Claiming the £720 annual tax relief once retired

Pyewacket69

Could some kind soul sanity check me please? Currently a hypothetical scenario. 

I have taken 25% of my pension tax free, and am now in drawdown, withdrawing my personal tax allowance per year, 12500. I have no other income. 

Each year from savings I put 2880 into a second SIPP, which the governemnt tops up to 3600. I invest this and let this pot grow over a number of years. 

Eventually I want to access the money in the second SIPP, and my original drawdown provider doesn't allow any transfers in. Do I simply put the money in a second drawdown product and withdraw from there? Obviously being mindful not to exceed the personal tax allowance each year. (E.g. pause withdrawals on the first drawdown product while withdrawing from the second).

Thank you for any insight, this cunning plan seems too simple to be true...

Linton

Your cunning plan is fine.  I guess another option would be to transfer your first SIPP into your second, but the effort to do that would perhaps be not very different to swapping the drawdown stream.  Depending on your platform(s) there may be a difference in charges between the options but it should be relatively small.

bowlhead99

If you aren't close to hitting the lifetime allowance and aren't at risk of needing to pull money out of a pension so fast that you pay higher rate tax on it, it doesn't hurt to keep adding more money to your pension pot(s) at the maximum allowed rate of £3600 a year and getting the £720 of tax relief.   

It may not be possible to draw that money out entirely tax free of course, because only 25% of the £3600 or whatever it grows into is officially tax free. The other 75% of it would either cost you some tax (if it was being taken on top of the £12500 of other pension income), or it would not cost you tax because it was being taken within your personal allowance but it would displace other pension income that was otherwise going to use that personal allowance (as you suggest, pause the first drawdown product to access the second tax free, but you are still left with money inside a pension that costs tax to extract at some point.  Perhaps  you die with an uncrystallised amount in one of your pensions before age 75, allowing the pot to get passed to some beneficiary tax-free outside your estate with no income tax to pay, which is nice and efficient but means you died

So depending on personal circumstances you might be overstating the benefit to think of it as £720 'free', if some of the £3600 gets taxed. But even 20% tax on 75% of £3600 is still not as much as the £720 they gave you, so is worth doing if you don't mind a bit of admin. A cunning plan, with its own dedicated thread elsewhere on the board. 

Albermarle

With two drawdown accounts , you will probably find you get taxed wrongly and have to claim it back .
https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired#latest
Here is a link to the thread Bowlhead mentioned.

green_man

bowlhead99 said:

So depending on personal circumstances you might be overstating the benefit to think of it as £720 'free', if some of the £3600 gets taxed. But even 20% tax on 75% of £3600 is still not as much as the £720 they gave you, so is worth doing if you don't mind a bit of admin. A cunning plan, with its own dedicated thread elsewhere on the board. 

Indeed. It looks like you will only be £180 better off in the scenario where your original pot is large enough to support a £12500 withdrawal per year.

I will be in a similar position from next year and considered this, but for £180 it’s not worth the effort and tying up of the money for me.

Pyewacket69

green_man said:

bowlhead99 said:

So depending on personal circumstances you might be overstating the benefit to think of it as £720 'free', if some of the £3600 gets taxed. But even 20% tax on 75% of £3600 is still not as much as the £720 they gave you, so is worth doing if you don't mind a bit of admin. A cunning plan, with its own dedicated thread elsewhere on the board. 

Indeed. It looks like you will only be £180 better off in the scenario where your original pot is large enough to support a £12500 withdrawal per year.

I will be in a similar position from next year and considered this, but for £180 it’s not worth the effort and tying up of the money for me.

The original drawdown pot will only sustain 12500 per annum for 8 or 9 years, so should avoid paying tax on the 'second' pot to a large extent, thank you for the heads up. 
Many thanks to all for the feedback that's wonderful, my first viable cunning plan? Had to happen eventually! 

green_man

The original drawdown pot will only sustain 12500 per annum for 8 or 9 years, so should avoid paying tax on the 'second' pot to a large extent,

Won’t you be drawing a state pension by then though? Or very close to? (I.e state pension using your tax free allowance)

where_are_we

green_man said:

bowlhead99 said:

So depending on personal circumstances you might be overstating the benefit to think of it as £720 'free', if some of the £3600 gets taxed. But even 20% tax on 75% of £3600 is still not as much as the £720 they gave you, so is worth doing if you don't mind a bit of admin. A cunning plan, with its own dedicated thread elsewhere on the board. 

Indeed. It looks like you will only be £180 better off in the scenario where your original pot is large enough to support a £12500 withdrawal per year.

I will be in a similar position from next year and considered this, but for £180 it’s not worth the effort and tying up of the money for me.

A £180 return on a £2880 outlay gives you a annual gain of about 6% guaranteed by the government - compared to instant access cash returns of just above 1% and getting lower every day. Ok you have to wait 6 or 7 weeks for HMRC to add the tax relief. We have been doing this each year since 2015. After the initial set up its not much effort.