Work Pension and SIPP and that lump sum in SW.

lookatbowen

Hello all. 
A bit of background I hope will help with my questions below:

• I am 47 years old.
• I am currently contributing 23% while my employer is contributing 3% into a smart work pension, which is invested in three (3) funds that I chose. 
• The smart pension only has 12 pension funds to choose from. 
• I have a Scottish Widows pension that I do not contribute to anymore.
• I am in the process of partially transferring a lump sum of cash from my Scottish Widow pension to a SIPP provider, which I want to invest in stocks and funds.
  
• My employer has stated they will not divert their 3% pension contribution to my SIPP provider. 
• I want to keep my work pension because my employer contributes a percentage to my pension (free money).
  
• I aim to contribute a minimum of 25% of my salary into my pension.
• I fall in the 40% tax bracket. 

Given the above, I would like to know the following: 

1. If I matched my employer's 3% pension contribution and then set up a debit order to pay the other 19% contribution into my SIPP to be invested in stocks or funds, will the tax allowance still be 20% regardless of how a split up the contribution? (employer 3% / me 3% work pension and me 19% SIPP)? 
2. Given I am in the 40% tax bracket, can I still apply for the extra 20% tax allowance through my self-assessment regardless of how I have made the contributions (SIPP and Work Pension)? 
3. Do I have to have a SIPP to get the extra 20% tax allowance through my self-assessment?   Could I have requested this 20% extra allowance by just having my workplace pension?
4. Am I correct in believing that between the workplace pension and SIPP, the contribution amount cannot be more than £40000 a year? 
   
5. Ignoring question 1-4 above for a moment, now that I am going to have a SIPP and knowing the background above would it wise to leave the 23% pension contribution into Smart Pension or would I be better investing that contribution into SIPP?  
   

Thanks in advance.
Kind regards,
Mike

NottinghamKnight

1. Contributions are gross so if you pay directly into a SIPP then the Sipp provider adds 20% for basic rate tax to your contribution and you reclaim higher rate tax from HMRC by self assessment or contacting them.
2. Yes for you SIPP contributions, if you are in an employer smart scheme then the contributions are taken gross so you can't reclaim another 20/ 40%.
3. Not sure of the question probably related to 2 above.
4. Yes, but you can carry forward previously unused allowance from past tax years if that is available.
5. You are slightly better off using the smart pension because you save NI as well (does the employer contribute any of theirs?) so best solution given that the scheme allows you to transfer out is to do that on an annual basis.
Just for confirmation you do have to pay HRT on all of the contributions for 40% tax relief, some may only get 20% if the contribution takes you below the HRT limit,

lookatbowen

NottinghamKnight said:

1. Contributions are gross so if you pay directly into a SIPP then the Sipp provider adds 20% for basic rate tax to your contribution and you reclaim higher rate tax from HMRC by self assessment or contacting them.
2. Yes for you SIPP contributions, if you are in an employer smart scheme then the contributions are taken gross so you can't reclaim another 20/ 40%.
3. Not sure of the question probably related to 2 above.
4. Yes, but you can carry forward previously unused allowance from past tax years if that is available.
5. You are slightly better off using the smart pension because you save NI as well (does the employer contribute any of theirs?) so best solution given that the scheme allows you to transfer out is to do that on an annual basis.
Just for confirmation you do have to pay HRT on all of the contributions for 40% tax relief, some may only get 20% if the contribution takes you below the HRT limit,

Hi NottinggamKnight, 
Thank you for answering my questions.
I understand what you are saying in answer 5 because of the slight savings regarding the NI and yes my employer does contribute theirs as well, so that makes sense. But what do you mean by transfer out at the end of the year? 
With regard to Question 2, I am trying to understand if it benefits me with regards to the tax allowance if I contributed more to my SIPP than my work pension each month granted there may be better choices available to me in my SIPP versus the dozen funds I have access to in the smart pension.  

NottinghamKnight

If the employer is giving you all of their NI then it's a lot more than a slight savings, it's quite a good chunk. You can transfer out whenever you want assuming the scheme allows it, his could be annual, or less or more, and that way you get the maximum paid in but have the ability to invest in your SIPP as it is transferred in. Paying into your SIPP would be worse as you wouldn't get the NI savings, which are significant if the employers NI is included.
Sorry I thought the SW pension was your employers, have you asked your employer/ pension provider if you can transfer out on a periodic basis?

lookatbowen

NottinghamKnight said:

If the employer is giving you all of their NI then it's a lot more than a slight savings, it's quite a good chunk. You can transfer out whenever you want assuming the scheme allows it, his could be annual, or less or more, and that way you get the maximum paid in but have the ability to invest in your SIPP as it is transferred in. Paying into your SIPP would be worse as you wouldn't get the NI savings, which are significant if the employers NI is included.
Sorry I thought the SW pension was your employers, have you asked your employer/ pension provider if you can transfer out on a periodic basis?

It is possible to transfer out, but I would have to cease the workplace pension scheme, which I don't want to do. 

NottinghamKnight

Well you are slightly worse off if you contribute outside your employers scheme, but appear to have wider fund choices, it's up to you whether you think it is worthwhile. Do you earn over £65k?

lookatbowen

Yes, I do. 
I punched in a few numbers on the "listen to the taxman" website and from what I can see:
National Insurance contributions are the same whether I contribute 23% for my workplace pension or 3%, therefore would it make a big difference if I contributed 3% into my workplace pension matching what my employer contributes and contribute 19% of my salary into my SIPP?
According to Which website (or a video on Tax relief)
High earners may have to claim the tax relief through a tax return. (I assume here they mean for my SIPP contributions). 
If you are part of a company pension and your employer operates under Net Pay arrangements, the tax relief will be automatically added to your pension. (automatically done for me). 
The main reason I want to put more into SIPP is that I have more choices in the SIPP versus the workplace pension? 

NottinghamKnight

No, if it's a salary sacrifice or smart pension then you get to retain the NI saving with your employer that you wouldn't paying into a sipp. This is only 2% for employee but is 13.8% for employer contributions so if you are getting all of the employers saving then that is worthwhile.

Dazed_and_C0nfused

I suspect you are getting confused with the different types of pension contribution.

Relief at source (typically a SIPP or personal pension) - this is where you contribute the net amount and the pension company, courtesy of HMRC, add the 25% uplift.  For example you contribute £1,000, the pension company adds £250 giving you a fund of £1,250.

Net pay (typically a defined benefit scheme) - this is where your contribution is deducted before tax (but not NI) is calculated.  For example you earn a salary of £35,000 and contribute 10% under a net pay arrangement so your taxable pay (the amount shown on your P60) is only £31,500.

Salary sacrifice/smart pension (typically an employer's defined contribution scheme) - you aren't contributing anything to the pension.  You are agreeing to a lower salary in return for your employer contributing to the pension.  That is why there is no pension tax relief with salary sacrifice.  The tax (and NI) saving comes from having less salary to be subject to tax and NI in the first place.

cloud_dog

Can you confirm how much you earn?  It is important because may have a material impact on your plans.

Also, can you confirm if you can control how much you contribute, via portal or similar, or whether you have to contribute the amount/percentage for a tax year, i.e. are you able to alter your contributions during the year i.e.  £X for 6 months and £Y for 6 months of the year.

lookatbowen

I like your name Dazed and confused. I should be called Dazed and confused 2 Thanks for explaining the different pension contributions. I am definitely not on salary sacrifice. In answer to Cloud_Dog, I log into a pension portal and I am able to adjust my pension contribution percentage any time of the year, as well as pick and choice from the 12 funds available. 
I set the pension contribution to 22% and my company has to pay a minimum of 3%.