Is it worth making one last £2880 contribution to SIPP?

funkyronster

Hello pensioneers!

I finally get state pension this April. For the last few years I have had no earnings and have been contributing £2880 a year into my SIPP to take advantage of the £720 tax relief.

I am wondering if it is worth doing one last time this tax year.

When I get state pension I intend to top it up to around 18k a year using an annual UFPLS from my SIPP. My rough calculations are as follows.

State pension 10k, personal allowance 12500, leaving 2500. UFPLS 8000 of which 25% = 2000 is tax free leaving 6000, and of that I have 2500 personal allowance left, leaving 3600 taxable at 20% which is (rather nicely coincidentally!) £720.

So by my thinking putting in 2880 into the SIPP this year will pay my tax bill next year. Although I understand that it won't actually "pay" the tax, rather my SIPP pension pot will be 720 better off than it would have been - the taxman still gets his 720.


But this is the last year I can do this because in future years my state pension is counted as earnings.

Unless I am missing something.

Many thanks to whoever answers.

RB

Dazed_and_C0nfused

You can continue doing it until you are 75.

As you are clearly a basic rate taxpayer if you simply add the money, leave it uninvested and then take it all out you will spend £2,880 and get a 6.25% return.
Subject to any provider costs.

Out of your account = £2,880

Back in to your account = £3,060 (£900 TFLS + £2,160 post basic rate tax pension)

One downside to this, which may not be a factor for you personally, is that it will mean you lose all of your remaining savings starter rate band.

But you will still have the full £1,000 savings nil rate band (aka Personal Savings Allowance) if needed.

funkyronster

Many thanks.

"You can continue doing it until you are 75." - so that means that my assumption that state pension is classed as earnings is incorrect, and, assuming no other income from work, I can carry on making 2880 contributions every year until I am 75?

So for example if I have other savings in, for example, ISAs, it would make sense to take 2880 out of ISAs and into SIPP, every year? Effectively a 720 gift from HM every year?

Dazed_and_C0nfused

I don't understand what relevance you think the State Pension has?

State Pension is taxable pension income.  It isn't earnings in the sense that it allows greater pension contributions.  If you don't any have earnings (wages, business profits) then you will be limited to a gross contribution of £3,600.

So for example if I have other savings in, for example, ISAs, it would make sense to take 2880 out of ISAs and into SIPP, every year? Effectively a 720 gift from HM every year?

You would get the £720 tax relief but if you took the whole £3,600 out you would pay £540 in tax, a net profit of £180.

Audaxer

You can continue paying up to £3,600 gross into the SIPP until 75, it's just that when your draw it out it will be subject of tax, so the net 'profit' will only be £180.

Audaxer

funkyronster said:

So for example if I have other savings in, for example, ISAs, it would make sense to take 2880 out of ISAs and into SIPP, every year? Effectively a 720 gift from HM every year?

In my view the best way to do it is pay in the £2,880 each year and leave it as cash and draw it out each year for the £180 net profit, and repeat each year, so you are not transferring an additional £2,880 each year into your SIPP from your ISA.

skycatcher

Dazed_and_C0nfused said:

You can continue doing it until you are 75.

As you are clearly a basic rate taxpayer if you simply add the money, leave it uninvested and then take it all out you will spend £2,880 and get a 6.25% return.
Subject to any provider costs.

Out of your account = £2,880

Back in to your account = £3,060 (£900 TFLS + £2,160 post basic rate tax pension)

One downside to this, which may not be a factor for you personally, is that it will mean you lose all of your remaining savings starter rate band.

But you will still have the full £1,000 savings nil rate band (aka Personal Savings Allowance) if needed.

I wasn't aware of this (maybe I dont understand!). My wife is a sole trader and makes a small profit c £8k. We put all of that (£6k) into her SIPP. How much of her starter rate savings does she lose?

thanks.

Dazed_and_C0nfused

skycatcher said:

Dazed_and_C0nfused said:

You can continue doing it until you are 75.

As you are clearly a basic rate taxpayer if you simply add the money, leave it uninvested and then take it all out you will spend £2,880 and get a 6.25% return.
Subject to any provider costs.

Out of your account = £2,880

Back in to your account = £3,060 (£900 TFLS + £2,160 post basic rate tax pension)

One downside to this, which may not be a factor for you personally, is that it will mean you lose all of your remaining savings starter rate band.

But you will still have the full £1,000 savings nil rate band (aka Personal Savings Allowance) if needed.

I wasn't aware of this (maybe I dont understand!). My wife is a sole trader and makes a small profit c £8k. We put all of that (£6k) into her SIPP. How much of her starter rate savings does she lose?

thanks.

You don't lose any of it by contributing.

It's taking taxable income out of the pension that could impact it.

So say she has profits of £8,000 and takes £5,500 taxable income from a pension.  And has no other non savings non dividend income and hasn't applied for Marriage Allowance.

Her non savings non dividend income would be £13,500 so she would have used all of her Personal Allowance and £930 of the savings starter rate band would be lost.

skycatcher

Dazed_and_C0nfused said:

skycatcher said:

Dazed_and_C0nfused said:

You can continue doing it until you are 75.

As you are clearly a basic rate taxpayer if you simply add the money, leave it uninvested and then take it all out you will spend £2,880 and get a 6.25% return.
Subject to any provider costs.

Out of your account = £2,880

Back in to your account = £3,060 (£900 TFLS + £2,160 post basic rate tax pension)

One downside to this, which may not be a factor for you personally, is that it will mean you lose all of your remaining savings starter rate band.

But you will still have the full £1,000 savings nil rate band (aka Personal Savings Allowance) if needed.

I wasn't aware of this (maybe I dont understand!). My wife is a sole trader and makes a small profit c £8k. We put all of that (£6k) into her SIPP. How much of her starter rate savings does she lose?

thanks.

You don't lose any of it by contributing.

It's taking taxable income out of the pension that could impact it.

So say she has profits of £8,000 and takes £5,500 taxable income from a pension.  And has no other non savings non dividend income and hasn't applied for Marriage Allowance.

Her non savings non dividend income would be £13,500 so she would have used all of her Personal Allowance and £930 of the savings starter rate band would be lost.

Thank you so much for this very clear explanation....even I now understand!

zagfles

Audaxer said:

funkyronster said:

So for example if I have other savings in, for example, ISAs, it would make sense to take 2880 out of ISAs and into SIPP, every year? Effectively a 720 gift from HM every year?

In my view the best way to do it is pay in the £2,880 each year and leave it as cash and draw it out each year for the £180 net profit, and repeat each year, so you are not transferring an additional £2,880 each year into your SIPP from your ISA.

Why? Why not just leave it in the SIPP? There will be some cases where it's best to draw it out eg possibility of higher rate of tax in the future, or spare PA, equally some reasons to leave it in the SIPP eg IHT, but for most it'l make no difference. So why bother recycling the money from an ISA to a SIPP then back to the ISA unless there's a specific reason to?

Just putting it into the SIPP gets you the benefit of the £180 "profit" whether you take it now or later, makes no difference if you invest it in the same stuff as long as your marginal tax rate stays the same.

Audaxer

zagfles said:

Audaxer said:

funkyronster said:

So for example if I have other savings in, for example, ISAs, it would make sense to take 2880 out of ISAs and into SIPP, every year? Effectively a 720 gift from HM every year?

In my view the best way to do it is pay in the £2,880 each year and leave it as cash and draw it out each year for the £180 net profit, and repeat each year, so you are not transferring an additional £2,880 each year into your SIPP from your ISA.

Why? Why not just leave it in the SIPP? There will be some cases where it's best to draw it out eg possibility of higher rate of tax in the future, or spare PA, equally some reasons to leave it in the SIPP eg IHT, but for most it'l make no difference. So why bother recycling the money from an ISA to a SIPP then back to the ISA unless there's a specific reason to?

Just putting it into the SIPP gets you the benefit of the £180 "profit" whether you take it now or later, makes no difference if you invest it in the same stuff as long as your marginal tax rate stays the same.

I agree that moving invested funds from an S&S ISA to a SIPP and back each year is not the best idea. I was meaning the method discussed on a long-running thread on this forum about moving £2,880 from cash savings into a SIPP, and once that tax relief is added drawing out all the cash, and repeating each year. Alternatively, as you say, if the OP is moving funds from his S&S ISA, he could just leave them in the SIPP.