Benefit of a SIPP?

canaldumidi

Savings rates being what they are, someone suggested I open & contribute to a SIPP. I understand that anything I contribute, the Gov will add 20% (I'm a basic rate tax-payer), and that seems like good news so far.

But then what happens if I want to withdraw my money? Am I commited to only doing so in the form of regular monthly payments ie a pension)? I can se that one can withdraw 25% tax free, but what if I want to withdraw more (for arguements sake the full 100%). Do I have to return the contributon the gov made to the SIPP? Or is it taxed as income (at 20%)?

Am I right that if, say the investment had not moved, I'd still be better off as 25% would be tax free, the remainder would be taxed, but I'd still have the gov contribution?

(I have reached retirement age).

Albermarle

As you say you can withdraw 25% tax free and the rest is taxable ( whether you pay tax or not depends on your personal tax situation at the time .It is the same way as you pay income tax when working )
As long as you are over 55 , you can withdraw from it . Either all of it , part of it , or take a regular income.
Depending on the size of the pot , withdrawing all of it at once could land you with a hefty tax bill. 

Assuming the contributions have not moved ( unlikely ) and you pay 20% tax on the 75% then the tax advantage is 6.25%.

If you check your SIPP's website there will be plenty of info an ways of withdrawing the pension and you can look here.
Pensions and retirement | Help with pensions and retirement | MoneyHelper

bugbyte_2

Yep, as a 20% tax payer it is worth 6.25% extra to you.

For example - pay in £800, Gov pays £200 on top = £1000. When you cash in first 25% is tax free = £250. Presuming your tax band is 20% when you retire* when you take out the remaining £750 you pay £150 tax on it leaving you with....£1000 - £150 = £850 for your £800 investment 6.25% increase.



*which it may not - for example what you take out of your pension is less than £1250 pa and for example you used savings from elsewhere

jimjames

If you are already drawing your pension from elsewhere then there are strict limits on the amount you can pay into a SIPP so that might impact your plans too.

canaldumidi

jimjames said:

If you are already drawing your pension from elsewhere then there are strict limits on the amount you can pay into a SIPP so that might impact your plans too.

Ah! Where would I find these shown. Is there a gov link? I have a private pension paying out early on ill-health grounds.

Albermarle

It depends what you mean by private pension , which has no specific meaning in the pensions world.

If it is a defined benefit/final salary type scheme, where you have a guaranteed income and not a specific pot of money , then then the strict limit mentioned on future pension contributions does not apply .

If it is a Defined Contribution scheme ( like a SIPP) and you have taken taxable income from it , then there is limit of £4kpa that can go into a pension . That includes your contribution + tax relief + employers contribution.

As you mention 'ill health grounds ' it would indicate it is the former, which would be good news.

On the other hand if the ill health means you are not currently employed then you will be limited by this instead.

Can you clarify your situation ?

canaldumidi

No not currently employed.

I started receiving several pensions early on ill-health grounds some years ago.

2 final salary schemes (1 private company + 1 local gov) and

2 small annuities

Dazed_and_C0nfused

If you have no pensionable earnings (usually taxable pay, company benefits and business profits) in a particular tax year then you cannot contribute more than £3,600 gross.

That's £2,880 from you and £720 in tax relief the pension company adds.

Whether you pay income tax is irrelevant, you will still get tax relief on a qualifying contribution.

I understand that anything I contribute, the Gov will add 20% 

They actually "add" 25%.  Which is 20% (basic rate tax) of the gross contribution.