£2,880 into SIPP... warning for tax on interest for those paying tax on income

clivep

There have been numerous posts regarding the benefit of paying £2,880 into a SIPP if you have no earned income. HMRC grosses this up to £3,600. When this is withdrawn it generates £720 profit if you are not a tax payer, or £180 if you are.

I made such contributions for some 20 years before making UFPLS withdrawals tax free after retiring and before getting state pension.

I am now a tax payer as I now receive state pension which this year is slightly above the £12,570 frozen personal allowance. I also have taken a £4,000 UFPLS and paid £600 tax on the £3,000 taxable part.

I have recently paid in £2,880 and had planned do an UFPLS withdrawal of £3,600 gross to realise the £180 gain. However...

The taxable £2,700 element of the withdrawal would take my taxable income over £17,570 meaning I would lose all of the savings starting rate of 0%.

Due to decent savings rates on regular savers and Santander's Edge Savers, I will have about £2,000 in savings interest this year. Currently, I will not be due to pay tax on this but if I make the SIPP withdrawal to gain £180 this will cause £200 tax on the savings!

I can see an extreme example of this loss when having a taxable income of £14,870 and savings interest of £3,700. There would be no tax to pay on this. If £2,880 were paid into the SIPP and £3,600 withdrawn then there would be £540 tax to pay on £2,700 of the interest turning the £180 gain into a £360 loss.

Marcon

clivep said:

There have been numerous posts regarding the benefit of paying £2,880 into a SIPP if you have no earned income. HMRC grosses this up to £3,600. When this is withdrawn it generates £720 profit if you are not a tax payer, or £180 if you are.

I made such contributions for some 20 years before making UFPLS withdrawals tax free after retiring and before getting state pension.

I am now a tax payer as I now receive state pension which this year is slightly above the £12,570 frozen personal allowance. I also have taken a £4,000 UFPLS and paid £600 tax on the £3,000 taxable part.

I have recently paid in £2,880 and had planned do an UFPLS withdrawal of £3,600 gross to realise the £180 gain. However...

The taxable £2,700 element of the withdrawal would take my taxable income over £17,570 meaning I would lose all of the savings starting rate of 0%.

Due to decent savings rates on regular savers and Santander's Edge Savers, I will have about £2,000 in savings interest this year. Currently, I will not be due to pay tax on this but if I make the SIPP withdrawal to gain £180 this will cause £200 tax on the savings!

I can see an extreme example of this loss when having a taxable income of £14,870 and savings interest of £3,700. There would be no tax to pay on this. If £2,880 were paid into the SIPP and £3,600 withdrawn then there would be £540 tax to pay on £2,700 of the interest turning the £180 gain into a £360 loss.

Then don't withdraw £3,600. Just take the 25% tax free cash - £900.

squirrelpie

clivep said:

Due to decent savings rates on regular savers and Santander's Edge Savers, I will have about £2,000 in savings interest this year. Currently, I will not be due to pay tax on this but if I make the SIPP withdrawal to gain £180 this will cause £200 tax on the savings!

Yes, there can be relatively complicated interactions between income streams for tax. That's one reason people put savings in premium bonds, or cash ISAs, despite the often poorer interest rates.

wjr4

Are you using your ISA allowance annually? If not, you can use £20,000 now and £20,000 from 6th April. 

wjr4

squirrelpie said:

clivep said:

Due to decent savings rates on regular savers and Santander's Edge Savers, I will have about £2,000 in savings interest this year. Currently, I will not be due to pay tax on this but if I make the SIPP withdrawal to gain £180 this will cause £200 tax on the savings!

Yes, there can be relatively complicated interactions between income streams for tax. That's one reason people put savings in premium bonds, or cash ISAs, despite the often poorer interest rates.

Cash ISAs now receive a decent interest rate, if you’re fine with opening online accounts. 

clivep

Due to the announced inheritance tax raid on inherited pension pots (our son is the sole nominated beneficiary of our SIPPS), it no longer makes sense to leave the 25% TFLS (tax free lump sum) in the SIPPS once we reach 75.

We will shortly take the lump sums and put them into ISAs for this and next tax year. The funds are currently in ETFs and we planned to invest the lump sums in our S&S ISAs. However, we may put them in Cash ISAs instead.

Although Cash ISA rates are decent, our regular savers and Santander Edge Saver all pay 6% or more so I'd like these to continue outside of ISAs.

The proposed change to bring the SIPPs into our estates on death means there is no point in us making any further contributions other than to realise the £180 gain on the £2,880 in and withdrawal scenario. The purpose of my post was to highlight the fact that doing this can sometimes lead to a loss.

Marcon

clivep said:

Due to the announced inheritance tax raid on inherited pension pots (our son is the sole nominated beneficiary of our SIPPS), it no longer makes sense to leave the 25% TFLS (tax free lump sum) in the SIPPS once we reach 75.

Without wishing to be too morbid, you need to nominate another (or other) beneficiary/ies, in case the very worst happens. These other potential beneficiaries would only become actual beneficiaries if such an unthinkable tragedy happened and your son was not alive to benefit. A note on the form confirming who these 'fall back' beneficiaries are, and the circumstances in which they would actually benefit, will do the trick.

clivep

Indeed...

Our son is our only child and is unmarried with no children. My only sibling is my older brother who is married but does not have any children and is in no need of financial support. We need to look further afield to find backup beneficiaries. We have already made significant PETs and charity donations and will continue to do so.

From what I can see, the proposed changes mean that there will no longer be any point in having an expression of wishes for the SIPPs as the inheritance tax advantage will disappear and estate distribution can be made according to our wills.