Adding cash to SIPP for pension soon to be claimed

rothers

Sarahspangles said:

rothers said:

Let's say that she just puts it into the vanguard SIPP that she currently has invested as cash. Before she retires she can put £45k in which will attract and additional 25% tax relief (£11,250) which means she will have a total of around £131,250 (£56,250 in cash and £75,000 invested). When she retires can she take the 25% tax free amount of the whole pot in one go (circa £33k) and take that from the cash part of the sipp, leaving the invested part to be drawn down over the next 12 years?

I hope that I am making a little bit of sense!!

I’m six months ahead of your wife. I am not going to draw any of my DB pensions immediately. They are all inflation proofed, including the NHS one.

Over the ‘gap years’ I will take UFPLS from my SIPP each year - 25% tax free, 75% taxed - to use up my personal allowance. The £12,570 taxed at 0% plus the 25% tax free is £16,760, I will pay 20% income tax on anything over this. I have the ‘first year’s money’ in an RL money market fund. It’s beating both inflation and the interest rate on cash in my SIPP. The rest is invested, but I’ll buy more money market funds at some point for ‘next year’s money’.

The reason for not taking all my tax free lump sum in one go is that that crystallises the 75% and if my investments grow I lose the benefit of being able to take 25% of a larger pot tax free. Also, if I take a lump sum I need to save/manage it so I’m not getting taxed on the interest. Some of what I draw down will go into ISAs.

If you’re paying tax on savings interest, but she has low income such as the £12,570 mentioned, you could take advantage of the fact she'll have £6,000 of starter savings band and personal savings allowance. Interest on an account in her name or half of the interest in a joint account won’t be taxed until it exceeds that.

I'm busy doing the housework at the moment before she gets home  There is a lot to ponder in your post and I'll look at it in more depth a little later. Thanks for posting your circs, it's much appreciated.

rothers

bjorn_toby_wilde said:

MallyGirl said:

yes that sounds fine. As long as she is earning more than the £45k plus tax relief plus any workplace pension gross contributions then all is well. If she is with Vanguard then forget about Royal London MMF - she can only hold Vanguard products in there

Just to add that Vanguard do have their own Sterling Short Term MMF.

That's great, thank you!

Secret2ndAccount

So you've learned that you need to pay in a bit less than you thought: personal contribution to NHS pension + SIPP payment + tax top up <= Salary
And that UFPLS is a good way to take the money out: 25% tax free, 75% taxable each year. However, if you do succeed in getting it all out tax free, that won't have gained you anything. Arguably, you should pull out a bit more via extra tax-free in the early years and put that into an ISA. Use up your full £20,000 allowance. That gives you more flexibility if you need access to the money. You can still invest that money using a stocks & shares ISA, or use the ISA to hold the part you keep as cash to spend in the near term.
As to whether to invest the money or not, that is to a large extent a personal decision. Where do you sit on the Fear -- Greed scale? Perhaps an easier question: what would happen if half the money disappeared in a crash? If it meant no food on the table, then keep it as cash. If it meant one less holiday per year, then put it in equities. Certainly for money that won't be withdrawn for 8, 10, 12 yrs, I would be choosing equities. The tougher decision is around the 3yr or 5yr timescale.
Don't keep cash in the SIPP. Use a money market fund. They are low risk, and pay close to the base rate, which is currently well above the inflation rate.

bjorn_toby_wilde

Secret2ndAccount said:

However, if you do succeed in getting it all out tax free, that won't have gained you anything.

Surely it will have gained the basic rate tax rebate?

rothers

Secret2ndAccount said:

So you've learned that you need to pay in a bit less than you thought: personal contribution to NHS pension + SIPP payment + tax top up <= Salary
And that UFPLS is a good way to take the money out: 25% tax free, 75% taxable each year. However, if you do succeed in getting it all out tax free, that won't have gained you anything. Arguably, you should pull out a bit more via extra tax-free in the early years and put that into an ISA. Use up your full £20,000 allowance. That gives you more flexibility if you need access to the money. You can still invest that money using a stocks & shares ISA, or use the ISA to hold the part you keep as cash to spend in the near term.
As to whether to invest the money or not, that is to a large extent a personal decision. Where do you sit on the Fear -- Greed scale? Perhaps an easier question: what would happen if half the money disappeared in a crash? If it meant no food on the table, then keep it as cash. If it meant one less holiday per year, then put it in equities. Certainly for money that won't be withdrawn for 8, 10, 12 yrs, I would be choosing equities. The tougher decision is around the 3yr or 5yr timescale.
Don't keep cash in the SIPP. Use a money market fund. They are low risk, and pay close to the base rate, which is currently well above the inflation rate.

Thanks for your post, my intention in putting cash in is to gain the tax relief and take it all out tax free. Having read the helpful replies on here I will put it into the money market fund. We currently fill our isas each year and have them invested in a couple of multi-asset funds with the majority being in equities. 

I don't have an issue in holding my nerve if they fall in value in the short term, if anything I'd probably keep it in too long as I'm a bit stubborn!

Secret2ndAccount

bjorn_toby_wilde said:

Secret2ndAccount said:

However, if you do succeed in getting it all out tax free, that won't have gained you anything.

Surely it will have gained the basic rate tax rebate?

Yes, you get the tax top up when you put the money in. That always applies. The question is whether to take the tax free lump sum a bit at a time or all at the beginning. Normally we tell people to use UFPLS - to take the tax free sum in parts along with the other withdrawals. This leaves some tax free money in the pension to grow, and allows more tax free to be witthdrawn in total over time. If you take all the TFLS at the beginning, you crystallise what's left. When that grows, so does the tax bill on all of it. There is no tax free part that grows too. In the case we are looking at here, the plan is that none of the money is subject to tax. Then, it doesn't matter the order in which it is withdrawn. You have saved no tax by using UFPLS vs crystallising.

bjorn_toby_wilde

Sure I understand that.  It’s just the way you put it in that paragraph reads as if there’s no gain from taking it out via UFPLS.

 “ And that UFPLS is a good way to take the money out: 25% tax free, 75% taxable each year. However, if you do succeed in getting it all out tax free, that won't have gained you anything.”

Dazed_and_C0nfused

rothers said:

Dazed_and_C0nfused said:

rothers said:

Let's say that she just puts it into the vanguard SIPP that she currently has invested as cash. Before she retires she can put £45k in which will attract and additional 25% tax relief (£11,250) which means she will have a total of around £131,250 (£56,250 in cash and £75,000 invested). When she retires can she take the 25% tax free amount of the whole pot in one go (circa £33k) and take that from the cash part of the sipp, leaving the invested part to be drawn down over the next 12 years?

I hope that I am making a little bit of sense!!

Does she earn enough to add £56,250 across this and the tax year?

As in meeting the rules, not has she got the cash in the bank to do it.

She earns just short of £37k per year and pays 9.1% into her NHS pension. She hasn't paid anything extra into her SIPP this financial year and will have 6.5 months of the next financial year to make more contributions. Am I right in thinking that she can put up to 100% of her wage into a pension (in total) each financial year?

Edited to add that she will be adding £45k, the £56,250 is including the tax relief.

As she is in the NHS pension scheme I think yo will find she only actually earns £33.6k for tax and pension contribution purposes.

You should be able to see her taxable earnings on her payslips, this will be less than her salary and it is the taxable amount (which goes on her P60 each year) that matters.

rothers

Dazed_and_C0nfused said:

rothers said:

Dazed_and_C0nfused said:

rothers said:

Let's say that she just puts it into the vanguard SIPP that she currently has invested as cash. Before she retires she can put £45k in which will attract and additional 25% tax relief (£11,250) which means she will have a total of around £131,250 (£56,250 in cash and £75,000 invested). When she retires can she take the 25% tax free amount of the whole pot in one go (circa £33k) and take that from the cash part of the sipp, leaving the invested part to be drawn down over the next 12 years?

I hope that I am making a little bit of sense!!

Does she earn enough to add £56,250 across this and the tax year?

As in meeting the rules, not has she got the cash in the bank to do it.

She earns just short of £37k per year and pays 9.1% into her NHS pension. She hasn't paid anything extra into her SIPP this financial year and will have 6.5 months of the next financial year to make more contributions. Am I right in thinking that she can put up to 100% of her wage into a pension (in total) each financial year?

Edited to add that she will be adding £45k, the £56,250 is including the tax relief.

As she is in the NHS pension scheme I think yo will find she only actually earns £33.6k for tax and pension contribution purposes.

You should be able to see her taxable earnings on her payslips, this will be less than her salary and it is the taxable amount (which goes on her P60 each year) that matters.

Yeah, I've just looked at her payslip and they are two different amounts, why is that and how would I calculate it for the rest of the year as I want to put money into it in January? Cheers

Micrographia

rothers said:

Ah, ok, thanks for that both of you. I’ll adjust the figures!

You may also be able to add any unused annual allowance carried forward from the previous 3 years to those figures.

https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings