Is SIPP loophoole still available?

hogweed

Forgive my ignorance, but… back in 2017, my cousin advised me of a dodge whereby I could put some money in a SIPP, have the government top it up with the tax rebate, then more or less immediately withdraw the 25% tax-free lump sum…

Worked well for me, nothing like free money! Is that option still available (for my girlfriend), or has some thrifty chancellor since closed it down?

Thanks 

eskbanker

Provided she's 55 or more, then yes, she can contribute to a SIPP, benefit from the tax relief, and then withdraw 25% of that grossed-up figure tax-free.

hogweed

Thanks very much. Yes, she's 62, but will have to work until she gets her state pension (66 I think).

Trouble is, I can't remember what I did back in 2017 - it was a period of enormous stress and grief for me, and much of my memory seems to have been wiped... what are her options regarding the rest of the money left in the SIPP, after she withdraws the 25%?

And how much can she put in?

eskbanker

Her total pension contributions (including tax relief) are capped by her earned income.

She can draw down from the taxable 75% in the SIPP but as soon as she does so, she'd then be constrained to no more than £4K annual contributions thereafter (MPAA).

hogweed

Yes… it’s starting to come back to me now. My situation was different – I was forced to retire early, with zero income, so I was able to take the 25% lump sum, then withdraw the rest also tax free, in the next tax year, as I had no other income.

She earns about £28k, and it seems the annual contribution limit is £40k? So she could potentially invest £12k or so, I suppose, and withdraw the 25% - but would be taxed at 20% on anything else she withdrew… does that sound about right?

Thanks again

{edit} so the only reason it felt like free money for me was that my entire earnings for the next tax year was so low, I guess... and it wouldn't work for her

Albermarle

She earns about £28k, and it seems the annual contribution limit is £40k? So she could potentially invest £12k or so, I suppose, and withdraw the 25% - but would be taxed at 20% on anything else she withdrew… does that sound about right?

Yes that is right. If she adds £12K , then £3K tax relief would be added.

She could take 25% of £15K tax free and the rest is left as a 'crystallised pot'. Anything taken from that is taxable at her normal rate. However as pointed out as soon as she takes one penny of taxable income , She will be restricted in future to contributing£4Kpa .

Probably better to leave the taxable part alone until retirement. If she keeps adding £12K pa it could build up nicely . 

zagfles

It's not a dodge or a loophole, it's how pensions work. In most cases you get more tax relief when paying in, than you pay in tax with you withdraw. This applies to almost everyone who pays into a pension. It's just it becomes blatently obvious when you pay in and take out straight away. But if you pay in now and take out in 5, 10 or 50 years, you still get the same tax advantage, even more so usually as growth is tax free too.

Grumpy_chap

Unused contribution available from recent previous years can also be used over-and-above the annual cap.  That may not be relevant in this case.

zagfles

Grumpy_chap said:

Unused contribution available from recent previous years can also be used over-and-above the annual cap.  That may not be relevant in this case.

OP says she earns about £28k so can only get tax relief on £28k gross ie about £22k net. No carry forwards for the tax relief limit. Then if she withdraws the lot she'll be subject to the MPAA so £4k max gross.

dunstonh

Forgive my ignorance, but… back in 2017, my cousin advised me of a dodge whereby I could put some money in a SIPP, have the government top it up with the tax rebate, then more or less immediately withdraw the 25% tax-free lump sum…

Its not a loophole or a dodge.

And no it hasn't been closed down.

hogweed

dunstonh said:

Forgive my ignorance, but… back in 2017, my cousin advised me of a dodge whereby I could put some money in a SIPP, have the government top it up with the tax rebate, then more or less immediately withdraw the 25% tax-free lump sum…

Its not a loophole or a dodge.

And no it hasn't been closed down.

Heh - sorry, I'm pretty thick when it comes to finance, but I understand what you're saying.

But maybe you can see how it looked that way to me, with my otherwise-zero income... I put £13k in, and got £16k back out more or less straight away - I just couldn't remember why