Pension contribution unearned income (higher rate tax payer)

drjohn67

Grateful for advice.

I am 57, retired and in receipt of a good work pension. 

In the past 12 months I crystallised 25% of my private pension and left the remaining 75% in drawdown account. The amount crystallised was over £40000.

I have no earned income although unearned income has pushed me past the 40% threshold.

I would like to put £3600 a year in to my private pension without triggering recycling or other penalties.

So are the following correct?

1. I understand that the maximum allowed is £3600 per year? Also with a £40000 total limit??

2. Do I contribute £3600 to my SIPP then reclaim the £1440 in tax when I submit self assessment?

3. Can I then collect a 25% tax free lump sum on the 5-10 years of £3600 contributions? 

My lifetime tax free lump sum used up to now has been £170000 ie below the lifetime TFLS    allowance. 


Being realistic frozen thresholds mean that I will remain a higher rate tax payer whenever this additional pension is drawn. I am ok with that. 

The gain would seem to be £360 for each year that I contribute (plus any growth.)

 Apologies if I am being a bit stupid. 

molerat

1) Yes.  With no "relevant income" you are limited to £3600 pa

2) You pay in £2880.  The pension co claim the £720 basic tax and add it to the fund.  You then inform HMRC that you have paid £3600 gross into the pension - there is now a new on line way to do that https://forums.moneysavingexpert.com/discussion/6585592/new-online-way-to-claim-pension-tax-relief-via-government-gateway - and they will sort out refunding the additional higher rate tax.

3) Yes, all new contributions are subject to the 25/75% on withdrawal.

soulsaver

You put in £2880, platform claims £720 from HMRC = £3600.

As hrtp you'd need to claim the additional relief from HMRC. 

drjohn67

Thanks for help.
Recognise that it is not a huge amount saved but it will add up over a decade and I would like to use it to help my children save towards house deposits in the coming years. 

My plan is to take money from the existing drawdown account each year (paying the appropriate tax on that sum) then gifting this to the children to set up their own ISA (or whatever).

I understand that, as this will be taxed as unearned income, it will not trigger any issues with recycling?

AlanP_2

I understand that, as this will be taxed as unearned income, it will not trigger any issues with recycling?

What will be taxed as unearned income? If you mean a withdrawal from the taxable 75% in your current then yes it will be taxed and is unearned I guess so yes.

Recycling only considers TAX FREE income from a pension so drawing taxable money has no relevance to it.

What the taxman is attempting to stop is wholesale schemes to recycle tax free cash through a pension wrapper and getting multiple large bites at the TFLS cherry. They are not at all interested in what you are considering, many of us do this working on the Asda principle that every little helps.

drjohn67

Thanks will set up.

dharm999

soulsaver said:

You put in £2880, platform claims £720 from HMRC = £3600.

As hrtp you'd need to claim the additional relief from HMRC. 

Can you claim additional relief if you have no earned income?  Apologies if a stupid question

AlanP_2

dharm999 said:

soulsaver said:

You put in £2880, platform claims £720 from HMRC = £3600.

As hrtp you'd need to claim the additional relief from HMRC. 

Can you claim additional relief if you have no earned income?  Apologies if a stupid question

Yes, AFAIK. The max £3600 contribution limit was put in place to allow non-earners (e.g. stay at home parent) to build up some kind of pension with the same tax breaks as an employed person.

Middle_of_the_Road

dharm999 said:

soulsaver said:

You put in £2880, platform claims £720 from HMRC = £3600.

As hrtp you'd need to claim the additional relief from HMRC. 

Can you claim additional relief if you have no earned income?  Apologies if a stupid question

Additional tax relief only applies to higher rate taxpayers.

dharm999

Even if you have no earned income, by which I take to mean no relevant earnings for pension purposes?  The OP says they have unearned income.  I guess my question is if you have no relevant earnings can you still claim additional tax relief if you are a higher rate taxpayer?  I thought you couldn’t, but happy to be proven wrong, as that would help me.

EthicsGradient

dharm999 said:

Even if you have no earned income, by which I take to mean no relevant earnings for pension purposes?  The OP says they have unearned income.  I guess my question is if you have no relevant earnings can you still claim additional tax relief if you are a higher rate taxpayer?  I thought you couldn’t, but happy to be proven wrong, as that would help me.

With self-assessment, the way they implement higher rate tax relief is to increase the basic rate band size by your gross contribution (and, I suppose, in their internal calculation for everyone). I don't see why this wouldn't happen for the OP's case too.