance or whatever is left of the normal 40k annual allowance. So make all or all but 4k of the contributions before taking taxable money - you still have the full 40k untill you do. Flexibly taking means UFPLS or money from the 75% taxable in a drawdown pot. It doesn't include taxable money from use of the small pot rule.

You're potentially affected by the limits on tax free lump sum recycling. You won't be affected if the tax free lump sums taken during this and the next two tax years are no more than 7500 per rolling 12 month period (not calendar or tax year) because this keeps you within the limits until the five year rule expires. You'll also be within the limits if the extra contribution is no more than 30% of the tax free lump sum, meaning at least 83333 tax free lump sum for 25k extra.

There aren't any limits on the recycling of pension income into new pension contributions. Nor on using small pot rule money for it.

jamesd

LHW99 wrote: »

I think if you take any of the non-tax free part of a DC pension in this financial year it cuts the amount you can pay in to another pension to £4k for this FY also

Yes, but the full 40k is available until then, so 40k can be paid in before. Or 36k before and 4k after.

0779mike

Let me put some hypothetical figures on this as an example.

I will receive a taxable income of up to £78k this financial year comprising salary (£58k) and a DB pension that started paying in May this year (£20k).

I have £34k in a DC scheme with previous employer.
I have £18k in a DC scheme with my current employer.

If I pay £40k into the current DC scheme while I am still working; move the £34k scheme into a SIPP; then prior to retirement (in a few months), take the tax-free cash. Then after I retire in a few months I will also move that second scheme into a SIPP, take the tax-free lump and enough drawdown that I do not hit the 40% income tax band.


I can prove that I have access to an under-used offset mortgage facility that can provide far more than £40k should I need it.

I will check that my all DC contributions for this year and previous 2 years come to less than £120k.

Will I be deemed to be "Lump Sum Recycling" ?

If I discuss my plans with HMRC will they give me an indication that this is ok or not ?

0779mike

After further research I have seen the 6 tests that HMRC apply, if I fail one I would be ok but I would probably pass them all thus making me a "lump sum recycler".

I would make the additional contribution even without the PCLS but if I were deemed a "recycler" my contribution allowance would be reduced to £4k.

Frankly, these rules are an overcomplex, inappropriate mess.

Dazed_and_confused

In your original post you mentioned being a 40% payer.

In a later post you state your taxable income in the current tax year will be £78k.

And refer to paying £40k into your current employers scheme.

Irrespective of whether this would be via net pay (which reduces taxable income) or relief at source (which doesn't reduce your taxable income but increases the amount of basic rate tax you can pay) I presume you are aware that you won't receive higher rate tax relief on the whole contribution?