Pension questions (SIPP + workplace)

inkydolphin

Hi, I have some questions about pensions and wonder if anyone can confirm if my thinking is correct. I have looked at the MSE guide (including #9 "Aren't pensions a load of rubbish?" lol) but just want to check my understanding. 

It seems you can have a SIPP as well as a workplace pension (up to £60,000 contributions in total if you want to avoid paying tax). Is that right? If so, does having both affect the tax relief you get on the SIPP?

Example 1: if your annual income is £25,000 pre-tax and you pay £2,500 a year into a workplace pension, you can put up to £22,500 in total into a SIPP and get tax relief on all this amount?

In the example above would the 20% tax relief be added on top of the £22,500 (making it £27,000) or does the £22,500 include the 20% tax relief (i.e. you can only in fact pay £18,750 into the SIPP)?

Example 2: if your annual income is £6,000 and you have an old workplace pension you no longer pay into (i.e. you don't work there any more), you can put up to £6,000 in total into a SIPP and get tax relief on all this amount?

Sorry if this is all answered elsewhere but any thoughts appreciated. Thanks.

Linton

inkydolphin said:

Hi, I have some questions about pensions and wonder if anyone can confirm if my thinking is correct. I have looked at the MSE guide (including #9 "Aren't pensions a load of rubbish?" lol) but just want to check my understanding. 

It seems you can have a SIPP as well as a workplace pension (up to £60,000 contributions in total if you want to avoid paying tax). Is that right? If so, does having both affect the tax relief you get on the SIPP?

Example 1: if your annual income is £25,000 pre-tax and you pay £2,500 a year into a workplace pension, you can put up to £22,500 in total into a SIPP and get tax relief on all this amount?

In the example above would the 20% tax relief be added on top of the £22,500 (making it £27,000) or does the £22,500 include the 20% tax relief (i.e. you can only in fact pay £18,750 into the SIPP)?

Example 2: if your annual income is £6,000 and you have an old workplace pension you no longer pay into (i.e. you don't work there any more), you can put up to £6,000 in total into a SIPP and get tax relief on all this amount?

Sorry if this is all answered elsewhere but any thoughts appreciated. Thanks.

One piece of advice: When thinking about SIPP contributions, always work in terms of Gross Contribution and then at the end subtract 20% to get your actual payment.  If you work in terms of net payment you are likely to get very confused. "Contribution"  means Gross payment.

The £60K Annual Allowance includes all contributions, both employers and employees.  There is some carry over of unused AA  from previous years.  If you exceed it you lose tax relief on the excess.

Example 1: Your total gross contribution should not exceed your annual gross earnings in a tax year to get full tax relief .  So yes the £22750 does include the tax relief.  There is no carry over of unused earnings from previous years.

Example 2: Yes, contributions from previous tax years, no matter whether they are to a current pension or an old one, do not affect the earnings limit.

dunstonh

It seems you can have a SIPP as well as a workplace pension (up to £60,000 contributions in total if you want to avoid paying tax). Is that right? If so, does having both affect the tax relief you get on the SIPP?

A SIPP is a specific type of pension.     You can have as many pensions as you like.
There are no rules specific to SIPPs compared to other defined contribution pensions.   

Example 1: if your annual income is £25,000 pre-tax and you pay £2,500 a year into a workplace pension, you can put up to £22,500 in total into a SIPP and get tax relief on all this amount?

yes.  The rules on contributions are across all pensions.

In the example above would the 20% tax relief be added on top of the £22,500 (making it £27,000) or does the £22,500 include the 20% tax relief (i.e. you can only in fact pay £18,750 into the SIPP)?

Gross contributions are what matters.  not net.
Tax relief is a relief not a bonus.  i.e. it doesn't get added on.   Your pension contribution in this example would be £27,000.   not £22,500.     In other words, its not what you pay out of your account that is the contribution but the gross amount.

Example 2: if your annual income is £6,000 and you have an old workplace pension you no longer pay into (i.e. you don't work there any more), you can put up to £6,000 in total into a SIPP and get tax relief on all this amount?

You can contribute £6,000 into any pension or multiple pensions across that tax year as long as you dont exceed £6k

Note, that employer contributions (including company directors of own company) have variations on this.

inkydolphin

Thanks @Linton and @dunstonh - seems I'm on the right lines but good tip about thinking in gross not net.

Albermarle

Workplace DC pensions and SIPP's are the same from a legal and tax point of view. The main difference is the latter have a wider range of investments to choose from.

If you have a non workplace pension, they will automatically add basic rate tax relief to your contributions. It is up to you not to add more than you are entitled to.

With a workplace pension it can work the same way OR the contribution can be taken from your salary pre tax, so you get the tax relief automatically . In the latter case the provider will not add any more tax relief. So you need to be clear how your employer is dealing with your pension contributions.