SIPP and government pension

Hansplace

Hi All,

Just want to share my thoughts on SIPP and government pension. Do comment if you think I am wrong.

One of the main reason I put money in SIPP is for the extra 20% or 25% that the government will add on and also the extra 20% tax relief I get back every years a high income earner. But I believe I should not be putting too much in SIPP as the withdrawal will be an issue later.

So I have worked out that at 68 where the government pension kicks in, I will have £180 a week as I got 35 years NI contribution. That works out to be £9360 a year. Currently the tax free allowance is £12500 so ignoring inflation, the tax free allowance going to increase in 10 years etc, so technically I can withdraw another £3140 before getting tax. 
£9360 + £3140 = £12500 the tax free allowance.

Assume I live to 80 (average life span) so from 68 to 80 we say 12 years x £3140 = £37680.

And if I intend to retire at 58 and start taking money from my SIPP, the amount I can take without being tax is £12500 a year. So from 58 to 68 is 10 years x £12500 = £125000

£125000 + £37680 = £162680 which is what I need from 58 years old to 80

Hence I come to the conclusion that I needed £220000 in my SIPP when I reached 58 years old where I can withdraw 25% tax free £55000 and still have £165000 for the yearly drawdown calculated above.

cloud_dog

Hi... I think you are asking if your calculation of £220k is sufficient to support early retirement and then top up the SP?

Firstly, the general consensus is that you don't need to withdraw the full 25% TFLS unless there are reasons to do so.  If you didn't then you could use UFPLS, uncrystallised funds pension lump sum, approach which would allow you to use your Personal Allowance as the taxable component and then a further 25% on top which would be tax free.  The PA is now £12570 (21/22) so this would allow you to draw £16760pa tax free, without crystallising any of the other pension, e.g. allowing you to apply a different drawdown method in the future if you wish / need to.

EDIT:  The question that really drives your options is going to be 'What's my number?'.  You need to think in terms of how much you will want to live on in order to understand if the numbers and the drawdown method stack up.

NoMore

The question is will that be enough income for you to live on ?  don't get caught up in trying to avoid tax and then not have enough for a comfortable retirement.

Alice_Holt

".... the extra 20% tax relief I get back every years a high income earner... I should not be putting too much in a SIPP ...."

Personally if I was getting 40% (plus) tax relief on my SIPP contributions, and anticipated to be (at the most) a 20% tax payer in retirement, I'd be putting as much as possible into a SIPP to benefit from that tax uplift.

dunstonh

Hence I come to the conclusion that I needed £220000 in my SIPP when I reached 58 years old where I can withdraw 25% tax free £55000 and still have £165000 for the yearly drawdown calculated above.

Do you need to draw the 25% up front?   Most people do not and will find that drawing it on drip is a more tax efficient option over the long term.

Have you considered the impact of IHT on assets outside of the estate but not within the pension?

Hansplace

Thanks for the reply.

Think I should state that I am 45 and plan to semi retire next year.
My question is that I don't think I should over contribute into SIPP and get the money 'trapped' until I am 58.
The option I have is on putting the money in ISA

Hansplace

the 25% tax free draw is optional but likely being use as a top up to government pension when I am 68 as I don't have the full 35 years if I semi retire next year. Might still work to get the £12500 tax free allowance and pay the minimal NI to get for qualify NI years

It is just that every FA says to load up on SIPP which I don't feel is correct especially in my case.

Linton

Several propblems in your calculations:
1) 35 years is only relevent to your State Pension if you spent your entire working life under the new rules.  You havent and so may need more or less than 35 years depending on the details of your employment. It is possible that you have already accrued more than £180.  You need to get an accurate prediction from https://www.gov.uk/check-state-pension.  

2) The average lifespan for a male aged 58 is around 85.  The figure you gave may be on life expectancy at birth but we know you survived childhood and if you die prior to 58 your retirement plans wont matter.  And even if you base your numbers on average death at 85 there is a roughly 50% that you will live longer.  Do you want to take a toss of the coin risk of having insufficient money?

3) You cannot ignore inflation

4) You are assuming you will be keeping your money in cash.  This is inefficient, much better to use investments.

5) Why are you so determined not to pay tax?  If you pay £1000 in basic rate tax £4000 must have gone into your pocket.  As a higher rate taxpayer extra pension really is a no-brainer since you may be paying 20% for the pension but you get 40% tax relief on your contrubutions.

6) Havent you got an employers pension?  That would add to your taxable income.  Can you live on £12500/year?

7) In your calculations you are ignoring the fact that you can withdraw 25% of your SIPP tax free.

dunstonh

It is just that every FA says to load up on SIPP which I don't feel is correct especially in my case.

You shouldn't be speaking to FAs. Speak to IFAs if you need advice.      Paying into pension is financially the best option providing the timescales meet the objective.   If the objective is different and the timescale unsuitable for the pension wrapper, you wont find an IFA recommending pension.

Chances are (as we only have limited info) that you need the money to last you through your life. So, certainly, pension would be the best for the money needed post age 58.  But for funding the gap until 58, then ISA and GIA are likely to be more suitable.

Albermarle

£125000 + £37680 = £162680 which is what I need from 58 years old to 80

This appears to be the maximum amount you can draw from the SIPP without paying tax .

If so it is a strange way to base a strategy .

With the SIPP you get 40% tax relief and only pay maximum 15% on withdrawal . What's not to like ?

Now if you want to build up a S&S ISA pot to cover some years before your SIPP is available that is perfectly sensible and you need to find a balance between the very beneficial tax treatment with the SIPP and the easier availability of the ISA.

However some calculation about avoiding tax in 20 or 30 years time is not relevant. 

Hansplace

Albermarle,

You sums up my intention. Maximum amount without paying tax.
Want the extra 20% or 25% from the government when topping up my SIPP but have no intention of paying tax at all after I semi retire next year at 45 years old.
Don't intend to pay for any furlough or dingies (apologies if this is wrong)

Thanks