25% Lump sum, Lifetime Allowance and Tax efficiency

mistapike

HI all - I am after some advice about whether I understand the following correctly.

I have three pensions that are already crystallised, being actively taken, and the lump sums already taken. (Two are employer pensions and one is a SIPP with drawdown (we will call this SIPP A).

In total these amount to £800k of the lifetime allowance (which I appreciate becomes 0% Taxation rate from April 2024, but for now I think it prudent to stay onside of this).

I also have another small SIPP (call this SIPPB), uncrystallised and untouched, with about £10k in it.

I believe I am able to still pay £10k per annum (under MPAA) into SIPP B if I wish.......

So my question is, am I right that each tax year I could drawdown say 10k from SIPP A, paying income tax as necessary on that amount - but then pay that amount into SIPP B and not only claim the tax back, but also 25% of this amount would ultimately become tax free. As I am only 60, I think until I am 75, I can switching 10k (ish) from SIPP A to SIPP B each year, and I will benefit from 25% becoming tax free, and I just need to make sure SIPP B doesn't reach a value over 237k (ish) and hit the LTA. Have I understood this correctly please MSE Pension experts ?         

NoMore

Do you have relevant income of 10k or more that would cover the Tax relief. Income from a pension doesn't count.

Besides that there is Pension recycling rules which you might fall fall off.

eskbanker

mistapike said:

...the lifetime allowance (which I appreciate becomes zero from April 2024...

Quite the opposite, it becomes infinity!  A zero allowance would be very punitive....

mistapike

Thanks @NoMore - no I don't have any other income, so I think that is my first misunderstanding - that there is no tax relief on contributions that come from pension income rather than a salary. So if I went ahead I would get 25% tax free on drawdown, but pay income tax (20% right now), so any gain then becomes fairly marginal. I thought I must be missing something !. (I will also read up on pension recycling rules)

NoMore

You can contribute 2880 net (3600 grossed up by tax relief claimed by the pension) per year, with no income up to age 75

MallyGirl

mistapike said:

Thanks @NoMore - no I don't have any other income, so I think that is my first misunderstanding - that there is no tax relief on contributions that come from pension income rather than a salary. So if I went ahead I would get 25% tax free on drawdown, but pay income tax (20% right now), so any gain then becomes fairly marginal. I thought I must be missing something !. (I will also read up on pension recycling rules)

If you paid in as a 20% tax payer and then withdraw at 20% on 75% of it then it is still a 6.25% gain which is better than savings but hopefully there will have been investment growth too.