Investing state pension lump sum into SIPP via Ltd company 8 February at 2:43PM in Pensions, annuities & retirement planning 6 replies 272 views

rwat

I'm enquiring on behalf of my father who reached retirement age before April 2016, and did not take the state pension at that time. He has just received a lump sum payment which he will obviously be taxed on. I have a few questions regarding options with the lump sum and how Dad could best utilise it.
He is 73, still working in the limited company that he owns jointly with my mother. Has not maxed out pension contributions in last 4 years, and is not near the life time allowance. 

1. He is currently a 20% tax payer. If a lump sum pay out pushes him into the 40% bracket, does he have to pay 40% on the section of this lump sum that is then in 40% bracket, or is it all set at 20% as that is his current rate prior to lump sum?

2. If the lump sum was introduced to the company and paid into a SIPP via company contribution, would this be tax efficient and/or legal? My basic logic is suggesting that there would be 20% tax relief (as this is his current tax bracket), 19% corporation tax relief, and then it will be part of his personal pension (that has not been crystalised as yet) and therefore would increase the 25% part that is receivable tax free when pension (or parts of it) is crystallised. 

How far off the mark am I with this? Probably wildly, but can't find anything on the google that discusses this particular scenario. 

Any help very welcome. 

Dazed_and_C0nfused

I think you've misunderstood how the deferred State Pension lump sum is taxed.

This particular lump sum has very specific rules and is ignored when determining the persons tax rate and then it is taxed at that rate. 

So if he's a basic rate payer the lump sum will be taxed at 20%.

https://www.litrg.org.uk/tax-guides/pensioners/what-tax-do-i-pay-my-state-pension-lump-sum#toc-what-tax-do-i-pay-on-my-state-pension-lump-sum-

dunstonh

2. If the lump sum was introduced to the company and paid into a SIPP via company contribution, would this be tax efficient and/or legal? 

It is legal if there is sufficient profits through trade to support the level of pension contribution made.

My basic logic is suggesting that there would be 20% tax relief (as this is his current tax bracket), 19% corporation tax relief, and then it will be part of his personal pension (that has not been crystalised as yet) and therefore would increase the 25% part that is receivable tax free when pension (or parts of it) is crystallised. 

Not correct.
Employer contributions do not get tax relief.  They are paid gross.  They do reduce corporation tax by lowering the profit.

Normally, directors would take less in dividends to offset the amount they wish to "transfer" into the company,  i..e if it was £10,000 lump sum held personally, then he takes £10,000 less in dividends without the need to play around with his DLA.

rwat

Great help - thanks for this. If we were to put numbers into play, would it look roughly like this?

£40,000 lump sump state pension
20% basic rate tax to be paid on this lump = £32,000 remaining

£32k introduced to company. 
£32k paid into director's SIPP.
19% corporation tax relief = £6080 tax saved
14.53% NI relief = £4650 tax saved 

The £32k in his pension can then be accessed when he takes the pension (25% tax free, then current income tax rate on remainder).
The £10,730 tax saved within the business can be used as required. If it's paid into his SIPP the following year, would it again generate further corporation tax and NI relief? Or as its not profit, it wouldn't receive double tax relief upon pension contribution??

Is there a time restriction after paying into a SIPP before it can be crystallised and accessed? As an extreme example, if someone used the carry forward rules and paid in £160k into a SIPP (assuming director, company profits ok, LTA etc), could this pension be accessed the following week with 25% tax free and the remaining at current income tax rate? 

Linton

There are no time restrictions on when you can take a tax free lump sum.  How long it takes before you get the money is purely dependent on admin.  Possibly dependent on the provider SIPPs may have only one payroll run a month and require 2 weeks notice of a taxable drawdown.  So it could take up to 6 weeks between you requesting a taxable drawdown and it being paid into your bank account.  Tax free payments would not go through the payroll system and so should not suffer the same delay.

ader42

In order to use “carry forward” / previous years allowances, the SIPP has to exist in those prior years - you can’t create a new SIPP this year and put funds from a previous year in.

The maximum contribution limits of salary and £40k also apply for previous years, and he has to use the earliest year first (can only go back 3 years).

I would expect pension re-cycling rules to thwart you with respect to both Tax Relief and MPAA (pension contributions in future years) but I don’t know enough about that to say categorically.

A quick google led to this which is a starting point:

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pensions-recycling

dunstonh

In order to use “carry forward” / previous years allowances, the SIPP has to exist in those prior years - you can’t create a new SIPP this year and put funds from a previous year in.

You can as long as there was a pension in existence in the year being carried forward.  It doesn't have to be the same pension. A pension just needs to have existed.