SIPP - Have I understood them correctly?

marycanary

I am a member of the Local Government Pension Scheme, and I have been making regular AVC payments.  I intended to add a further £30,000 in AVC before the end of the financial year. (I have sufficient taxable earnings and carried forward Annual Allowance).  Silvertabby then gave very useful information that the AVC would exceed 25% of the pension value. This has made me reassess my options. I may still pay the AVC and decide what to do with any taxed element later. On the other hand,  a SIPP may add flexibility. Until now I hadn't considered a SIPP so I would like to check I have understood them correctly.

If I contribute £30,000 of taxed income in a SIPP tax relief will be added 30,000*1.25 = £37,500. It can then be withdrawn as tax free lump sum of £9375 plus a further £12,500 tax free, using the Personal Allowance, assuming no other taxable income.

I hope to retire in the next two years. If I have understood correctly I could live on the SIPP for a year to reduce the actuarial reduction from taking the pension early. The balance could be left invested until it is needed in the future to pay for major home repairs, a car or the like.
Mary

zagfles

Note that the pension input amount to the SIPP would be £37,500 rather than £30,000 with your original AVC plan, so make sure you take that into account in the AA calculations.

Dazed_and_C0nfused

You have the basics right.

If you are able from a contribution limit perspective to contribute £37.5k then you hand over £30k and the pension company adds the £7.5k basic rate tax relief.

Depending on your overall tax position you may be entitled to some additional tax relief but that will save you money, it doesn't go in the pension fund.  This will be relevant if you pay intermediate rate or higher rate tax.

If you kept it in cash in the SIPP then you will have £37.5k (eroded by inflation such as it is at the moment and any provider fees) and can indeed take 25% TFLS and the balance will be taxable income.

If you took £12,500 in a tax year where you had no other earnings/pension income then ultimately no tax would be due on it.

Some people choose not to take the TFLS upfront but take it as part of each payment i.e. take £16,666 of which £4,166 is tax free and £12,500 taxable.

marycanary

Hi
Thank you
I did not realise that the applicable amount for allowance and income purposes was £37,500. I've done a rough calculation and I think I only have £32,000 remaining. The limiting factor is taxable income not carried forward allowance. 
I have decided to open a SIPP with AJ Bell for the extra flexibility one would provide. 
Mary

Dazed_and_C0nfused

If you can only contribute £32,000 gross to a relief at source pension such as a SIPP then you hand over £25,600 and the pension company, courtesy of HMRC, adds the other £6,400