Sipp investment limits

rothers

My wife is opening a sipp and we have a couple of questions about how much can be invested and when...

I understand that a person can invest up to 100% of their wage into a sipp per year, is that a rolling year of can we put a lump sum in now followed by another in April? The total amount would be more than her annual wage. 

In addition, I will be retiring at 55 on a final salary pension which will also provide a lump sum (my pension will not increase if I work longer). My wife will be continuing to work on my retirement, is there anything to stop me giving her part of my lump sum each year to invest in defensive stocks (or leave in cash as she will be retiring 4 years later) just to take advantage of the tax benefit?

Many Thanks

Linton

You can put your gross earnings each tax year into a pension - it's not a rolling year.  So how much you can put into a SIPP depends on how much you have contributed to other pensions in that tax year.  You can pay money into a pension after April 5th in the expectation that your earnings in that new tax year will cover the amount.  Note that when you wish to contibute £x to a personal pension you actually pay in 80% of £x and HMRC add the missing 20% tax relief directly into the pension.

There is nothing to stop you doing whatever you like with your tax free lump sum except possibly paying it back into your pension.  Any contribution you make to your wife's SIPP is regarded as her making the payment, so it's still limited by her annual earnings and she gets the tax benefit.

rothers

That’s great, thanks very much Linton. I presume that the max that she can pay in includes the amount that the govt puts in? Ie if she earns £20k the max that she could put in is £16k (if she didn’t pay into another pension). 

dunstonh

e if she earns £20k the max that she could put in is £16k (if she didn’t pay into another pension). 

If she earns £20k then the maximum she can pay in to the pension is £20k.      i.e. pension contribution £20,000.  Net contribution after tax relief is £16,000.    use the gross contribution when working out maximums.   It doesn't always come out the same if you use the net method.

Alexland

Also in terms of making another lump sum contribution in the new tax year from 6th April it might be safer to wait until she has earned most of the money for next tax year (or make multiple contributions during the tax year) incase there is any unexpected change in circumstances that cause her earnings to drop below the level you had expected.

LHW99

rothers said:

That’s great, thanks very much Linton. I presume that the max that she can pay in includes the amount that the govt puts in? Ie if she earns £20k the max that she could put in is £16k (if she didn’t pay into another pension). 

dunstonh said:

e if she earns £20k the max that she could put in is £16k (if she didn’t pay into another pension). 

If she earns £20k then the maximum she can pay in to the pension is £20k.      i.e. pension contribution £20,000.  Net contribution after tax relief is £16,000.    use the gross contribution when working out maximums.   It doesn't always come out the same if you use the net method.

I am a little confused here (and maybe the OP is too?).

The "maximum allowed in the SIPP is your gross earnings (less any payment into a company pension).

However if the £20 is her gross earnings, and there is no company pension, she would surely "put in" £16k to the SIPP - because if she paid £20k in, then there could be an issue of the SIPP provider claiming tax relief which would take the actual contribution over her gross earnings?

Albermarle

However if the £20 is her gross earnings, and there is no company pension, she would surely "put in" £16k to the SIPP - because if she paid £20k in, then there could be an issue of the SIPP provider claiming tax relief which would take the actual contribution over her gross earnings?

Yes she can put in £16K and no more. However it will be grossed up to £20K .

The way Dunstonh states it is the correct way but I can see it can sound a bit confusing to the uninitiated.

rothers

Thanks all, I am fairly settled on the vanguard LifeStrategy multi asset fund, my only other decision to make is whether to go with 60% or 80% equity. My wife is fifty and will be working for another ten years however we should be in a position to delay drawdown for 2 or 3 years if we are in the middle of a slump at that time. The reason for my indecision is that I’ve read about bonds potentially not returning as much if interest rates rise. 

Can anyone offer any opinions on that? Cheers. 

dunstonh

However if the £20 is her gross earnings, and there is no company pension, she would surely "put in" £16k to the SIPP - because if she paid £20k in, then there could be an issue of the SIPP provider claiming tax relief which would take the actual contribution over her gross earnings?

The amount going into the pension is £20k.  Not £16k.      £16k is what the net contribution is.

The way some sites describe tax relief in recent years has created potential confusion.   Also, the way some providers no longer pre-fund tax relief hasn't helped.      You also need to remember that there are more than type of pension.  Some still get no tax relief at source but need to declared via self assessment.   So, the safest way to describe a pension contribution, when dealing with limits, is the same way HMRC look at it and is the historic way of looking at it. i.e. Gross contributions.

Alexland

If she is still working it's also worth considering if a direct contribution of all this into a SIPP is the most efficient way of funding her pensions. If her employer operates salary sacrifice to save the national insurance on pension contributions then it might be more efficient to increase her workplace pension contributions (although not below the personal allowance, minimum wage, etc depending on how many hours she works) and then put any remainder above what she can salary sacrifice each year into a SIPP etc.

Aceace

@rothers, don't forget that you can also put £3,600 gross into your own SIPP (£2,880 net) even if you don't have any earned income in that year, provided you don't exceed the lifetime allowance.