Leaving work soon - SIPP or not worth it??

Augusta_Carp

I'm 56 and earn £44000, single, no dependents.  It looks like I will have to leave my job in the next 6 months/year. 

Assuming I leave in the next financial year, my DB pension will be about £19000 and I have a very small AVC pot.  I can't take the pension or AVC without reduction until I'm 67.  I will get the maximum state pension.  I am in the fortunate position of having savings worth nearly £900,000 but I currently don't own a house and I will need to buy one in about 2 years.  (I had to move in with my father to care for him.)  

I'll probably have to spend about £600,000 on a house (live on London outskirts).  I will have to start drawing on my savings to live in the meantime.  My ISA and PB are maxed out.

It just occurred to me - should I open a SIPP and put the max I can this financial year (my salary minus mine and my employer's contribution??) and do the same next year when my job finishes?  Then I could draw on this money in the future before I'm 67.  Or is this completely pointless as the drawdown sum would be subject to tax, and I may as well leave the money in a savings account and use that?

I live very modestly and think I will be alright for money but I have always saved all my life and the thought of not having a monthly income is completely freaking me out!!  

Thank you.

Dazed_and_C0nfused

Augusta_Carp said:

I'm 56 and earn £44000, single, no dependents.  It looks like I will have to leave my job in the next 6 months/year. 

Assuming I leave in the next financial year, my DB pension will be about £19000 and I have a very small AVC pot.  I can't take the pension or AVC without reduction until I'm 67.  I will get the maximum state pension.  I am in the fortunate position of having savings worth nearly £900,000 but I currently don't own a house and I will need to buy one in about 2 years.  (I had to move in with my father to care for him.)  

I'll probably have to spend about £600,000 on a house (live on London outskirts).  I will have to start drawing on my savings to live in the meantime.  My ISA and PB are maxed out.

It just occurred to me - should I open a SIPP and put the max I can this financial year (my salary minus mine and my employer's contribution??) and do the same next year when my job finishes?  Then I could draw on this money in the future before I'm 67.  Or is this completely pointless as the drawdown sum would be subject to tax, and I may as well leave the money in a savings account and use that?

I live very modestly and think I will be alright for money but I have always saved all my life and the thought of not having a monthly income is completely freaking me out!!  

Thank you.

You would gain 6.25% if you are a basic rate payer now and when you take the money out.

You add say £800.  That becomes £1,000 with the basic rate relief that gets added.

You take £1,000 out.  £250 is a TFLS and £750 is taxed at basic rate.  Your net return is £250 + £600 = £850.

£800 in, £850 out = 6.25% return.

Marcon

Augusta_Carp said:

I live very modestly and think I will be alright for money but I have always saved all my life and the thought of not having a monthly income is completely freaking me out!!  

You are not alone on that score! Changing your habits from being someone with a monthly income who is saving regularly for 'their future', to someone without a monthly pay cheque who is now beginning to draw on their savings,  is a huge change in mindset.

Is there any merit in considering the possibility of a part time job to ease you between the two extremes?

dunstonh

It just occurred to me - should I open a SIPP and put the max I can this financial year (my salary minus mine and my employer's contribution??

Seems logical.  Indeed, should have done it a while back.  You have focused on ISAs and PBs but missed the most tax efficient option of the lot. 

Or is this completely pointless as the drawdown sum would be subject to tax, and I may as well leave the money in a savings account and use that?

Why do you think it would be all subject to tax?    is there other income you haven't mentioned? 
a) only 75% of the draw is taxable
b) you will have your personal allowance.

Pension appears to be a no-brainer based on the limited information you have given.

MarzipanCrumble

You are young enough to maybe not give up work altogether.  You could contribute a lot of your earnings to SIPP if you have other means.  

You say you have no dependents but to whom or what are you going to leave your wealth to when you die?  A SIPP can be left to named individual/s in a will.  

Somebody

MarzipanCrumble said:

A SIPP can be left to named individual/s in a will.  

No, SIPPs should not be included in a will.  Instead, you register an "expression of wishes" with the SIPP provider.

ColdIron

Augusta_Carp said:

I'll probably have to spend about £600,000 on a house (live on London outskirts).  I will have to start drawing on my savings to live in the meantime.  My ISA and PB are maxed out.

Even £300,000 will generate a lot of interest, much of which will be taxable

It just occurred to me - should I open a SIPP and put the max I can this financial year (my salary minus mine and my employer's contribution??)

The relevant earnings limit is your contribution plus tax relief. Employers contribution doesn't count towards it, only the £60,000 annual allowance. Your SIPP won't get employer contributions anyway

Pensions are rarely a bad idea. Over time they have a good chance to keep up with inflation, cash almost never does. Your cash will be taxed every year while they won't within a pension. You get tax relief. Your pension does not form part of your estate and therefore isn't subject to Inheritance tax

and do the same next year when my job finishes?  Then I could draw on this money in the future before I'm 67.

You won't be able to put as much in but that doesn't mean it's a bad idea and it will get your money out of cash. If you want to retire early it's a useful source of income to bridge the gap before your DB and SP kick in. It gives you options

You say the 'thought of not having a monthly income is completely freaking me out'. Well there's a source of income

Or is this completely pointless as the drawdown sum would be subject to tax, and I may as well leave the money in a savings account and use that?

Your cash will be subject to tax, likely more than your pension. Pensions get tax relief and 25% tax free. If you draw on it before you reach SP or DB age you may be able to use your Personal Allowance to mitigate tax further

Augusta_Carp

@dunstonh - thanks, yes, there is a lot that I should have done a while ago including getting an IFA!  Of course - just realised I won't be paying tax if I am under the personal allowance!

I have to be a full time carer for a while but may be able to get a part time job or another job in the future.  I will claim carer's allowance in the mean time.

As I have contributed £5700 to my pension this year, how much can I put in a SIPP?  (Sorry, if this is a stupid question.)

Thanks all.

ColdIron

Augusta_Carp said:

As I have contributed £5700 to my pension this year, how much can I put in a SIPP?  (Sorry, if this is a stupid question.)

Up to your relevant earnings, for most people this will be salary. Interest, BTL etc don't count. That's why I say you won't be able to contribute so much when your job finishes though everyone has a minimum £2,880/£3,000 available

The contribution is gross so if you earn £10,000 that's £8,000 from you and £2,000 tax relief

Was that £5,700 your contribution or gross? You'll need to deduct the gross amount from your earnings limit to see what's left

Albermarle

OP, If you want to open a SIPP this tax year and contribute to it ( which looks like a good idea) you need to get moving !

Sarahspangles

@Augusta_Carp If all goes to plan I will retire in a year’s time and have 2.5 years to bridge between retirement and my first DB pension commencing. I’m currently paying close to the maximum allowed into a SIPP, with the intention of withdrawing a basic income of £16,760 (personal allowance + the 25% tax free). I’ll pay basic rate tax on withdrawals from the remainder of my SIPP, but still get the 6.25% explained by Dazed.