SIPP considerations when no longer working

ljayljay

Just to say I have only started using these forums in recent months and wished I read them earlier as have come across lots of useful advice and information, including things that I had never thought about. One thing I keep on reading on these sites is about SIPP’s and since both myself and wife have always mainly been in contracted out DB employer schemes I have totally ignored. Especially with high outgoings, mortgage, children etc we probably wouldn’t have been able to afford extra pension contributions in any case. However, our financial situation has significantly improved in recent years i.e. no mortgage or dependents so we both decided to retire a year or so early as fortunately able to claim DB pension at 60. In fact, I claimed mine a few months early when my wife left work in the summer.

My questions following some of the threads on here are as follows.

I do not work so believe I could only contribute £2,880 into a SIPP, however, as I am 59 and a BR taxpayer, in receipt of a DB pension, is there much point in doing so? Am I right in thinking that there would only be a marginal tax advantage in doing this after paying tax in drawdown?

More relevant is probably my wife’s situation. As I mentioned earlier, she finished working in the summer this year after receiving taxable earnings of approximately £15,000 for TY 20/21. Subsequently she will have no further income until drawing her DB pension of approximately £11,000 in August 2021 (i.e. approximately £7,500 for TY 21/22) and will therefore be within the personal tax allowance until she receives her state pension at 67.  

My main question is what financial considerations should she be making in order to maximise her income between now and 67? I am also aware she could transfer part of her personal allowance to me, however this would mean that from TY 22/23 her DB pension will just about use up most of her allowance and would put her back in the same situation as me.

Appreciate any advice or experiences anyone has had with similar circumstances.

Albermarle

Am I right in thinking that there would only be a marginal tax advantage in doing this after paying tax in drawdown?

Yes it is only £180 pa .

As I mentioned earlier, she finished working in the summer this year after receiving taxable earnings of approximately £15,000 for TY 20/21. 

If she could afford it she could add £12K to a pension and tax relief of £3K would be added. Or less if that was more affordable .

Next year she could withdraw £1666 tax free and £5K taxable but as she will have £5K room in her personal allowance she would not actually pay any tax .

Dazed_and_C0nfused

But don't forget that that £180 is 6.25%.

625x better return than quite a few savings account are currently paying

ljayljay

Albermarle said:

Next year she could withdraw £1666 tax free and £5K taxable but as she will have £5K room in her personal allowance she would not actually pay any tax .

Thanks so to follow up -

1) So, are you saying that she can still put an additional £15,000 into a SIPP (including the £3,000 tax relief) even though she will have paid pension contributions on her £15,000 salary?

2) Can she still get £3,000 tax relief, even though she only paid £150 tax during TY 20/21 (NB I transferred part of my personal allowance to her this TY).

3) If having the SIPP is fairly short term i.e. 7/8 years up to age 67 and drawdowns starting within a year, can some of it just be held in cash for the early drawdowns? Assume would make little sense cashing in an investment after just a few months. 

4) If as above this would still leave £8,000 in the fund, would it still be worth adding the £2,880 in subsequent years and just recalculate how much to withdraw every year to maximise the tax allowances?

5) Would the SIPP provider calculate any tax exemption or is it a matter of claiming a refund from HMRC?

6) She currently has a S&S ISA with Fidelity (previously Cavendish). So, I guess she could just use them or would there be a better platform for a fairly small SIPP as discussed here?

7) If proceeding with the above I assume that there is no financial advantage to transfer any of her personal allowance to me, is that correct?

Apologies for so many questions but am very 'green' when it comes to private pension/tax implications.

ljayljay

Dazed_and_C0nfused said:

But don't forget that that £180 is 6.25%.

625x better return than quite a few savings account are currently paying

True, maybe i'll have a rethink.

In these circumstances would it also make sense to invest, let it roll over, take the 25% when returns hopefully look good and just pay the appropriate tax on the remainder?

Dazed_and_C0nfused

1.  That is the first time you mentioned that.  It will make a difference but she is likely to be able to add a significant amount of not the full £15k.

2.  Yes, subject to point 1.  Not sure how she will have only paid £150 though.

3.  Yes.  Will introduce an extra risk though although the tax relief will mitigate that.

4.  It's easy money.

5.  No idea what you are referring to.  There is no tax "exemption" with a SIPP.

6.  Lots of options.  Google "snowman's spreadsheet" for info on costs for different pot sizes.

7.  You haven't given enough information to know for certain.  What you need to remember is that the person applying has a reduced Personal Allowance.  The person receiving Marriage Allowance gets £250 (current tax year) knocked off their tax bill, they do not get a higher Personal Allowance.  Tax is all about the detail and in some situations Marriage Allowance can be more beneficial than it first seems.

ljayljay

Thanks, very informative. As I say, a bit green so apologies if some of my questions are nonsensical.

Dazed_and_C0nfused said:

1.  That is the first time you mentioned that.  It will make a difference but she is likely to be able to add a significant amount of not the full £15k.

Any idea how I will find this out?

2.  Yes, subject to point 1.  Not sure how she will have only paid £150 though.

Just checked her tax return -

Taxable income £14,500-£13,750x20%=£150 after just recently receiving a tax refund for this year Transferred some of my allowance TY 20/21 as I only started receiving pension recently, but will transfer back from TY 21/22.

5.  No idea what you are referring to.  There is no tax "exemption" with a SIPP.

Must have worded this wrong. Following advice from Albermarle if took out £1,666 lump sum and £5k taxable, albeit below personal allowance, will the platform automatically deduct the tax and leave it to the recipient to contact HMRC for a refund?

Albermarle

ljayljay said:

Thanks, very informative. As I say, a bit green so apologies if some of my questions are nonsensical.

Dazed_and_C0nfused said:

1.  That is the first time you mentioned that.  It will make a difference but she is likely to be able to add a significant amount of not the full £15k.

Any idea how I will find this out?

2.  Yes, subject to point 1.  Not sure how she will have only paid £150 though.

Just checked her tax return -

Taxable income £14,500-£13,750x20%=£150 after just recently receiving a tax refund for this year Transferred some of my allowance TY 20/21 as I only started receiving pension recently, but will transfer back from TY 21/22.

5.  No idea what you are referring to.  There is no tax "exemption" with a SIPP.

Must have worded this wrong. Following advice from Albermarle if took out £1,666 lump sum and £5k taxable, albeit below personal allowance, will the platform automatically deduct the tax and leave it to the recipient to contact HMRC for a refund?

If she earns £15K , she can add max £12K to a pension + £3K tax relief. If she has already made some pension contributions then this will reduce the amount that can be added separately .
The word 'exemption ' is technically incorrect . You can gain tax relief but that depends on how much you earn , other income etc 

Probably the platform will take off tax at the basic rate and you will have to claim it back . They may even take off more tax than you might expect as it is an irregular payment .

Dazed_and_C0nfused

ljayljay said:

Thanks, very informative. As I say, a bit green so apologies if some of my questions are nonsensical.

Dazed_and_C0nfused said:

1.  That is the first time you mentioned that.  It will make a difference but she is likely to be able to add a significant amount of not the full £15k.

Any idea how I will find this out?

2.  Yes, subject to point 1.  Not sure how she will have only paid £150 though.

Just checked her tax return -

Taxable income £14,500-£13,750x20%=£150 after just recently receiving a tax refund for this year Transferred some of my allowance TY 20/21 as I only started receiving pension recently, but will transfer back from TY 21/22.

5.  No idea what you are referring to.  There is no tax "exemption" with a SIPP.

Must have worded this wrong. Following advice from Albermarle if took out £1,666 lump sum and £5k taxable, albeit below personal allowance, will the platform automatically deduct the tax and leave it to the recipient to contact HMRC for a refund?

1.  What type of scheme was it, DB or DC?  If it's DC then it's fairly simple to work out.  DB is more complicated.  I think.

2.  Her earnings were £15k at the start of this thread  .  Maximum Personal Allowance is £12,500 although probably won't make a difference in this situation although her savings starter rate band will be less than you would calculate.

This also means there is no way she can contribute £15k.

3.  £1,666 would be TFLS, irrelevant for income tax.  £5,000 would be taxable income and the tax due would depend on her other taxable income in the same tax year.

ljayljay

Thanks both for your advice.

It is a DB scheme. I have looked at snowmans spreadsheet which is very useful. I will have a further dig around to check out how to calculate what can be purchased this year. Just had a further check and see that her gross pay for the year was £15,400 icluding employee pension contributions and £14,500 taxable. So, maybe just need to knock £900 off, although be surprised if that simple.

xylophone

It is a DB scheme. 

Link below to  https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-contributions-qa/#relatedcontent

Pension contributions: Q&A

Q: My client is an active member of his employer’s defined benefit pension scheme. He also wants to make a personal pension contribution. 

 may be of interest.