To SIPP or not to SIPP?

TMSG

I am semi-retired (but still a couple years away from SP), just doing the occasional odd job and I have always assumed (mistakenly, it appears) that SIPPs are just for people IN WORK, ie PAYE (don't know how I got this into my skull... it's just there ).

OK, so it seems I could actually open a SIPP and pay in some money and use this for my later years (I'd rather keep such a pot as a sort of insurance as so far I have not included this in my pension planning so it could potentially sit in a SIPP for a decade or even more).

My odd jobs get me less than the £3600 amount so I assume that would be my maximum amount per year (of which I'd have to pay in £2880, I understand). So I can't build a huge pot but every little helps and if I do that for say five or six years, it's not millions but still gives some added protection.

Now I *think* that the investment side of a SIPP works a bit like a stock&shares ISA (which I have) in that I can buy whatever investment I think is doing well. The tax bill comes once I actually begin to empty the pot, with the first 25% tax free and the rest taxable.

It's here that my problems start: do I have take those 25% as one lump sum or can they be split over a few years? If so, then what is the basis for those 25% -- the pot size when I take out money for the first time or the pot size as it stands at the moment of taking out?

And further, after those 25% tax free I have to pay tax on the remaining 75%... I assume I pay tax only on gains made during the time I had the SIPP and not on the capital I invested (which has been taxed already)?

And finally, how do I know how big (or small) those gains are? Will the SIPP provider give me a nice simple number I can forward to HMRC (or even handle the tax due) or do I have to sit down and calculate all those gains/losses accrued over the years myself?

I guess I am just not sure whether it's worth the bother?

Dazed_and_C0nfused

You have a good grasp on some elements but are off the mark with others 

You can add the £2,880 and get £720 added in basic rate tax relief.  You get the benefit of that even if you haven't paid any tax in the first place.

You can choose investments like in a S&S ISA.  The exact range available will depend on who you choose as the provider.  HL (not a recommendation) will have a massive choice.  Vanguard (not a recommendation) will only have their own funds to choose from.

The tax bill comes once I actually begin to empty the pot, with the first 25% tax free and the rest taxable.

Taxable yes but the tax will depend on your other taxable income.  Plenty get taxable money out without paying tax on it.

It's here that my problems start: do I have take those 25% as one lump sum or can they be split over a few years? If so, then what is the basis for those 25% -- the pot size when I take out money for the first time or the pot size as it stands at the moment of taking out?

No, you can take 25% upfront or 25% of each withdrawal could be tax free.  Or you could crystallise just a portion of your fund so getting multiple 25% elements of each slice. 

For example you have a fund of £50k.  You take £5k TFLS and crystallise £20k.  Leaving £30k not crystallised.  This grows to £40k and you decide to crystallise the whole of the remainder so can take another £10k TFLS (25% of the uncrystallised amount).

And further, after those 25% tax free I have to pay tax on the remaining 75%... I assume I pay tax only on gains made during the time I had the SIPP and not on the capital I invested (which has been taxed already)?

No, you don't have to pay tax on it.  Other than the 25% TFLS element it is all taxable income but the amount of tax will depend on what other taxable income in the same tax year you take taxable income out.

And say you crystallise £20k by taking a £5k TFLS, leaving £15k invested.  A few years later that £15k has grown to £25k.  All £25K is taxable.

And finally, how do I know how big (or small) those gains are? Will the SIPP provider give me a nice simple number I can forward to HMRC (or even handle the tax due) or do I have to sit down and calculate all those gains/losses accrued over the years myself?

It doesn't work like that.  You have a taxable and non taxable (TFLS) element.  Nothing more complicated than that.  The taxable element is taxed under PAYE just like employment income.  If you pay too much tax or not enough HMRC will sort out the difference and send you a refund or ask you to pay any shortfall.

tacpot12

You have understood how SIPPs work pretty well. You don't have to take the 25% tax free as a lump sum, you can take it over as many years as you want. You can decide the basis for the 25% yourself. (You can have it from the point you first take money out or you can have it every time you take money out).

You are correct that you have to pay tax on the 75%, but you get your annual allowance for income tax that you can use, so if you were to stop working and only be receiving your state retirement pension as income you would be able to take a quite a bit out, without paying any tax. For example, this tax year you could withdraw about £4,200. 25% of this would be tax free, and the remaining 75% (£3,150) would not take you over your personal allowance when added to your state pension income. There is no National Insurance to pay when you receive pension income. 

You won't pay any capital gains tax on assets held in a SIPP. This is one advantage of a SIPP, and it certainly helps with paper work - there isn't any. 

It is worth the bother, as you will get tax relief on the £2,880 you put in, so it's effectively free money from the government AND you only pay income tax on 75% of it (and only if you have used up all of your personal allowance). The SIPP providers take care of deducting the tax from any payment, and they know the rules, so that you don't have to worry amount the mechanics of it, but it is really good that you want to understand the process before making any decisions. 

TMSG

Thanks, guys, for that. I am trying hard to wrap my poor head around what you've thrown at me Perhaps best to try to get this sorted with some real numbers, so please bear with me.

Let's say I open a SIPP and pay my £2880 pa for five years. Gov gives me another £720 pa. Here's the first question: @tacpot12 wrote that I get tax relief on the £2880 I put in. Does that mean that if I had £15,000 pa taxable income and £2880 go into the SIPP, my taxable income would be £12,120 and so below the personal allowance? (Alas, I am not in that position but hey, my wife might well be!)

FF ten years. My SIPP stand now at £24,000 of which £14,440 is my money, £3600 is gov money and £6000 is gains. I could now take out £6000 (25%) tax free and that would crystallise (love that word) the rest, so all that's left would be taxable.

Or I could take out £3000 tax free and that crystallises half of the pot. However, I could include any gains for the other half in my remaining 12.5% so if the uncrystallised half (£12,000) grows by £2000 (and the whole pot by £3500) I could take out another £3500 tax free.

Now to the sums I take out. Let's return to the first scenario where I take out £6000, ie 25%, thereby crystallising the remaining 75%. So if later I decide to take out another £6000 then this sum is added WHOLLY to my income for that year? OTOH, if I understood @tacpot12 correctly, I have not paid taxes on the 5 x £2880 I paid in. So basically what I have been doing is delaying paying tax on those sums, as I received tax relief  in the years I paid them in but have to pay tax on them (and of course the rest) when I take them out?

If that's about right (is it?) then it's probably worth the bother, even more so for my wife as she has a v nice company pension and will certainly be above the allowances as a pensioner.

Marcon

Have a look at the websites of some of the main SIPP providers. That should answer your questions and most of them include examples to help clarify various points.

TMSG said:

Now I *think* that the investment side of a SIPP works a bit like a stock&shares ISA (which I have) in that I can buy whatever investment I think is doing well. The tax bill comes once I actually begin to empty the pot, with the first 25% tax free and the rest taxable.

And finally, how do I know how big (or small) those gains are? Will the SIPP provider give me a nice simple number I can forward to HMRC (or even handle the tax due) or do I have to sit down and calculate all those gains/losses accrued over the years myself?

You can't just go out and buy any old stocks and shares which take your fancy. You can only choose from those on offer within your particular SIPP, and (the better news!) the SIPP provider does indeed do all the admin and calculations.

xylophone

I am semi-retired (but still a couple years away from SP), just doing the occasional odd job 

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

You are drawing an occupational pension?

If your relevant earnings (which don't include pension income) are under £3600 (gross) and you are under age 75, you are still eligible to  receive tax relief on a contribution to a personal pension but you are limited a net contribution of up to £2880 - the pension provider will claim relief of up to £720 and add it to your pot.

Once in the pension, you can choose whether to leave the money uninvested or to buy funds/shares etc.

Some people choose not to invest, regarding the tax relief in the light of interest at a jolly good rate!

If you chose to invest, the provider would levy an administration charge and you would pay fees on the chosen investments.

However, you would hope to create a pot  larger than you would have if you simply left the money in cash.

In the case of HL (as at time of writing), no charge would be levied on  UNINVESTED cash within the pot.

Suppose you contributed from age 63 up to age 75  and held all cash -  you would have anything up to £43,200 in the pot.

You would have various ways of accessing the money

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise/pension-pot-options

 - you might choose to take 25% tax free and draw down the balance as best suited you tax position.

If you chose to invest, the provider would levy an administration charge and you would pay fees on the chosen investments.

However, you would hope to create a pot  larger than you would have if you simply left the money in cash.

Albermarle

Let's say I open a SIPP and pay my £2880 pa for five years. Gov gives me another £720 pa. Here's the first question: @tacpot12 wrote that I get tax relief on the £2880 I put in. Does that mean that if I had £15,000 pa taxable income and £2880 go into the SIPP, my taxable income would be £12,120 and so below the personal allowance? (Alas, I am not in that position but hey, my wife might well b

No your taxable income would remain the same at £15K and you would pay the appropiate tax on that.
However tax relief is added to the pension contributions, in the pension.

TMSG

Hm... now I am again confused. I have trouble understanding what @tacpot12 meant when they wrote that I get tax relief on the £2880... is that simply the £720 the gov pays in?

At any rate... if @Albermarle is right and there's no tax relief for the £2880 I pay in then potentially a SIPPer pays taxes twice: first when they put in their contribution which according to @Albermarle has been taxed normally and then again when they take out the 75% which are not tax free. In my case that would probably be OK as I still have some personal allowance buffer but for my wife this looks a lot less attractive as she now pays taxes (basic rate) and will continue to do so when she a pensioner.

Dazed_and_C0nfused

TMSG said:

Hm... now I am again confused. I have trouble understanding what @tacpot12 meant when they wrote that I get tax relief on the £2880... is that simply the £720 the gov pays in?

At any rate... if @Albermarle is right and there's no tax relief for the £2880 I pay in then potentially a SIPPer pays taxes twice: first when they put in their contribution which according to @Albermarle has been taxed normally and then again when they take out the 75% which are not tax free. In my case that would probably be OK as I still have some personal allowance buffer but for my wife this looks a lot less attractive as she now pays taxes (basic rate) and will continue to do so when she a pensioner.

When you contribute using the "relief at source" method i.e. personal contributions to a SIPP, personal pension or stakeholder pension, then 25% is added to your contribution in the form of tax relief.

So your £2,880 has £720 added making a gross contribution of £3,600 (20% of  £3,600 is £720).

It's a little misleading to think that your contribution is coming from already taxed money.  Plenty of people contributing like this haven't paid tax in the first place.

Currently you could, if you had enough qualifying earnings, contribute £12,570 gross without having paid a penny in tax on it.  You would be paying £10,056 and the pension company adding £2,514 in tax relief.  Whether you have paid any tax isn't a factor.

TMSG

OK, I think I have understood how this works, thanks for all the input. For me a SIPP is a good option, but I'm less sure about my wife's position especially as she's still some ISA allowance left and any gains in her ISA will be tax free, 100%.

We'll do some calculations and we'll see.

Again many thanks.

Secret2ndAccount

Your wife puts £100 into an ISA. It doubles to £200. She can take out the whole £200 tax free.
Your wife puts £100 into a SIPP. It gets topped up to £125. Doubles to £250. She can take out £62.50 tax free, and £187.50 taxable. If she pays tax at 20% that costs £37.50, leaving her with £150 plus the £62.50 = £212.50

I wouldn't bother for £12.50. There are charges for holding a SIPP, so it might not be worth it, or the bother. But for larger amounts, the SIPP wins. Particularly if you don't pay tax on all of the taxable money.
It would be a bad idea in the unlikely event that you save 20% tax on the way in, but pay 40% tax on the way out. (could happen if you built up a large pot, then desperately needed to withdraw it all in one year). Or the perhaps more likely event that you saved 20% tax on the way in, but the basic tax rate was 25% by the time you came to withdraw it.