Pension contribution, tax relief and small lump sum

OliverLacon

My wife has cashed in two small pension pots. The total is around £8K. The pension administrators have deducted the tax - she has filled in the necessary form from HMRC to recover the tax as she has no other income for this year and has the whole of her personal tax allowance to use. The amount received so far will go into a new cash ISA.

I've recently discovered that it is possible for a person with no income to put £3600 into a pension and the government will top this up by 20%. I also realise that there are rules that prevent recycling of tax free pension lump sums. As the 8K from the two small pots will eventually be tax free, would those rules prevent her from setting up a new SIPP and depositing  £3600 into it? The £3600 would not be from the cash ISA mentioned previously.

Albermarle

The amounts involved are too small to have any recycling issues.
Otherwise she can only add £3600 gross to a pension, which in practice means she can add £2880 and tax relief of £720 will be added to it by HMRC via the pension provider.

Dazed_and_C0nfused

OliverLacon said:

My wife has cashed in two small pension pots. The total is around £8K. The pension administrators have deducted the tax - she has filled in the necessary form from HMRC to recover the tax as she has no other income for this year and has the whole of her personal tax allowance to use. The amount received so far will go into a new cash ISA.

I've recently discovered that it is possible for a person with no income to put £3600 into a pension and the government will top this up by 20%. I also realise that there are rules that prevent recycling of tax free pension lump sums. As the 8K from the two small pots will eventually be tax free, would those rules prevent her from setting up a new SIPP and depositing  £3600 into it? The £3600 would not be from the cash ISA mentioned previously.

Others will no doubt answer the recycling question but just to be clear, she cannot add £3,600 to a pension and expect the government to top this up by 20%.

She can add £2,880 and the the pension company, courtesy of HMRC, will add basic rate tax relief of £720, making a gross contribution of £3,600.

OliverLacon

Thanks to both of you.

OliverLacon

Currently my wife has no income apart from small amount of savings interest (less than £1000), her State Pension becomes payable in July 2027. Other assets are in a S&S ISA.

Would this work?
Open a SIPP and pay in £2,880 before April (i.e. tax year 24-25). Government adds basic tax relief to £3600.
After April, pay in another £2,880 (tax year 25-26) Government adds basic tax relief to £3600.
Withdraw all the money from the SIPP) i.e. £7200 - this will be tax free as it falls below the basic tax allowance.

In April 2027, could she open another SIPP to pay another £2800 into - and then cash it before she gets the State Pension (there should still be enough tax allowance to cover the withdrawal and the pension for tax year 27-28.

SVaz

Yes she can

kempiejon

OliverLacon said:

Currently my wife has no income apart from small amount of savings interest (less than £1000), her State Pension becomes payable in July 2027. Other assets are in a S&S ISA.

Would this work?
Open a SIPP and pay in £2,880 before April (i.e. tax year 24-25). Government adds basic tax relief to £3600.
After April, pay in another £2,880 (tax year 25-26) Government adds basic tax relief to £3600.
Withdraw all the money from the SIPP) i.e. £7200 - this will be tax free as it falls below the basic tax allowance.

In April 2027, could she open another SIPP to pay another £2800 into - and then cash it before she gets the State Pension (there should still be enough tax allowance to cover the withdrawal and the pension for tax year 27-28.

Yup. And keep going after state pension used up most of the allowance. Pay in £2880, grossed up to £3600. Take 25% £900 tax free then income tax is paid reducing the £2700 balance to £2160, which added to the £900 tax free is still £180 more than the £2880 deposited. After 27/28 there might be a useful change to personal allowance.
I think I have my maths right there.

OliverLacon

Thanks Kempiejon.
No experience of SIPPS, would she have to close the SIPP to withdraw the funds each time (and then open a new one for the following tax year). Or could a single SIPP be re-used each time?

molerat

HL for instance require £50 to be kept in the SIPP to keep it open.  They pay interest on cash held and there are no charges.  

So you open one before 6th Mar, the tax will be added 22nd April, add more before 6th May and tax will be added 21st June.  Straight after 6th April you apply for a UFPLS of no more than £1397 which means no tax will be deducted and will trigger HMRC to issue a tax code.  From then on you are free to take more tax free according to the code in use as long as you leave the £50 in the account.  in 2027-28 you do the same but work out when is best to take it according to the code applied, paying in so the tax can be added in time to withdraw.  The first UFPLS is a bit of a pain as you will need to provide proof of ID and bank account proof but once that is done you just fill in the form each year and the money is in your account in about a week.

kempiejon

OliverLacon said:

Thanks Kempiejon.
No experience of SIPPS, would she have to close the SIPP to withdraw the funds each time (and then open a new one for the following tax year). Or could a single SIPP be re-used each time?

I haven't done it quite the way described, I guess each provider has their own conditions. To delay money purchase allowances I've used small pot lump sum and I have closed the pensions and I had to reclaim tax.

Albermarle

There are a number of SIPP providers, but some have minimum charges to try and deter smaller customers, where the admin costs will far outweigh any charges.
As mentioned the provider Hargreaves Lansdown is often mentioned as a good provider for this type of operation.
There is no minimum charge and they have good customer service.