What's the advantage of a SIPP?

JakeHyde

Hello everyone,
I just typed 'SIPP' into the search bar, and have a lot of results to go through, but I thought I should try and ask my question, in a clean thread.

I've never had a SIPP, and never really earned enough to be bothered.  But I have mentioned in the past I have some inheritance I'm trying to make the best use of.

I'm fortunate enough to not need to save for a pension necessarily, but I'm trying to do the smart thing, and make use of all of the Tax efficient saving I can, for when I'm older (I'll not use the word retirement). I'm 45 now. Currently living off my savings. But have enough to put away in the ISA's each year.

My question is: Can someone help me understand the advantages of having a SIPP?  I hear the government contribute towards your investment, but don't they tax you on the way out too? So what's the point?   Because I'm not earning, the max I will be allow to put in will only be £2880.

Does that mean I can back date it 3 years?   3 x £2800  -  I have just been on the phone with moneyhelper.org.uk - and they said No I can't, for reasons, I didn't understand.

Thank you so much in advance, it's great listening to your sage advice! 😝

Any useful articles, suggestions, and tools you could direct me to, would be greatly appreciated. 🙏 

Dazed_and_C0nfused

There is no back dating with pension contributions.

And you have to have used this years annual allowance (£60k) before you can use unused annual allowance from the previous 3 years.

So with no earnings you will be limited to £3,600 (gross)

But that is £3,600 that only costs you £2,880.

If you have no other taxable income when you eventually taken the pension out you could get £3,600 back.  But you only paid £2,880 to start with.

Put £2,880 in an ISA and you only get £2,880 back.

Even a basic rate payer would get £3,060 back.

25% of the £3,600 is tax free (£900)

£2,700 would be taxed at 20%, so £2,160 after tax.

£900 + £2,160 = £3,060.

JakeHyde

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

Dazed_and_C0nfused

JakeHyde said:

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

Yes, 25% can be taken as a tax free lump sum (TFLS) but the remaining £2,700 would be taxable pension income.

The tax payable on the £2,700 will depend on what other taxable income you have in the tax year you take the money out of the pension.

Albermarle

JakeHyde said:

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

75% of the pension pot is taxable income on withdrawal ( 25% is tax free).
Whether it is taxed at all, or by how much depends on what other taxable income you have.

fun4everyone

I am in a similar situation to you OP and decided a SIPP was worth it many years ago.  You can't contribute for previous years as other posters have already pointed out.  Assuming you are earning nothing (you did say you are "living off your savings") then you can contribute £2880 per tax year, and the government will add £720 to it for a total contribution of £3,600.  If you decide to do this then I believe the last day of this tax year is tomorrow the 5th April so that might be a good time to make a contribution.  The catch is you cant access the money until you are 55 (changing to 57 soon so it would be at least that for you I think).  You can have a reasonably wide range of investments in your SIPP and dont have to worry about capital gains tax or dividend tax.  When drawdown starts you can take 25% tax free then rest is taxed at your rate of income tax.You can have as many SIPPS as you like across multiple providers.

I believe that if you die before the age of 75 your heirs you nominate can inherit your SIPP tax free.

https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die

The above is just my understanding, there are lots more knowledgeable posters on here than me.

TBC15

JakeHyde said:

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

Bottom line you are still £180 ahead of the game.

Where is your other income coming from?

When do you want to retire?

JakeHyde

Dazed_and_C0nfused said:

JakeHyde said:

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

Yes, 25% can be taken as a tax free lump sum (TFLS) but the remaining £2,700 would be taxable pension income.

The tax payable on the £2,700 will depend on what other taxable income you have in the tax year you take the money out of the pension.

Thanks again.
So as long as I stay within the 20% tax bracket (so far I am), I'm gravy! 😝

I wish I was so knowledgable! 🍻

dunstonh

Can someone help me understand the advantages of having a SIPP?

Pensions are one of the most tax efficient options for later life.  The pension wrapper beats ISAs for example.

 I hear the government contribute towards your investment, but don't they tax you on the way out too? So what's the point?  

They only tax 75% of it and only the amount above your personal allowance.   So, you get 20% relief on the contributions but only pay 15% effective on the withdrawals (Again, only what is above your personal allowance). Hence, why it beats ISA by 6.25%

JakeHyde

fun4everyone said:

I am in a similar situation to you OP and decided a SIPP was worth it many years ago.  You can't contribute for previous years as other posters have already pointed out.  Assuming you are earning nothing (you did say you are "living off your savings") then you can contribute £2880 per tax year, and the government will add £720 to it for a total contribution of £3,600.  If you decide to do this then I believe the last day of this tax year is tomorrow the 5th April so that might be a good time to make a contribution.  The catch is you cant access the money until you are 55 (changing to 57 soon so it would be at least that for you I think).  You can have a reasonably wide range of investments in your SIPP and dont have to worry about capital gains tax or dividend tax.  When drawdown starts you can take 25% tax free then rest is taxed at your rate of income tax.You can have as many SIPPS as you like across multiple providers.

I believe that if you die before the age of 75 your heirs you nominate can inherit your SIPP tax free.

https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die

The above is just my understanding, there are lots more knowledgeable posters on here than me.

Sadly, I don't have anyone to leave my estate to... So I'll need to get working on that ASAP!😅  I think I'm going to go with InvestEngine, I already have my S&S ISA with the, and at 0.15% it's not a bad fee.

TBC15 said:

JakeHyde said:

Thanks @Dazed_and_C0nfused for taking the time to break it down for my tiny little distracted mind! I think I understand it better now.  So would this be classed as income, when I come to withdraw it?  If say I'm still earning/receiving £12,570? 

Bottom line you are still £180 ahead of the game.

Where is your other income coming from?

When do you want to retire?

To be honest... I kinda think I'm sort of semi-retired already?!? I've been looking after my dad, after losing mum a year ago. Any work I do will be trying to pursue something I love.  But I guess I'll need to find some work to give me a better quality of life (I'm hardly living in the Bahamas), and stop me running out of money when I'm 60! haha

My income is just savings, and interest at the moment, but that won't last unless I invest it into something like property or something that grows.

JakeHyde

dunstonh said:

Can someone help me understand the advantages of having a SIPP?

Pensions are one of the most tax efficient options for later life.  The pension wrapper beats ISAs for example.

 I hear the government contribute towards your investment, but don't they tax you on the way out too? So what's the point?  

They only tax 75% of it and only the amount above your personal allowance.   So, you get 20% relief on the contributions but only pay 15% effective on the withdrawals (Again, only what is above your personal allowance). Hence, why it beats ISA by 6.25%

Thanks.  Yeah my ISA is with InvestEngine, so far I'm on about 20% gains, which is pretty good.  Fingers crossed that doesn't change! 😅   You can do both, right? £20 ISA (max) + SIPP.