Is this allowed or is it considered an abuse of the system?

SneakySpectator

I recently came to learn that if I open a SIPP and deposited the money I have in my S&S ISA into it, the government will give me an additional 20% on top.

Here's what I currently have.

Company pension that matches my contribution up to 7.5%, which I'm maxing each month.
Then I have my S&S ISA which I invest into each month to build a retirement fund.

So far it's working just fine but let's say in 20 years when I'm like 55 and getting real close to being able to draw from my private pension, why wouldn't I just sell my S&S ISA and deposit all that money into a SIPP and get an instant 20% bump, while still being able to stay invested in whatever I was invested in before in my S&S ISA? Like VWRP for example.

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

You may asl why I don't just do that now, but the reason why is because I like having the money in the ISA just in case I need it for whatever reason you never know what life might throw at you. But if I've made it basically to the age of private pension access without needing to access it, then why wouldn't I transfer it and get an instant 20% bump?

gt94sss2

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

TheSpectator

Wishful thinking I'm afraid.

By electing for ISA over pension just now you are missing out on the tax relief and will be limited to what you can put into pension in later life.

Hoenir

SneakySpectator said:

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

Small matter of income tax when you come to withdraw it though.

SneakySpectator

Hoenir said:

SneakySpectator said:

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

Small matter of income tax when you come to withdraw it though.

I could withdraw 25% per year tax free, that's a massive amount of money per year on a £500,000 balance. Way more than I could possibly spend.

gt94sss2 said:

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

Ah yes thank you for this! So £60,000 per year, I could do it over multiple years then? Just do £60k a year until I've got it all inside the SIPP?

TheSpectator said:

Wishful thinking I'm afraid.

By electing for ISA over pension just now you are missing out on the tax relief and will be limited to what you can put into pension in later life.

What difference does it make whether I do it now every month, or in lump sums in the future? The 20% isn't compounded or anything it's just a flat top up. 

Dazed_and_C0nfused

SneakySpectator said:

I recently came to learn that if I open a SIPP and deposited the money I have in my S&S ISA into it, the government will give me an additional 20% on top.

Here's what I currently have.

Company pension that matches my contribution up to 7.5%, which I'm maxing each month.
Then I have my S&S ISA which I invest into each month to build a retirement fund.

So far it's working just fine but let's say in 20 years when I'm like 55 and getting real close to being able to draw from my private pension, why wouldn't I just sell my S&S ISA and deposit all that money into a SIPP and get an instant 20% bump, while still being able to stay invested in whatever I was invested in before in my S&S ISA? Like VWRP for example.

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

You may asl why I don't just do that now, but the reason why is because I like having the money in the ISA just in case I need it for whatever reason you never know what life might throw at you. But if I've made it basically to the age of private pension access without needing to access it, then why wouldn't I transfer it and get an instant 20% bump?

One basic thing you have got wrong is that you don't get a 20% top up.  It's 25%.

In your example you have paid £500,000 and received £100,000 extra, making a gross contribution of £600,000.  Which would make the tax relief 16.666%.  And there is no such tax relief rate.

The gross contribution would be £625,000.

And as others have pointed out there are limits which prevent you from adding that much in a single tax year.

Hoenir

SneakySpectator said:

Hoenir said:

SneakySpectator said:

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

Small matter of income tax when you come to withdraw it though.

I could withdraw 25% per year tax free, that's a massive amount of money per year on a £500,000 balance. Way more than I could possibly spend.

So what. The money was tax free in the ISA anyway.  First you've got to save £500,000.  By utilising the pension over 40 odd years. You'd have a far larger pot to play with. 

EthicsGradient

SneakySpectator said:

Hoenir said:

SneakySpectator said:

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

Small matter of income tax when you come to withdraw it though.

I could withdraw 25% per year tax free, that's a massive amount of money per year on a £500,000 balance. Way more than I could possibly spend.

gt94sss2 said:

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

Ah yes thank you for this! So £60,000 per year, I could do it over multiple years then? Just do £60k a year until I've got it all inside the SIPP?

TheSpectator said:

Wishful thinking I'm afraid.

By electing for ISA over pension just now you are missing out on the tax relief and will be limited to what you can put into pension in later life.

What difference does it make whether I do it now every month, or in lump sums in the future? The 20% isn't compounded or anything it's just a flat top up. 

You don't get "25% per year tax free", you get 25% of the total pension tax free - once. The other 75% will be subject to income tax (but if you've retired and aren't yet getting your workplace or state pensions, then the first £12,570 you take as income from the SIPP can use your personal allowance).

The limit you can contribute each year (after tax relief) is the smaller of that year's salary or £60k (someone else should advise on how this is calculated with your own and employer's contributions to your workplace pension - I've never mixed a workplace pension and a SIPP).

So if you plan to retire fairly early (say at 57), there is a bit of an advantage from using a SIPP, especially if you move down a tax bracket from work to retirement (eg higher to basic rate payer, or basic rate to within the personal allowance). And you could structure it to put in the maximum in later years, and use an ISA before that for flexibility, But don't think you'll get "more than you can possibly spend". Using a SIPP might get you few thousand a year more for a few years.

SneakySpectator

EthicsGradient said:

SneakySpectator said:

Hoenir said:

SneakySpectator said:

Let's say I had £500,000 in there and then deposited that into the SIPP, I'd immediately get £100,000 extra. 

Small matter of income tax when you come to withdraw it though.

I could withdraw 25% per year tax free, that's a massive amount of money per year on a £500,000 balance. Way more than I could possibly spend.

gt94sss2 said:

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

Ah yes thank you for this! So £60,000 per year, I could do it over multiple years then? Just do £60k a year until I've got it all inside the SIPP?

TheSpectator said:

Wishful thinking I'm afraid.

By electing for ISA over pension just now you are missing out on the tax relief and will be limited to what you can put into pension in later life.

What difference does it make whether I do it now every month, or in lump sums in the future? The 20% isn't compounded or anything it's just a flat top up. 

You don't get "25% per year tax free", you get 25% of the total pension tax free - once. The other 75% will be subject to income tax (but if you've retired and aren't yet getting your workplace or state pensions, then the first £12,570 you take as income from the SIPP can use your personal allowance).

The limit you can contribute each year (after tax relief) is the smaller of that year's salary or £60k (someone else should advise on how this is calculated with your own and employer's contributions to your workplace pension - I've never mixed a workplace pension and a SIPP).

So if you plan to retire fairly early (say at 57), there is a bit of an advantage from using a SIPP, especially if you move down a tax bracket from work to retirement (eg higher to basic rate payer, or basic rate to within the personal allowance). And you could structure it to put in the maximum in later years, and use an ISA before that for flexibility, But don't think you'll get "more than you can possibly spend". Using a SIPP might get you few thousand a year more for a few years.

Oh ok I see now, I thought it was 25% per year, not 25% one single time. Basically my goal is to make as much extra "free" money as humanly possible from every source possible while paying as little tax as possible. 

I'm a low earner so my options are limited but currently here's what I'm doing. 

Maxing my pension contribution for the free 7.5% from my employer.
Have my emergency fund in the highest interest cash isa I can get, currently 4.5%.
Invest all my left over money each month into my S&S ISA.

So now I'm looking at other options, and hearing about a possible 20% bump to whatever money I put into a SIPP seems too good to say no to. But there is a trade off. An ISA is flexible, 100% tax free and I can withdraw any time. 

Once I put money into that SIPP, it's locked in there until private pension age, which could very well be 60+ by the time I get there considering I'm only 36 now.

gt94sss2

SneakySpectator said:

gt94sss2 said:

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

Ah yes thank you for this! So £60,000 per year, I could do it over multiple years then? Just do £60k a year until I've got it all inside the SIPP?

Not quite, its up to £60,000/year but if you earn less, then you can only put 100% of your salary in/year (though you can carry forward some unused contributions)

Aretnap

gt94sss2 said:

SneakySpectator said:

gt94sss2 said:

There are limits to how much you can contribute to a SIPP

For information see

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/sipp-contributions-rules-limits-how-much-can-you-pay-in

https://www.hl.co.uk/pensions/contributions

Ah yes thank you for this! So £60,000 per year, I could do it over multiple years then? Just do £60k a year until I've got it all inside the SIPP?

Not quite, its up to £60,000/year but if you earn less, then you can only put 100% of your salary in/year (though you can carry forward some unused contributions)

The salary (relevant earnings) limit is a hard limit and no carry forward can be applied to it. If your salary is £25K then the most you can ever pay in in a single tax year is £20K net/£25K gross, plus employer contributions. (Well, technically you can pay in more, but you won't get tax relief on the more, and it will still be taxable on the way out, which makes it a pointless exercise for most people).

It's the £60K annual allowance which can be carried forward, but in practice this is only relevant to people on high salaries, as you still need sufficient salary to cover each years contributions if you want tax relief on them. If you earn £100K and paid nothing in last year then this year you can pay in £100K gross, plus up to another £20K employer contributions. (Unlike the relevant earnings limit, the annual allowance does apply to employer contributions)