In FT employment, can I set up and contribute to a supplementary SIPP?

markym3

Hi

I am age 51, in full-time employment where I'm a member of a 1/60 final salary scheme, though it has become poor value due to a 2% cap on pensionable salary increases since 2009, plus additional NI overheads passed on to us. My annual salary is 64250 (but my pensionable salary is only 46k) and the company adds an extra 10% in pension funding. I pay 5% extra contributions on top to retire at 60 instead of 65. 

Anyway, whilst far from wealthy, I'm comfortably off with no mortgage/debt and don't have a family to support so I'm hoping to get out of full-time employment from the end of next year and perhaps just do occasional contracts or part-time work when needed.

I'm therefore interested in the possibility of trying to save as much as possible over the next 16 months in as an efficient way as possible. I considered ISAs but I have quite a bit of money in non-ISA wrappers that I intend to bed & ISA over the next few years. Therefore, ramping up my pension contributions seems a likely alternative but I don't want to do it with the existing scheme I'm in using AVCs etc.

Therefore....would be possible to set up a SIPP this year and pay into that whilst still continuing to contribute to the company scheme? I understand I can pay a maximum of £40k pension contributions in the current financial year, if my taxable pay (I assume I use taxable and not gross) matches or exceeds that? I won't earn a full year's salary in 2022/23 because I took some unpaid leave at beginning of the tax year, but I'm expecting taxable pay to come out at around £45k. I've also got unused allowances from the last 3 tax years too, which I believe I could make use of since my taxable income will exceed £40k this year.

This tax year, I will see pension contributions of around £9500 from my company, therefore hoping it be possible to pay everything else I earn this tax year into a SIPP, for which I'll get tax relief? I'd like to overpay again next tax year too in a similar way.  

I'm aware I will still have to pay my NI contributions.

Any help or alternative suggestions would be appreciated before I try to find a financial adviser. If this route is realistic, any suggestions on advisers? I'm wary of them, having been mis-sold an EPP in my 20s! I use HL as a platform for ISA and stocks & shares and have considered them. 

Cheers! 

Rich1976

Yes you can have your own pensions on top of an existing employer one. It’s what we do and add ad hoc payments occasionally as and when we can

Dazed_and_C0nfused

A combination of DB and DC contributions in the same tax year can make life more complicated when it comes to how much you can contribute.

In a perfect world how much would you want to contribute to the SIPP?  The gross amount including basic rate tax relief.

And are you Scottish resident for tax purposes?

NedS

Simple answer: yes you can.

But you must adhere to the limits set by HMRC whereby:

1. In any one tax year, you cannot contribute more that you earn (for most, this will be your gross taxable pay - in your case, £64,250).

AND

2. You are limited by the Annual Allowance of £40k

(1) is relatively simple - it is the amount you have contributed to pension schemes - both your employers DM scheme and any other private/personal pensions such as a SIPP that you may contribute to.

(2) Annual Allowance. This is a little more complicated to calculate as you are a member of a final salary / DB scheme. Here your contributions are not simply how much you have contributed, but is rather your Pension Input Amount (PIA), so what you paid towards your DB scheme is not relevant for Annual Allowance calculations. You must then add on any contributions to DC pensions such as your SIPP to your PIA to obtain your contributions towards your Annual Allowance ,

You may be able to exceed the £40k Annual Allowance in (2) if you have unused annual allowance from the previous 3 tax years, referred to as carry forward.

xylophone

You may find this of interest

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa?utm_source=legacyurls&utm_medium=301&utm_campaign=/knowledge-literature/knowledge-library/pension-contributions-qa/

and

https://techzone.abrdn.com/public/pensions/guide-pension-annual-allowance#:~:text=The input amount is calculated,the accrued pension by 16.

markym3

Dazed_and_C0nfused said:

A combination of DB and DC contributions in the same tax year can make life more complicated when it comes to how much you can contribute.

In a perfect world how much would you want to contribute to the SIPP?  The gross amount including basic rate tax relief.

And are you Scottish resident for tax purposes?

Hi, thanks for the reply.

I'm looking to pretty much contribute as much as I can in the present tax year. When I say earnings, is that figure gross pay or is it taxable pay btw? My taxable pay being minus company pension contributions and a few other deductibles. 

Due to a career break in the current financial year, I expect this year's gross to be about 50-55k and taxable to be around 45k.

I covered the company's pension contributions while on my break so, assuming I stayed in the DB scheme for remainder of this financial year, I expect the overall DB pension contribution from the company and I to come out at around 9.5k-10k. Though I believe I could stop paying into it and start using their defined benefit scheme going forwards or put their 10% contributions into a SIPP if it was opened. 

Assuming I stayed in the company DB scheme and total pension contributions were 10k, I'd like to contribute pretty much everything else I earn this financial year into a SIPP at a suitable time prior to end of tax year. In effect, covering this year's living expenses from savings. Seems to me I'd have roughly 30k in pension allowance left in this year in allowance and could use unused allowances from previous years to cover more, should that be possible.

I'd like to do the same next financial year as well and then consider my situation in December 2023. 

Not a Scottish tax resident. 

markym3

NedS said:

Simple answer: yes you can.

But you must adhere to the limits set by HMRC whereby:

1. In any one tax year, you cannot contribute more that you earn (for most, this will be your gross taxable pay - in your case, £64,250).

AND

2. You are limited by the Annual Allowance of £40k

(1) is relatively simple - it is the amount you have contributed to pension schemes - both your employers DM scheme and any other private/personal pensions such as a SIPP that you may contribute to.

(2) Annual Allowance. This is a little more complicated to calculate as you are a member of a final salary / DB scheme. Here your contributions are not simply how much you have contributed, but is rather your Pension Input Amount (PIA), so what you paid towards your DB scheme is not relevant for Annual Allowance calculations. You must then add on any contributions to DC pensions such as your SIPP to your PIA to obtain your contributions towards your Annual Allowance ,

You may be able to exceed the £40k Annual Allowance in (2) if you have unused annual allowance from the previous 3 tax years, referred to as carry forward.

Thanks for the great detail!

This year I will gross about 50-55k, rather than my 64250 base (depends on what overtime I work), this being due to not working April-June inclusive. But I covered the pension contributions while on break, both employer and employee. Taxable pay i.e. minus company pension contributions will be about 10k.

I do have plenty of unused allowance from the 3 previous tax years. No other pensions aside from the company one during those years. So hopefully it's a case of getting a competent adviser to do this.  

As mentioned above, pretty much trying to keep as much away from the tax man this year and for next year and use savings to cover my expenses in that time. 

I also assume I could take 25% of fund size tax free at age 55 if desired?

Any views on reputable advisers in this field? HL is my platform for ISAs and stocks and shares because I like their set-up, I know they aren't the cheapest around so they are one I've considered.  

Dazed_and_C0nfused

As mentioned above, pretty much trying to keep as much away from the tax man this year and for next year and use savings to cover my expenses in that time

Unless you are Scottish resident for tax purposes or have failed to mention some other fairly significant amount of taxable income contributing to a SIPP won't make a jot of difference to the tax you pay in the current tax year.

You will receive basic rate pension tax relief which is added to your pension fund but you won't make a personal tax saving as you are only paying 20% tax.

It may well be different in the next tax year but by then you would have missed out on the ability to make contributions in 2022:23.

Due to a career break in the current financial year, I expect this year's gross to be about 50-55k and taxable to be around 45k.

markym3

Dazed_and_C0nfused said:

As mentioned above, pretty much trying to keep as much away from the tax man this year and for next year and use savings to cover my expenses in that time

Unless you are Scottish resident for tax purposes or have failed to mention some other fairly significant amount of taxable income contributing to a SIPP won't make a jot of difference to the tax you pay in the current tax year.

You will receive basic rate pension tax relief which is added to your pension fund but you won't make a personal tax saving as you are only paying 20% tax.

It may well be different in the next tax year but by then you would have missed out on the ability to make contributions in 2022:23.

Due to a career break in the current financial year, I expect this year's gross to be about 50-55k and taxable to be around 45k.

Sorry, don't quite understand? I believe I'm going to pay 20% income tax plus 13.25% NI on earned income between 127500 and just over 50k. I know the NI has to be paid still but was under impression if I contribute the salary element of that income to a pension and cover my living expenses from savings (which are doing not much) in meantime then I would effectively recover that 20% tax due to getting tax relief on the contributions. 

I'm aware pension income is taxable. But it can grow tax free and I believe I can take 25% tax free at age 55 or older which surely is a tax saving? 

I did consider ISAs, as mentioned in OP, but I have in excess of 150k in non-ISA stocks and want to bed & ISA them in coming years. So won't be making fresh ISA contributions for several years probably. And already maxed out my ISA contribs this year. 

Would appreciate further detail if I'm wrong here

Thanks 

Dazed_and_C0nfused

They are tax efficient just not in the way you described.

There is absolutely no connection between the income tax you pay and the pension tax relief added to a relief at source pension contribution such as that made to a SIPP.

There is huge thread on here for all the non earners who contribute £2,880 each year and get a free £720 in tax relief despite not paying any income tax in the first place.

As you are only paying basic rate tax in the current tax year contributing to a SIPP won't reduce that one bit.

You will get 25% added to your eligible relief at source contributions (equal to 20% of the gross contribution) but that is unrelated to the tax you pay (and will continue to pay) under PAYE in the current tax year.

For example if you pay £10,000 (assuming annual allowance isn't an issue) then the pension company will add £2,500, courtesy of HMRC, making a gross contribution of £12,500.  But that makes no difference to the PAYE tax you will pay.

markym3

Dazed_and_C0nfused said:

They are tax efficient just not in the way you described.

There is absolutely no connection between the income tax you pay and the pension tax relief added to a relief at source pension contribution such as that made to a SIPP.

There is huge thread on here for all the non earners who contribute £2,880 each year and get a free £720 in tax relief despite not paying any income tax in the first place.

As you are only paying basic rate tax in the current tax year contributing to a SIPP won't reduce that one bit.

You will get 25% added to your eligible relief at source contributions (equal to 20% of the gross contribution) but that is unrelated to the tax you pay (and will continue to pay) under PAYE in the current tax year.

For example if you pay £10,000 (assuming annual allowance isn't an issue) then the pension company will add £2,500, courtesy of HMRC, making a gross contribution of £12,500.  But that makes no difference to the PAYE tax you will pay.

I understand that the PAYE amounts collected won't be affected. But my understanding was that I could effectively counteract that by paying equivalent amounts from my own funds to a SIPP, up to the allowable amounts, and getting an automatic uplift from HMRC. In effect, cancelling out the tax from PAYE. 

Aware I've already paid tax on my own funds but I'm also going to pay tax on the PAYE side as well in this year and next. So I'd have thought trying to offset would be of some benefit. 

Seems I'm missing something obvious here, it just isn't clear to me unfortunately. I do appreciate your help though, cheers.