Any point of starting a SIPP as wrapper in retirement

joeNZ

I'm now drawing a DB pension that takes me over the personal tax allowance.
I have a lump sum to be invested for relatively long term (say £100K for >10 years) and I want to invest as tax efficiently as possible.
The first port of call for wrapping my investments are ISA's up to the £20K annual limit but this will take me all 10 years to shelter.
Does it make any sense to open a SIPP for the excess that cannot be accommodated in a ISA?
My thinking is that the only advantage would come from drawing the 25% TFLS from the eventual pot after 10 years?
So, should I shelter as much as I can in SIPP (presumably £2880 per year)?
I can't really see any advantage to this as long as I simply recycle any unwrapped growth using my CGT allowance?
Answering my own question: it looks as if a SIPP offers no advantage as long as annual growth does not breach the CGT limits and I crystalise growth and shift into the next years ISA.
Am I missing anything?
thanks

Albermarle

If you contribute £2880. HMRC will add £720 to make it £3600. You can take 25% tax free . If you pay 20% tax on the rest the gain is not great but it is there .
https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired#latest

RL11

You can't put 100k in a sipp either. Maximum 40k per annum or 100% of salary - whichever is lowest. But as you are drawing your pension, you are probably now limited to 4k maximum. Note it will take 5 years at 20k per annum to get 100k into ISA not 10. If you have a 100% trustable partner you could give them 20k to get your money into quicker too. Plus as the new tax year is just about to start you could potentially get 20k x 2 into isa's this tax year and another 20k x 2 into isas on 6th April, so only have 20k left of the 100k

Dazed_and_C0nfused

RL11 said:

You can't put 100k in a sipp either. Maximum 40k per annum but as you are drawing your pension, you are probably now limited to 4k maximum. Note it will take 5 years at 20k per annum to get 100k into ISA not 10. If you have a 100% trustable partner you could give them 20k to get your money into quicker too. Plus as the new tax year is just about to start you could potentially get 20k x 2 into isa's this tax year and another 20k x 2 into isas on 6th April, so only have 20k left of the 100k

As the op hasn't said whether they are earning anything (in addition to the pension income) how do you know the maximum is £40k?

The op also said they are drawing a DB pension so why would they be limited to £4k?  If they had some earnings, for pension contribution purposes, greater than £4k?

NB.  The op is probably limited to £3,600 (gross) but we just don't know enough to say that for certain at this stage.

xylophone

https://forums.moneysavingexpert.com/discussion/comment/76763978#Comment_76763978
The OP seems to be living on DB pension income plus savings ( plus perhaps a partner's income)?

I have accumulated around 2/3's of UK state pension rights 

I wonder has he obtained a state pension forecast? https://www.gov.uk/check-state-pension

Has he considered voluntary NI contributions?

And why should it take 10 years to get £100,000 into ISA? 

bowlhead99

joeNZ said:

So, should I shelter as much as I can in SIPP (presumably £2880 per year)?

Yes, because £2880 is grossed up by the pension provider to be £3600, and if you want to draw £3600 out of a pension a quarter of it can be taken as a tax-free lump so you only pay tax on the other £2700 of it. Effectively getting basic rate tax relief on 3600 of gross contributions but only needing to pay basic rate tax on 2700 of gross drawings, you will be better off to the tune of basic rate tax on the 900 difference (worth £180 a year).

While the income and gains taxes on investing an extra £2880 'unwrapped' instead of a pension may not be anything significant, and you are already keeping tax records for the unwrapped investment you're doing so would not be able to save that admin hassle by doing a small pension investment each year, it's still worthwhile using a pension for the tax relief aspect. 

One thing to note is that unlike your ISAs where you are trying to build up as much as possible, you probably don't want to build up tens of thousands in a SIPP because to get it out again you will create a chunk of taxable income that year and if you did it 'all at once' when combined with your other pensions that may take you into higher rate tax bracket in the year you do it. So if making these small SIPP contributions for the free tax relief 'bonus', make sure you do periodically draw the money back out again as you are going along to avoid creating a lack of flexibility later.

Dazed_and_C0nfused said:

NB.  The op is probably limited to £3,600 (gross) but we just don't know enough to say that for certain at this stage.

The OP did specifically mention that their idea was to contribute only £2880 per tax year so presumably they don't have relevant earnings like a salary or self-employed business profits higher than £3600 gross. 

xylophone said:

And why should it take 10 years to get £100,000 into ISA? 

The most common explanation would be that there is other household income (from his own income or partners income)or lump sums which is being put into the ISA at the same time so the full £20k a year allowance isn't available for this lump sum, without displacing that other money that was going to be put in to ISAs. 

Ciprico

Would there be IHT benefits to adding to SIPP at this relatively late stage....?

joeNZ

Ok - lets answer some of the points.

@xylophone makes a good tangential point regarding SP contributions. Not necessary since I have full NZ super rights that are transferable to UK.

@RL11: partner is not UK resident so no chance to double up on ISA allowance. The 10 year period to get the cash into ISA shelter is worst case and related to residency issues. It is possible that I might get it all packaged up in 4 and a bit years.

@Dazed_and_C0nfused guesses correctly that i have no current "earnings" so will be limited to the £2880 annual SIPP cash contribution. If I were to restart earning (especially above the basic rate) it would obviously change things but no immediate plans.

@123mat123 no concern over legacy so no advantage there.

I think @Albermarle and @bowlhead99 have made the most salient points; £180 per annum partially compounded gain due to the 25% tax free draw. A relatively small amount that I had thought not worth the general hassle of setting up, administering, fees etc.

However, the thing that may push it over the edge is that I am within my personal tax allowance for this year (not so next year) so it looks like it may be worth opening the SIPP just to recycle the govt top-up this year then keep the SIPP for the marginal annual gain going forward. Is this feasible time-wise (ie will the cash top-up be provided in time for me to withdraw this tax year)? Secondly, can I do this on the same SIPP account (ie pay in, draw almost all then subsequently continue contributions)? Thirdly, one I've drawn it seems I've capped any future contributions at £4K (not an issue as it stands but could be if I start earning again)?

cheers

BobWelham

123mat123 said:

Would there be IHT benefits to adding to SIPP at this relatively late stage....?

Yes. The SIPP will be inherited free of IHT. Moreover, you do not need to live a further seven years - the SIPP contribution leaves your IHT-taxable estate immediately you make it.

Albermarle

However, the thing that may push it over the edge is that I am within my personal tax allowance for this year (not so next year) so it looks like it may be worth opening the SIPP just to recycle the govt top-up this year then keep the SIPP for the marginal annual gain going forward. Is this feasible time-wise (ie will the cash top-up be provided in time for me to withdraw this tax year)? Secondly, can I do this on the same SIPP account (ie pay in, draw almost all then subsequently continue contributions)? Thirdly, one I've drawn it seems I've capped any future contributions at £4K (not an issue as it stands but could be if I start earning again)?

Yes if you are not paying tax when you take the money out then you gain the full £720 tax relief ( assuming whilst the money is in the SIPP it stays in cash , so no investment gains and losses) On the second point , best to follow the link I posted and spend an hour reading that . For example some SIPP providers are better than others for this exercise.. Third point - correct. 

Audaxer

joeNZ said:

However, the thing that may push it over the edge is that I am within my personal tax allowance for this year (not so next year) so it looks like it may be worth opening the SIPP just to recycle the govt top-up this year then keep the SIPP for the marginal annual gain going forward. Is this feasible time-wise (ie will the cash top-up be provided in time for me to withdraw this tax year)?

You seem to be too late to make a contribution now and receive the tax relief this tax year, as the HL tax relief calendar shows that for contributions made between 6 March and 5 April, the tax relief will not be received until 21 May. You would have had to have made the contribution by 5 February to receive the tax relief in time to withdraw it before the end of this tax year.