SIPP in Drawdown whilst contributing to another DC scheme ?

0779mike

Wait a minute, I already had a PCLS of £133k from a DC scheme in May 2019. So a contribution now of £39k would keep me below the 30% figure and thus I would fail a test, and not be a "recycler".

I have noticed that no one is responding on this thread now, have I exhausted everyone's patience ?

0779mike

"I presume you are aware that you won't receive higher rate tax relief on the whole contribution?"

...why not? That is the whole point of my plan. What relief will I get ?

Dazed_and_confused

It depends where you are resident for tax purposes but if we assume it's UK (England) then you will pay higher rate tax on £28k.

So if you pay £40k into a pension how do you expect to get higher rate tax relief on the whole £40k

jamesd

0779mike wrote: »

I have noticed that no one is responding on this thread now, have I exhausted everyone's patience ?

No, it just means that the people who thought they could usefully reply happened to be doing other things.

0779mike wrote: »

Wait a minute, I already had a PCLS of £133k from a DC scheme in May 2019. So a contribution now of £39k would keep me below the 30% figure and thus I would fail a test, and not be a "recycler".

You're still a recycler, just within the limits.

0779mike wrote: »

...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).

There aren't any special restrictions on recycling pension income so from just the recycling rules aspect it's fine for you to increase your contributions by 39k + 20k = 59k.

But because only 58k is salary, 58k gross is the maximum you can pay in and get tax relief. You also need enough annual allowance but it seems clear that you have at least 18k of unused allowance in the last three years to carry forward so that doesn't limit you. Which means that 58k gross is likely be optimal.

Is the current DC scheme using salary sacrifice? Is it a relief at source scheme, one where employee contributions have 25% added to them to give the 20% basic rate relief? That affects the details of how you should do things.

No need to ask HMRC - don't. If you do, don't mention the offset mortgage, it wouldn't help because the rules catch borrowing.

jamesd

0779mike wrote: »

"I presume you are aware that you won't receive higher rate tax relief on the whole contribution?"

...why not? That is the whole point of my plan. What relief will I get ?

You get 40% relief on the part you pay 40% on 20% on the part you pay 20% tax on. And 20% on the part you pay no tax on because it's within your income tax personal allowance, but to get this bit it must be paid in to a relief at source scheme, like your SIPP.

If you think non higher rate isn't worth doing, each 10k of it gross can have 25% taken out tax free, saving you 20% of £2500, £500. Not as nice as the higher rate bit but still money for you instead of HMRC.

With 78k taxable income you'll get 40% relief on 28k and 20% on the remaining 30k.

0779mike

I think I now understand what to do.

To summarise:-
I am a UK resident. Age 65.5 I am not yet receiving the state pension.

Current taxable Income

I am still in employment and expect to receive a taxable income from this employment of approx. £59k this financial year. I hope to retire by the end of this financial year.

I am also in receipt of a DB pension from a previous employer of £8758.20 p.a.

Earlier this year I elected to commence payment of my deferred DB pension from a previous employer and as a part of that I received a tax free PCLS of £131,665 in July. I will receive monthly payments of £1,646 backdated to start from May 2019.

So, my total income this FY will be up to £84.218.

DC Pensions

I have £18,672 in a DC scheme with my current employer and ongoing employee deductions from salary and employer contributions total £736.31 per month.

I have £34,041 in a DC scheme with a previous employer.

My combined salary deduction and employer monthly DC contributions for this year and previous 2 years have always been approx. £737. So, in 3 years the total will be £26,532.

My intention is to make an Additional Personal Contribution of £39,490 into the current DC scheme while I am still working.

Subsequently, I will transfer the old DC scheme (£34,041) into a flexi-drawdown SIPP and take the tax free PCLS of 25%.

Subsequent to that and after I leave my current employment I will transfer the DC scheme from there (£18,672+mthly payments) into that same flexi drawdown SIPP, again taking 25% tax free PCLS.

I will then draw as much taxable income from the SIPP as I can each year, to stay below the 40% tax band.

My expectation is that the APC will save me a significant amount of tax and will not be deemed to be "Lump Sum Recycling" as it is less that 30% of the £131,665 PCLS that I received a month ago.

Can I be confident that I will not fall foul of HMRC in any way ?

jamesd

Yes, that looks OK.

You have no recycling problem because the DB pension and 30% of its tax free lump sum permit an increase of 8758.20 a year from when that started plus over five years an additional 39k.

The rest also looks fine.

Albermarle

The OP will receive taxable income of approx. £84K in this FY .
However only £59 K of this is earned income from employment , the rest are monthly payments from a DB scheme(s)
If he makes a contribution to a DC pension , can he claim 40% tax relief on £34K or only on £9K .
Although he is paying 40% tax on £34K , I thought only actual earned income counted for pension contributions? To be honest I do not know the answer but no doubt somebody will .

Linton

Albermarle wrote: »

The OP will receive taxable income of approx. £84K in this FY .
However only £59 K of this is earned income from employment , the rest are monthly payments from a DB scheme(s)
If he makes a contribution to a DC pension , can he claim 40% tax relief on £34K or only on £9K .
Although he is paying 40% tax on £34K , I thought only actual earned income counted for pension contributions? To be honest I do not know the answer but no doubt somebody will .

WIth two incomes you cant say that one is paying full higher rate tax and the other is paying all other rates though PAYE could be set up with that effect. Annual tax due is calculated on the overall total income and total gross allowable contribution to pensions. "Earned" and "not earned" is only relevent to determining the allowable pension contributions: The allowable contributions are the minimum of Earned Income and actual contributions. So the OP will get full tax relief. PAYE may come up with different numbers but this will be sorted out at year end.

jamesd

Albermarle wrote: »

I thought only actual earned income counted for pension contributions?

Only earned income counts for the amount that can be paid in to pensions but all taxable income is used to calculate the tax saving. With 34k of contributions HMRC increases a person's basic rate band by that much and that delivers the higher rate relief.

If the person tells HMRC about the contributions early enough the tax relief might be delivered by PAYE via work getting a new tax code.