SIPP questions

mighty2022

Hi,

Trying to get my head around SIPP and tax – reading a lot of stuff online to try grasp how it all works. So I understand, we get tax relief on the amount we invest into SIPP. So if I pay £80 into my SIPP, it will be topped up with a 20% tax relief.

As a 40% taxpayer, I will need to fill in a self-assessment form to claim back the other 20%.

My questions: 

• Is this 40% on the full £40,000 limit per year that we can invest into SIPP?
• When I start taking my pension, I can take a 25% lump sum as tax free. However, if I have a work pension as well, is that 25% tax free on both pots individually or 25% combined?
•  Is the rest of the drawdown taxed as income tax? And is that taxed at whatever tax bracket I am in when I take the drawdown or the tax bracket when I invested the money i.e. tax deferred
• If something happens to me, will inheritance tax need to be paid on SIPP?

I’m in my early 30s, no kids, already maxed out employer contribution on a DC pension. To start off with, as I may need to access my money sooner, I’m thinking of contributing to a S&S ISA and the rest into a normal saving account.  At some point, I will start contributing to a SIPP. Will I be able to move my savings into a SIPP and claim back on the 40% tax or have I got this horribly wrong and that is not how it works? E.g. transfer the full £40,000 into a SIPP each year from my savings account until all of my savings is moved into a SIPP.

Thanks,

Dazed_and_C0nfused

There is no fixed extra 20%. Any additional tax relief depends entirely on your personal circumstances.

For example you might earn £55k and contribute £40k (gross) to a SIPP using the relief at source method of contributing.  But as you have only paid higher rate tax on less than £5k you will only get higher rate tax relief on that element, not the full £40k.

It would be unusual to need to complete a Self Assessment return just to claim pension tax relief.  But if you need to complete one for some other reason then you would include the RAS pension contributions on the return. 

There may also be other less obvious tax advantages on top of any higher rate tax relief.  Being eligible for Marriage Allowance, reducing any HICBC payable or increasing your savings nil rate band (aka Personal Savings Allowance) being three common ones.

You can take 25% TFLS from each DC pension fund.  You don't get 25% TFLS from DB pensions though.  There is no pot/fund with a DB pension, you get a (tax free) PCLS based on the scheme rules.

Excluding the TFLS or PCLS pension income is taxed in the same way as earnings.  Your Personal Allowance and basic rate band can be used before higher rate tax would be payable on it.  But you need to factor in any other taxable income received in the same tax year i.e. taxable earnings, company benefits or State Pension.

The tax rates in the year you made the contribution are only relevant if you made the contribution and take some (taxable) income out in the same tax year.

Providing you don't come unstuck with pension recycling rules (not an issue at your current age) it doesn't really matter where the funds come from. 

But once in the pension they will probably be tied up until you are at least 57/58.

MX5huggy

What ball park figure is you annual salary? Because your questions point to a salary in excess of £90k. 

zagfles

You seem to assuming the £40k annual allowance is a SIPP limit.  It's not, it's a limit on total contributions into all your pensions, including employer contributions, including tax relief. But unused allowance from previous years can be carried forwards as long as you were in a pension scheme in the previous years.

You can't (generally) "put savings" into a pension. You can only put earnings into a pension. There's a tax relief limit of 100% of earnings. Obviously you could put earnings in and live off savings but you're still constrained by the tax relief limit. There is NO carry forwards for this limit

mighty2022

Dazed_and_C0nfused said:

There is no fixed extra 20%. Any additional tax relief depends entirely on your personal circumstances.

For example you might earn £55k and contribute £40k (gross) to a SIPP using the relief at source method of contributing.  But as you have only paid higher rate tax on less than £5k you will only get higher rate tax relief on that element, not the full £40k.

It would be unusual to need to complete a Self Assessment return just to claim pension tax relief.  But if you need to complete one for some other reason then you would include the RAS pension contributions on the return. 

There may also be other less obvious tax advantages on top of any higher rate tax relief.  Being eligible for Marriage Allowance, reducing any HICBC payable or increasing your savings nil rate band (aka Personal Savings Allowance) being three common ones.

You can take 25% TFLS from each DC pension fund.  You don't get 25% TFLS from DB pensions though.  There is no pot/fund with a DB pension, you get a (tax free) PCLS based on the scheme rules.

Excluding the TFLS or PCLS pension income is taxed in the same way as earnings.  Your Personal Allowance and basic rate band can be used before higher rate tax would be payable on it.  But you need to factor in any other taxable income received in the same tax year i.e. taxable earnings, company benefits or State Pension.

The tax rates in the year you made the contribution are only relevant if you made the contribution and take some (taxable) income out in the same tax year.

Providing you don't come unstuck with pension recycling rules (not an issue at your current age) it doesn't really matter where the funds come from. 

But once in the pension they will probably be tied up until you are at least 57/58.

Thanks, some useful information there. It now makes sense that the 40% tax relief is only on the portion of the salary that falls into the 40% threshold. 

On the your point re: other tax advantages, a thick question: does paying into SIPP, reduce the taxable salary? So I could put enough into SIPP, to get my income to fall below the 40% threshold which in turn introduced those other tax advantages? Sorry, you can tell I’m new to all this. 

As much as I wish I did, I do not have a DB pension. 

mighty2022

MX5huggy said:

What ball park figure is you annual salary? Because your questions point to a salary in excess of £90k. 

Close, more towards mid 80s

Prism

Your contributions will be topped up by 25% so in your example, your £80 will become £100

Then you can either do a self assessment or make a call to HMRC to claim the rest back from anything in the higher tax bracket range. This can result in cash being paid back to you (not into your pension) or an adjustment to your tax code to the same effect.

Another way could be to contribute more directly to a workplace pension - you don't usually need to stop at the employer match. If the company uses salary sacrifice this can be the most tax effective and simple way to do it. 

Dazed_and_C0nfused

mighty2022 said:

Dazed_and_C0nfused said:

There is no fixed extra 20%. Any additional tax relief depends entirely on your personal circumstances.

For example you might earn £55k and contribute £40k (gross) to a SIPP using the relief at source method of contributing.  But as you have only paid higher rate tax on less than £5k you will only get higher rate tax relief on that element, not the full £40k.

It would be unusual to need to complete a Self Assessment return just to claim pension tax relief.  But if you need to complete one for some other reason then you would include the RAS pension contributions on the return. 

There may also be other less obvious tax advantages on top of any higher rate tax relief.  Being eligible for Marriage Allowance, reducing any HICBC payable or increasing your savings nil rate band (aka Personal Savings Allowance) being three common ones.

You can take 25% TFLS from each DC pension fund.  You don't get 25% TFLS from DB pensions though.  There is no pot/fund with a DB pension, you get a (tax free) PCLS based on the scheme rules.

Excluding the TFLS or PCLS pension income is taxed in the same way as earnings.  Your Personal Allowance and basic rate band can be used before higher rate tax would be payable on it.  But you need to factor in any other taxable income received in the same tax year i.e. taxable earnings, company benefits or State Pension.

The tax rates in the year you made the contribution are only relevant if you made the contribution and take some (taxable) income out in the same tax year.

Providing you don't come unstuck with pension recycling rules (not an issue at your current age) it doesn't really matter where the funds come from. 

But once in the pension they will probably be tied up until you are at least 57/58.

Thanks, some useful information there. It now makes sense that the 40% tax relief is only on the portion of the salary that falls into the 40% threshold. 

On the your point re: other tax advantages, a thick question: does paying into SIPP, reduce the taxable salary? So I could put enough into SIPP, to get my income to fall below the 40% threshold which in turn introduced those other tax advantages? Sorry, you can tell I’m new to all this. 

As much as I wish I did, I do not have a DB pension. 

No, personal contributions to a SIPP which qualify for tax relief will be made using the relief at source (RAS) method and they don't reduce your taxable income.

They do have the following benefits though,

1.  The pension company adds 25% to the amount you pay

2.  They increase your basic rate tax band meaning more tax can be paid at 20% and less at 40%.  This can mean you move from being a higher rate payer to a basic rate payer.

3.  They reduce your adjusted net income.  This is used when calculating HICBC and tapered Personal Allowance.

As a general rule though sacrificing salary in return for additional employer pension contributions is more tax efficient than RAS as you avoid paying tax and NI on the amount sacrificed.  And some employers add their own NI saving to your pension fund.

mighty2022

Thanks all, I've done some further readings based on your useful responses and I understand your points.

We do plan to have kids in the near future, but I would probably opt-out of child ben as it will be wiped out by the HICBC, unless I can my salary down to 50 - 60k, or even better below 50k.

Turning 31 next month, by the time, I get to retirement, the rules probably have changed and it'll be all a different world. But I can still start saving/investing early.

So far, I have around 27k in my current employer pension and 31k in my previous employer's pension, both DCs, so approx 58k in total. I'm not exactly sure what OH has in her pension. Mortgage should be done by 2027 (currently in a low fix rate of 1.9% until Sept 2025). Current pension contribution is 18% - my contribution is 6%  with an additional 12% added by my employer. Cash Savings are around 120k which we are looking to use to pay off the mortgage (better to invest?). No other debt

The dream? Retire early like one of the posters on here Sea_Shell although it wouldn't work with a SIPP as we can't access the funds until 55/57(from 2028)

I have been inspired by John Bogle's investment strategy of low cost index fund which I will probably start investing in via a S&S ISA, starting off with a 4k lump sum and then approx £600 monthly drip feed. 

Dazed_and_C0nfused

We do plan to have kids in the near future, but I would probably opt-out of child ben

Just make sure you understand the full implications of this, in particular any potential impact on your wife's State Pension as she would lose credits if you opted out completely rather than claiming Child Benefit but turning down just the actual payments.

I will probably start investing in via a S&S ISA, starting off with a 4k lump sum and then approx £600 monthly drip feed

Is that only after extinguishing any higher rate liability with additional pension contributions or will you remain a higher rate payer?

mighty2022

Just make sure you understand the full implications of this, in particular any potential impact on your wife's State Pension as she would lose credits if you opted out completely rather than claiming Child Benefit but turning down just the actual payments.

Yes of course, I meant opting out of the actual payments. I would still 'register' for CB

Is that only after extinguishing any higher rate liability with additional pension contributions or will you remain a higher rate payer?

I will still be a higher rate payer, we just feel like, for the time being, we need access to liquid cash (i.e S&S ISA, cash ISA) should we need to but perhaps move into paying more into SIPP/work pension as we get older. 

There's so many options (ISA, SIPP, work pension), each with its own benefits. I feel we need to sit down and come up with a plan that are we comfortable with especially if we want to use our cash saving of 120k to pay the mortgage off