Some naive questions about opening a SIPP

bugbyte_2

Hi, My wife and I are looking to open a SIPP and have a few questions which I can’t seem to get to the bottom of. We both have Teachers pensions which we hope to access in about 8 years time. My wife’s is considerably smaller than mine as she has always been part time and never been promoted. I pay 40% tax and she pays 20%. We have around £1000 a month extra to put a way and this has for the past few years gone into tracker funds mostly in her name via a Stocks and Shares ISA through Cavendish (Fidelity). This is currently at £41,000. We have joint accounts for everything else and don’t differentiate between each other’s money. At pension age I we will both likely be in the 20% band, especially when state pension kicks in.

OK the questions - Ideally we would like to boost her pension, but as my tax relief paying in would be 40% to her 20%, am I right in thinking that putting it in my name therefore gives the best return? She is OK with this BTW!

 

We are looking at a fund platform such as AJ Bell although I haven’t picked one yet. If I open it with a lump sum from our savings - say £8,000 - do I get the 40% relief on that? Or is the relief only on the £1000 I put away each month? I ask because the rules state ‘your earnings’ and although the £8,000 was ‘my earnings’ its not current earnings, or am I just getting tied up in semantics!

 

I have read that typically the fund platform processes the 20% automatically, but I have to apply for the extra 20% as a higher rate tax payer. Is this correct and if so how hard is it?

Thanks in advance for any answers!

Linton

bugbyte_2 said:

Hi, My wife and I are looking to open a SIPP and have a few questions which I can’t seem to get to the bottom of. We both have Teachers pensions which we hope to access in about 8 years time. My wife’s is considerably smaller than mine as she has always been part time and never been promoted. I pay 40% tax and she pays 20%. We have around £1000 a month extra to put a way and this has for the past few years gone into tracker funds mostly in her name via a Stocks and Shares ISA through Cavendish (Fidelity). This is currently at £41,000. We have joint accounts for everything else and don’t differentiate between each other’s money. At pension age I we will both likely be in the 20% band, especially when state pension kicks in.

1) OK the questions - Ideally we would like to boost her pension, but as my tax relief paying in would be 40% to her 20%, am I right in thinking that putting it in my name therefore gives the best return? She is OK with this BTW!

 

2) We are looking at a fund platform such as AJ Bell although I haven’t picked one yet. If I open it with a lump sum from our savings - say £8,000 - do I get the 40% relief on that? Or is the relief only on the £1000 I put away each month? I ask because the rules state ‘your earnings’ and although the £8,000 was ‘my earnings’ its not current earnings, or am I just getting tied up in semantics!

 

3) I have read that typically the fund platform processes the 20% automatically, but I have to apply for the extra 20% as a higher rate tax payer. Is this correct and if so how hard is it?

Thanks in advance for any answers!

1) All other things being equal you getting 40% relief when paying in and paying 20% + Tax Free Lump Sum when drawing down is better than your wife just getting the advantage of the TFLS. For either of you it would be tax advantageous if you could extract a significant amount from your SIPPs whilst having otherwise unused tax allowance.  If it is easier for you wife to do this than you then that could be a justification to put the money into her pension.

2) When paying into a pension it doesnt matter where the money physically comes from (except possibly if it's from another pension!).  What matters is that your total gross contributions do not exceed either your earnings or the £40K limit in a tax year.  I guess the £40K limit, which does include employer pension contributions, wont be an issue.

3) Correct.  To claim the 20% higher rate relief you could just let HMRC know ( phone them if you can get through) or wait until the tax year end if you complete a tax return or I think HMRC may pick it up anyway.

bugbyte_2

Thanks Linton thats fantastic. One final question - to claim 40% relief can I only put in what I earn above the £50,000 threshold - i.e. if I earn £65,000 can I only claim for £15,000 pa, or can I claim 40% for an amount above that? 

zagfles

bugbyte_2 said:

Thanks Linton thats fantastic. One final question - to claim 40% relief can I only put in what I earn above the £50,000 threshold - i.e. if I earn £65,000 can I only claim for £15,000 pa, or can I claim 40% for an amount above that? 

You can only get 40% relief to the extent you pay 40% tax, so in the example above, anything over £15k gross would just get you basic rate relief.

You also need to watch out for the annual allowance, as in a generous DB scheme like the teachers, and on £65k, you might exceed the annual allowance, it's likely that the PIA (pension input amount) from the DB scheme is around a third of your salary, so you'd be getting close with a £15k SIPP contribution in addition. Look at your PIAs from the last few tax years, they should be on your annual statements, and see how much spare you tend to have. Note that the PIAs can vary considerably from year to year if you have long service, due to discrepancies in inflation rates used, and payrises can have a major impact especially if you have a final salary link. Could use a carry forwards calculator like https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator - use the PIAs to the DB scheme plus gross contributions to any DC scheme like a SIPP, money purchase AVCs etc.

zagfles

Linton said:

bugbyte_2 said:

Hi, My wife and I are looking to open a SIPP and have a few questions which I can’t seem to get to the bottom of. We both have Teachers pensions which we hope to access in about 8 years time. My wife’s is considerably smaller than mine as she has always been part time and never been promoted. I pay 40% tax and she pays 20%. We have around £1000 a month extra to put a way and this has for the past few years gone into tracker funds mostly in her name via a Stocks and Shares ISA through Cavendish (Fidelity). This is currently at £41,000. We have joint accounts for everything else and don’t differentiate between each other’s money. At pension age I we will both likely be in the 20% band, especially when state pension kicks in.

1) OK the questions - Ideally we would like to boost her pension, but as my tax relief paying in would be 40% to her 20%, am I right in thinking that putting it in my name therefore gives the best return? She is OK with this BTW!

 

2) We are looking at a fund platform such as AJ Bell although I haven’t picked one yet. If I open it with a lump sum from our savings - say £8,000 - do I get the 40% relief on that? Or is the relief only on the £1000 I put away each month? I ask because the rules state ‘your earnings’ and although the £8,000 was ‘my earnings’ its not current earnings, or am I just getting tied up in semantics!

 

3) I have read that typically the fund platform processes the 20% automatically, but I have to apply for the extra 20% as a higher rate tax payer. Is this correct and if so how hard is it?

Thanks in advance for any answers!

1) All other things being equal you getting 40% relief when paying in and paying 20% + Tax Free Lump Sum when drawing down is better than your wife just getting the advantage of the TFLS. For either of you it would be tax advantageous if you could extract a significant amount from your SIPPs whilst having otherwise unused tax allowance.  If it is easier for you wife to do this than you then that could be a justification to put the money into her pension.

2) When paying into a pension it doesnt matter where the money physically comes from (except possibly if it's from another pension!).  What matters is that your total gross contributions do not exceed either your earnings or the £40K limit in a tax year.  I guess the £40K limit, which does include employer pension contributions, wont be an issue.

3) Correct.  To claim the 20% higher rate relief you could just let HMRC know ( phone them if you can get through) or wait until the tax year end if you complete a tax return or I think HMRC may pick it up anyway.

This is completely wrong. The pension input amount is what counts for a DB scheme as far as the "£40k" annual allowance goes, this has nothing whatsoever to do with contributions. It's the increase in value of the pension, taking into account inflation, it's quite complicated to work it out but it has nothing to do with contributions. And the OP could well have an annual allowance issue, as I've just mentioned in my other post.

For a DC pension, such as a SIPP, it is contributions that count.

Linton

Yes, I did not notice the DB pension for the £40K limit, so it is useful to point it out.  However, as it would seem the OP will have significant carry-over of the £40K limit from previous years this should not be a serious factor, at least for a few years.  Perhaps the OP should check the Lifetime Allowance as well.

zagfles

Linton said:

Yes, I did not notice the DB pension for the £40K limit, so it is useful to point it out.  However, as it would seem the OP will have significant carry-over of the £40K limit from previous years this should not be a serious factor, at least for a few years.  Perhaps the OP should check the Lifetime Allowance as well.

Yes for now the AA would likely be OK with carry forwards, but it's worth keeping an eye on particularly if they intend carrying on for a few years with those levels of contributions. Lifetime allowance less likely to be an issue - with a £25k pension would leave half a million available LTA left, contributing £15k a year for 8 years is unlikely to get to half a million! They've invested very well (or more likely very lucky) if they get anywhere near that!

Though OP used £65k as an example - may not be their actual salary...

bugbyte_2

Hi,
Salary is around 65K, current pension contributions around 7 1/2 K. The unknown is how much my pension increased and therefore added to the 7 1/2 K.  However, I think carry forward will be my saviour. According to the HL website posted above I have around £130,000 to play with over the four years  and to quote HMRC:
"You don’t need to notify HM Revenue & Customs if you use carry forward to reduce or eliminate an annual allowance tax charge. We suggest you keep a copy of your calculations in case they are required."

So all good. Around £8 1/2 K (65 -  50 - 7.5) can come from this years allowance at 40%, with any additional - say another £12K -from previous years carry forward.

For something that is meant to be accessible to us commoners it isn't half complicated!

Albermarle

The unknown is how much my pension increased and therefore added to the 7 1/2 K

If you mean by this , investment growth of the funds in the pension , then this can be ignored when looking at the Annual allowance. It only takes into account contributions that tax relief is paid on.

Linton

bugbyte_2 said:

Hi,
Salary is around 65K, current pension contributions around 7 1/2 K. The unknown is how much my pension increased and therefore added to the 7 1/2 K.  However, I think carry forward will be my saviour. According to the HL website posted above I have around £130,000 to play with over the four years  and to quote HMRC:
"You don’t need to notify HM Revenue & Customs if you use carry forward to reduce or eliminate an annual allowance tax charge. We suggest you keep a copy of your calculations in case they are required."

So all good. Around £8 1/2 K (65 -  50 - 7.5) can come from this years allowance at 40%, with any additional - say another £12K -from previous years carry forward.

For something that is meant to be accessible to us commoners it isn't half complicated!

Your current contributions to the DB pension do not count against the AA, they only count against the earnings limit, and you have plenty of spare there.  So you may have more to play with than you say.

bugbyte_2

Brill!
Thanks for all the responses.