Questions about SIPP with bank income

valmiki

Hi

I am not working presently and am fortunate to have bank interest of around £10k a year. I have maxed out this year's ISA allowance so this is not an option. The bank interest is the only income in my name, and I have declared via SA, I do not claim any government benefits.

I have a query on how much of this I can put into a SIPP? All the online guides talk about employed income, and I don't have this. I know I can put in the standard £2,880 plus tax relief, but can I put in more to equal my bank income? Could I carry forward previous years income (from bank interest) too? I'm guessing I can't get the tax relief as I'm not earning enough to pay tax. I would appreciate if someone could clarify the rules (a Google search hasn't helped so far unfortunately my case is a little too unusual I guess) to guide me forward.

Thank you in advance.

Albermarle

Interest from savings accounts do not count.
You are limited to the £2880 as a non earner.

I'm guessing I can't get the tax relief as I'm not earning enough to pay tax
The fact you are not paying tax is not relevant, it is the fact that you are a non earner that is the key issue.
For example someone could be earning £10K pa and not pay any tax, but they could still add £8K to a pension and get £2K tax relief.

valmiki

Thank you, just to clarify I can't put in more even without the tax relief?

FIREDreamer

valmiki said:

Thank you, just to clarify I can't put in more even without the tax relief?

Yes you can, theoretically, but most providers won’t accept it!

NoMore

valmiki said:

Thank you, just to clarify I can't put in more even without the tax relief?

Yes you can but why would you ? You’re opening it up to it being taxed as income when you withdraw. As previously said a lot of providers aren’t set up to accept contributions and not claim the tax relief. Exact because there’s very little point in doing it. 

valmiki

It is income that I don't need. I could invest it outside the ISA wrapper but then over time would be liable to CGT.

I have a SIPP with Vanguard - will have to ask them whether I can contribute without the tax relief (!)

Albermarle

valmiki said:

It is income that I don't need. I could invest it outside the ISA wrapper but then over time would be liable to CGT.

I have a SIPP with Vanguard - will have to ask them whether I can contribute without the tax relief (!)

The usual practical problem is that providers, having no knowledge of their clients affairs, just add basic rate tax relief to contributions automatically. Then at some point when it becomes clear that tax relief was not due, it all has to be unwound. So messy.

I guess it is possible that a specialist pension provider could accommodate contributions and not add tax relief. However I think a low cost provider like Vanguard will want to stick rigidly to standard automatic procedures. Quite likely whoever you talk to will not even understand what you are asking.

valmiki

I've sent them a message, let's see what they come back with. I'll report back when I get a reply. Thanks All.

jamesd

Inheritance tax avoidance planning is currently one application for making pension contributions without tax relief. The current absence of any charge for amounts above the lifetime allowance makes it particularly attractive for some.

Many investments in the AIM stock market also become more exempt from inheritance tax and these remain part of your estate.

NoMore

Why do you want to do this and do you fully understand the consequences ?

xylophone

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance#:~:text=While there's no limit on,a tax charge might apply.

While there’s no limit on the amount that can be saved into your pensions each tax year, there is a limit on the total amount that can be saved each tax year with tax relief applying.....

Inheritance tax avoidance planning is currently one application for making pension contributions without tax relief. The current absence of any charge for amounts above the lifetime allowance makes it particularly attractive for some.

Another situation where  no tax relief applies relates to contributions when aged over 75.

See https://www.curtisbanks.co.uk/app/uploads/2021/03/Contributing-after-age-75.pdf

Dylan explained that since 2015, there has been a concern that over-75s could look to use their pensions purely for IHT purposes, rather than for retirement saving purposes. Over 75s don’t get tax relief on their personal contributions, but those contributions also aren’t tested against the annual allowance or lifetime allowance.
Employer contributions aren’t tested against the lifetime allowance either, although they are still tested against the annual allowance. With no lifetime allowance to consider, over-75s could look to put large amounts into their pensions purely for the purposes of removing the funds from their estates for IHT purposes, ready to pass to their beneficiaries in the form of pension death benefits.

While strictly speaking this was possible before 2015, the pension freedoms changes made it a much more attractive proposition. Firstly, more beneficiaries would have the option of beneficiaries’ drawdown and may be able to carefully manage the amount of income tax they paid on the death benefits; secondly, if the client did need to withdraw any of the funds again they would no longer need to worry about capped drawdown limits.

Dylan went on to explain that when this potential loophole was discussed before the pension freedoms took effect, the Chancellor at the time was quoted saying that the government did not want pensions to become purely IHT planning vehicles. Therefore some providers took the view that such activity could be at risk of being seen as tax avoidance, potentially retrospectively. This was the reason behind their stance to look at post-75 contributions on a case-by-case basis: Dylan confirmed that they would not accept contributions that were being made purely for IHT reasons.

Any SIPP provider might refuse to accept non-tax relieved contributions regardless of the age of the contributor if it was considered that the contributions were made to  for IHT avoidance?