How to deal with surplus funds

JackSprout

Not paid into my SIPP for years.

• I am 48
• grown SIPP to around 300k
• 40K of profit sitting in the business account 
• 40K of retained profit sitting in the business account 
• I have a passive income so I don't need to draw down the cash
• Want to retire at 58
• The running costs of the business are negligible, the retained profits should keep me going for 10 years
• I do have ISA 130K in ISA 
• Only have Mortgage Debt
• Have saved enough for kids University fees, ages 13,10 and 8

Should I:
1) Put 40K into my SIPP reducing my corporation tax this year?
2) Put 80K into my SIPP reducing my corporation tax this year and getting a refund for previous years?
3) When and if I get a new contract via an umbrella and inside IR35, (no more money going into the business), put 120K from earning into the SIPP, thus saving PAYE salary?
4) Assume I will get a new contract via an umbrella, put the 40K from business through now and put 80K from earning into the SIPP from inside IR35 contract, thus saving PAYE salary?
Thanks.

Gary1984

Max out pension contributions within Ir35 via salary sacrifice and take retained earnings as dividends when required up to higher rate tax limit. If you're confident about not using the limited Co again look into winding it up using entrepreneurs relief. 

dunstonh

Should I:
1) Put 40K into my SIPP reducing my corporation tax this year?
2) Put 80K into my SIPP reducing my corporation tax this year and getting a refund for previous years?
3) When and if I get a new contract via an umbrella and inside IR35, (no more money going into the business), put 120K from earning into the SIPP, thus saving PAYE salary?
4) Assume I will get a new contract via an umbrella, put the 40K from business through now and put 80K from earning into the SIPP from inside IR35 contract, thus saving PAYE salary?

Which of these works out best when you calculate the figures?  (which we do not have access to so cannot answer)

JackSprout

This looks like the best thing to do:
Year 0 - 40K into the pension, saving 8K in corporation tax - SIPP 340K, retaining 40K in business. 
Year 1 - 80K into the pension, saving 16K in income tax - SIPP 445K - 2022
Year 2 - 40K into the pension, saving 16K in income tax - SIPP 517K - 2023
Year 3 - 40K into the pension, saving 16K in income tax - SIPP 594K - 2024
SIPP grows 7 years to about 950K, retire at 58, with 3% draw down, 29K.

jamesd

I'd modify JackSprout's answer a little. Using 68 state pension age deduct ten times 10k state pension from the pot leaving 850k. Take 3.2% of the 850k increasing with inflation each year and the 10k state pension substitute set aside. That gives 37.2k a year for life (assuming a 30 years from 58 plan). The difference is mainly setting aside the state pension replacement money to even out income in retirement.

Alternatively, use the Guyton-Klinger drawdown rules. Those start at 5% of the pot but increase, skip inflation increases or cut depending on the circumstances you live through. This starts at 52.5k a year including the state pension set-aside.

The difference between the two rules comes from your possible flexibility to take drops of up to 10% a year if required. That allows starting at closer to average historic results, while the other rule starts at the most pessimistic level.

Another alternative picks the income you want for all routine things including holidays and uses the rule for that. The excess is used for purely discretionary spending and you can spend it whenever you like. If you wanted say 25k a year then using 3.2% you'd have a discretionary pot of  381k. That can leg you spend more during younger years when people tend to be more active.

You could also choose to retire earlier. If you want to do that then things like extending a mortgage term to increase the amounts being invested help.

Gary1984

Paying into a SIPP from IR35 earnings using salary sacrifice is much more tax efficient than paying in from retained profits. Relief is 55.8%/45.8% vs 45%/25% for HR/LR earnings. 

drumtochty

Gary

Have you any experience of setting up Salary Sacrifice system on what I assume is JackSproats Limited Company pension.  Something I have wondered about doing on a two director Limited Company.

Gary1984

From your own Ltd company no need to do salary sacrifice. You can just make employer contributions directly from the company which reduces your corporation tax liability. Easy to set these up with any of the usual SIPP providers: HL, AJBell, II, Fidelity etc. Usually just a form to fill in.

If you're within Ir35 you need to use an umbrella company and not your own company. Some of these allow salary sacrifice/employer contributions and some don't so always choose one that does. No experience of this myself though. 

drumtochty

I see where you are coming from here on this one, thanks Gary!