SIPP tax relief query

f.castle

Hi all,

I (under 35yo) am unsure about how I receive tax relief when investing in a SIPP and buying shares and funds and holding them in the SIPP.

I already have £2,000 in a stocks and shares ISA and am taking a SIPP more seriously.

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

If I do get the tax relief, is this £400 cash (20% of 2000) into the SIPP? Or does the fund automatically increase by £400?

I’m unsure about how I get the tax relief (or if I get it on stocks and funds).

Can anyone shed light on this?

Thanks,

Dazed_and_C0nfused

f.castle said:

Hi all,

I (under 35yo) am unsure about how I receive tax relief when investing in a SIPP and buying shares and funds and holding them in the SIPP.

I already have £2,000 in a stocks and shares ISA and am taking a SIPP more seriously.

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

If I do get the tax relief, is this £400 cash (20% of 2000) into the SIPP? Or does the fund automatically increase by £400?

I’m unsure about how I get the tax relief (or if I get it on stocks and funds).

Can anyone shed light on this?

Thanks,

Your £2,000 is the net contribution so you wouldn't get £400 in tax relief, it would be £500.

Which is 20% of the gross contribution of £2,500.

That is always added to the pension fund, you never receive it personally.

As long as it qualifies for tax relief (which at your age and amount it would) then the pension company will add it automatically.

But I don't think you could transfer the existing investment from an ISA to a SIPP,  you would have to either fund the SIPP with new money or sell the ISA investments and add the money as cash to the SIPP. And then start investing within the SIPP.

https://www.ii.co.uk/ii-accounts/sipp/transfer-isa-to-sipp

jimjames

f.castle said:

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

You don't have a choice unfortunately. You can only add cash to a SIPP in the same way that you can only add cash to an ISA. (with the exception of sharesave)

dunstonh

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

You cannot do that.   Whilst it is possible to do in-specie transfers between the same wrapper, it is not possible to it between different wrappers.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

No.  Your contribution to the pension is reduced by 20%. e.g. if the pension contribution was £2,000 then you pay £1,600 and the provider claims the tax relief.  Some will pre-fund the tax relief claim and instantly show your value as £2,000.   Some will not pre-fund and you have to wait for around 6-8 weeks for the tax relief to show on your value.

You should also considerer the LISA wrapper.  As a basic rate taxpayer, LISA beats the pension tax wrapper unless you are planning for early retirement years (but then LISA beats pension for later retirement years).

f.castle

@dunstonh @jimjames @Dazed_and_C0nfused thanks a lot, I did not understand this was how it was. I need to go do some more research then around how the 20% is applied and received, and if a LISA is better for me.

Exodi

Tax relief is intended to return the income tax you paid (with the logic being that you will eventually pay income tax on it when you take it out in retirement, as otherwise you'd pay income tax on the same money twice).

Think of it like this - You're paid £2500 in wages. The employer deducts 20% for income tax, which is £500 (20% of £2500), leaving you with £2000 paid into your bank.

If you were to then put this £2000 in to your pension, the 20% tax they originally took would be returned to you to counter the income tax deducted from your wages. As you can see above, this would be £500 to bring you back to £2500.

Please note: the government doesn't guarantee that they will return exactly the amount of income tax paid but instead provides a blanket 20% relief to everyone (or 40% relief to higher rate tax payers who claim it on their SA). People that don't pay income tax benefit from receiving 20% tax relief on contributions that they didn't originally pay tax on.

r6mile

dunstonh said:

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

You cannot do that.   Whilst it is possible to do in-specie transfers between the same wrapper, it is not possible to it between different wrappers.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

No.  Your contribution to the pension is reduced by 20%. e.g. if the pension contribution was £2,000 then you pay £1,600 and the provider claims the tax relief.  Some will pre-fund the tax relief claim and instantly show your value as £2,000.   Some will not pre-fund and you have to wait for around 6-8 weeks for the tax relief to show on your value.

You should also considerer the LISA wrapper.  As a basic rate taxpayer, LISA beats the pension tax wrapper unless you are planning for early retirement years (but then LISA beats pension for later retirement years).

Hello could you elaborate on why a LISA is better for a basic rate taxpayer than a pension?

dunstonh

r6mile said:

dunstonh said:

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

You cannot do that.   Whilst it is possible to do in-specie transfers between the same wrapper, it is not possible to it between different wrappers.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

No.  Your contribution to the pension is reduced by 20%. e.g. if the pension contribution was £2,000 then you pay £1,600 and the provider claims the tax relief.  Some will pre-fund the tax relief claim and instantly show your value as £2,000.   Some will not pre-fund and you have to wait for around 6-8 weeks for the tax relief to show on your value.

You should also considerer the LISA wrapper.  As a basic rate taxpayer, LISA beats the pension tax wrapper unless you are planning for early retirement years (but then LISA beats pension for later retirement years).

Hello could you elaborate on why a LISA is better for a basic rate taxpayer than a pension?

LISA bonus is the equivalent of basic rate relief on a pension.   So, contributions in get the same tax benefit.

In retirement, draws on the LISA are tax free.    However, with a pension draws equate to 15% tax (75% at 20% and 25% tax free).   So, the net effective benefit overall is better with LISA.

However, LISAs cannot be taken without tax charge until age 60.  Pensions will be 58. 
Pensions are outside of your estate.  LISAs are part of your estate (only an issue if IHT would apply)

So, broadly speaking and very simplified, if someone wanted to retire before state pension age, then you would use pensions to fund the gap to use the personal allowance (which is an income of £16,760 from a pension).  Anything above that could use a S&S ISA or LISA.    Post state pension age, LISA moves ahead of pension in efficiency (apart from the small difference in personal allowance).

Albermarle

r6mile said:

dunstonh said:

I want to transfer my £2,000 which is already in  an index tracker into the SIPP. I don’t want to sell the index and put the cash in the SIPP, I want to transfer the index fund investment into the SIPP.

You cannot do that.   Whilst it is possible to do in-specie transfers between the same wrapper, it is not possible to it between different wrappers.

Will the £2,000 in the index tracker receive 20% tax relief? I am a 20% rate taxpayer.

No.  Your contribution to the pension is reduced by 20%. e.g. if the pension contribution was £2,000 then you pay £1,600 and the provider claims the tax relief.  Some will pre-fund the tax relief claim and instantly show your value as £2,000.   Some will not pre-fund and you have to wait for around 6-8 weeks for the tax relief to show on your value.

You should also considerer the LISA wrapper.  As a basic rate taxpayer, LISA beats the pension tax wrapper unless you are planning for early retirement years (but then LISA beats pension for later retirement years).

Hello could you elaborate on why a LISA is better for a basic rate taxpayer than a pension?

In the latter part of this article, there is an explanation of the pros and cons.
Lifetime ISA (LISA): how they work & best buys (moneysavingexpert.com)

Albermarle

f.castle said:

@dunstonh @jimjames @Dazed_and_C0nfused thanks a lot, I did not understand this was how it was. I need to go do some more research then around how the 20% is applied and received, and if a LISA is better for me.

Do you have a workplace pension that you and your employer pay into ?