Gross Member Contributions.

RippleM

I would welcome views on my plan.I know there are some flaws in it which are obvious however such is the incredible knowledge on this forum it would be stupid not to listen to other opinions.

in a nutshell I want move 80k to my wife’s SIPP  as GMB and obviously not receive any tax relief.Her SIPP currently has around 75k in it so plenty of room for growth over the next few decades.

firstly I am aware that I will be moving cash already taxed back into a taxable environment.I don’t see this as a major issue as all being well we won’t need to touch it again and should build as a very decent inheritance for my son.

If investments tank I will get it all back tax free through the 25% and P/A between ages 62/67 for my wife.

so why do I want to do this.

Quite simply I will need to reduce funds out side pensions as we currently have 500k over the 325k x 2 inheritance tax allowance.

this is in addition to managing the LTA which is looming large in the not too distant future.

I plan to draw down the growth on this which will meet our needs however this doesn’t cater for the 25% tax free which adds to the funds sitting out the pension.

Does this make sense?

Fully aware this is a first world issue.

Dazed_and_C0nfused

What's GMB?

RippleM

Sorry typo GMC Gross Member Contribution 

MX5huggy

Is your wife going to be contributing 100% of her salary to pension this year and in forthcoming years? 

If not you (her) live of these savings and she contributes the maximum for as many years as required to get it all in pension. 

Feels like you are confused about or trying to avoid issues that aren’t significant. IHT on £80k is not significant, just give your children the £80k and live 7 years. 

RippleM

Hi she will be retiring in two years and yes will contribute 100%.

It’s the IHT on 500k I am worried about which will increase to 750k if I take my 25% from pension.

none of us know when the grim reaper will call.

if we were both wiped out in one go that would be a 300k hit on IHT.

AlanP_2

Your fundamental problem is you have too much money by the sounds of it  .

That's fantastic and well done, but as you know, being in that fortunate position does raise issues around IHT and LTA.

Given the amounts involved it could be worthwhile to take advice from an IFA.

As for pension contributions:


Up to annual earnings and / or £40K can be contributed each year into a pension. If more than £40k in a year then carry forward of Annual Allowance needs to be available AND earnings must cover the amount being contributed.

Individual contributes 80% of eligible earnings and HMRC tax relief takes it to 100% of eligible earnings.

RippleM

Hi Alan

many thanks for your reply.

I have discussed with HL who tell me that tax relief is covered up to level of earnings which is 20k as she is part time. If I want to contribute 40k for her I can however 20k won’t attract tax relief which I agree with.HL defined this as Gross Member Contribution.HL also advised me that she can carry forward 3 years hence the 80k.I am quite happy to put in SIPP as the growth over the long term will at least balance any tax due when the SIPP is eventually inherited if all goes to plan.In essence better to pay 20% on something that has grown rather than 40% through inheritance tax if/when the worst happens.I initially picked this up on the citywire retirement thread a few months ago.

QrizB

RippleM said:

HL also advised me that she can carry forward 3 years hence the 80k.

That seems unlikely; you can only receive tax relief on income received in the tax year? If her income is £20k, she can only claim tax relief on £20k?

RippleM

I thought that as well to the extent I asked them to check again before I transfer the cash.HL confirmed you can put 40k but only get tax relief on the earnings. The remaining 20k is called gross member contributions.

I seem to remember JamesD commenting on this recently as well.

jamesd

It's fine. Don't be surprised that many will be unfamiliar with the idea because it's quite uncommon for people to be in your situation and see value in placing the money into trust and outside your estates in this way. Few will be familiar with the gross member contribution and quite a lot of pensions might not even offer the possibility.

Just to restate what HL have told you and you already know:

1. Gross contributions up to her gross pay will receive basic rate tax relief, delivered by adding 25% to the amount paid in within this range.
2. Above this gross contributions can be used. There will be no annual allowance charge on these provided she has enough annual allowance this year and carried forward unused annual allowance from the past three years to cover the amount. So for 80k she'd have 20k unused this year after her pay contribution and would need a total of at least 60k of annual allowance unused in the last three years as well.
3. It's also possible to go over the annual allowance available and pay the annual allowance charge on the excess. Not typically a good idea but it's permitted.

My own personal preference is to avoid inheritance tax by giving while still alive, potentially using term life insurance to cover the risk of dying before it's done, since insurance can be written to have the desired beneficiaries, subject to them having some interest in your life.

jamesd

On the lifetime allowance, while you could end up paying it, you can also avoid it by staying within it, starting by crystallising it by taking the 25% tax free lump sum. or maybe doing it for part of the value. There would then be a test on drawdown growth at age 75, which you avoid by withdrawing the growth. Starting after that there are no more tax charges and you could let it grow freely in (pension) trust and outside your estate.

Of course taking the 25% tax free in the short term increases your inheritance tax problem by moving that much outside the pension trust. Yet avoiding the lifetime allowance charge is quite likely to be a good move. Perhaps if you have children or grandchildren you could lock away the money in pension contributions for them? You can make them for babies and other children up to the £2,880 net, £3,600 gross allowed for those with no earnings. Child ISAs can also be used. For older people there's the option of adding to mortgage deposits to reduce their interest rates, or them investing in their own ISAs or pensions with the money.