DC transfer to SIPP and drawdown change of plan - Inheritance

ossie48

My wife is retired aged 55. She has a small DC pension pot worth £62k that we were about to transfer to a Vanguard SIPP and commence drawdown until state pension age. (We're unable to add to it or draw it down) . 

However life has taken a turn and at some point later in the next financial year she will receive a six figure inheritance (£270k). Its got me thinking of where to best utilise it and if we should change or pause the above plan as I understand drawdown limits future contributions for non earners.

She retired last Sept on a salary of £20k. Her pension contributions were £50 a month, matched by her employer. Would we be able to contribute the unused contributions for the last three years into her SIPP  as well as the £62k pension transfer, then commence drawdown ? What are the advantages of doing this over say maxing out this years S&S ISA contribution allowance or should we do both in anticipation of finding a home for some of the inheritance.  

NoMore

Two things limit Pension Contributions:

1) The Annual Allowance (AA) - Contributions form all sources to all pensions in single tax year cannot be more than 40k. However this can be extended by the three previous years unused allowance, once the full 40k of the current year is used up.

2) You can only get tax relief from up to your relevant taxable income for the year (Pension income does not count). You can legally put more into a pension and not get tax relief, but for 99% of people this is not a good idea and most pensions struggle with this as they automatically claim tax relief on personal contributions

I suspect number 2 is what will limit your wife's contributions not number 1.

Linton

In any one tax year you cannot contribute more new money to pensions than your earnings from employment  unless you have zero or very low earnings when you can contribute £3600 gross, £2880 net.  To be accurate you can but you lose the tax relief which makes the exercise in most cases rather pointless. The earnings limit operates in parallel with  the £40K Allowance but there is no carry over.

So, being retired, your wife would not be able to transfer a significant part of her inheritance into a SIPP.  If you are still working she could give you money to put into your pension.

The best option would be to move £20K X 2 each year into his and hers S&S ISAs, if she would be happy to do that.

Has she thought through what the money will be used for?

ossie48

Linton said:

The best option would be to move £20K X 2 each year into his and hers S&S ISAs, if she would be happy to do that.

Has she thought through what the money will be used for?

Thanks. We're going to gift our three children, then as you say £40k into the S&S ISA's. I guess £50k x2 into premium bonds and the rest will find a cash home until we come up with a plan. We currently have £140k in VLS60, £60K cash in Santander 2.75% destined for a new kitchen and a wedding.

I'm retired on a comfortable DB pension, with another DB to come for my wife then state pensions down the line. The DC pension transfer / SIPP / drawdown would simply be a holiday pot or pocket money.  I guess a house move might be on the horizon in about five to ten years.

xylophone

We're going to gift our three children, 

 Would s Deed of Variation be appropriate to the circumstances?

https://www.gov.uk/alter-a-will-after-a-death

https://www.irwinmitchell.com/personal/probate/probate-guide/changing-will-after-death

Albermarle

DC transfer to SIPP 

Maybe a bit pedantic, but a SIPP is a DC pension and governed by exactly the same legal and tax laws.
Due to clever marketing 'SIPP' has become modern/sexy, but in essence is just another variation on a  DC pension.

Secret2ndAccount

If she retired last Sept, presumably she ahs earnings of about 10k this tax year (April - April)?  So she could put 8k into a SIPP, and get it grossed up to 10k, provided she opens it in the next couple of weeks. Remember if she has already made some personal contributions out of her salary, to subtract those from what she puts into the SIPP.

Bimbly

Sounds like she can live off this new money and not touch the DC. So she could leave the DC where it is for unspecified future use, whatever that might be. It will be protected from inheritance tax, so if she doesn't touch it, it would perhaps be better for children to inherit money from the DC pot rather than anything taxable for IHT purposes.