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

kempiejon

SneakySpectator said: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

Becoming a higher earner is where the most money is at, yes a higher tax cost but extra into a SIPP, yes there are restrictions but the tax leverage is handy. You claim tax back and it can move you from a contributor to a receiver of tax money.
Alternatively you can always pay zero tax by working less.
Extra free money also available from stoozing, wombling, cash back, bank switches, quidco, matched betting, surveys. It's not really free, you have to give up some time.

jimjames

SneakySpectator said:

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.

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

Low earner so your annual contributions are limited to your earnings not £60k. Wishful thinking to get £500k in for that situation. Tax free ISA might be of more use anyway.

dunstonh

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.

No.

Pensions get tax relief.  Not an addition.   You get 20% relief.    i.e. You contribute £10,000 to a pension but only make an £8,000 payment.    

If you want to describe the relief as a bonus (which is risky to do as it can lead to mistakes) then it equates to 25%.   That is assuming basic rate relief or lower.

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.

The pension wrapper and ISA wrapper can share the same investments at the same cost.   If you have sufficient earnings later to dump the lot into the SIPP from the ISA then that is fine as long as the rules don't change.

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

a) you can't do that as its above the annual allowanc
b) figures of that size suggest higher rate relief could apply

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.

No you cannot.  You can only draw 25% of uncrystallised benefits.   Once they are crystallised, you cannot draw another 25% from them.

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?

There is the option of carry forward if you are a higher earner.    However, this suggests you are in the higher rate tax band which gets 40% relief on contributions in that band.

But you then say in a later post you are a low earner. So, £60k a year would not be possible (nor carry forward).

MEM62

SneakySpectator said:

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. 

Of course it is compounding.  Put £80 into your ISA and, assuming an annual return of 5% for arguments sake, your £80 is compounding at 5% per years.  Put £80 into your pension and you have £100 compounding at 5% per year.  Over a few decades the difference is significant.    

saajan_12

MEM62 said:

SneakySpectator said:

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. 

Of course it is compounding.  Put £80 into your ISA and, assuming an annual return of 5% for arguments sake, your £80 is compounding at 5% per years.  Put £80 into your pension and you have £100 compounding at 5% per year.  Over a few decades the difference is significant.    

No, the difference is zero. Yes there's compounding on the initial investment in either case, then the compounded amount is what gets the tax relief. 
Eg
Put in £80 into an ISA with an annual return of 5% over 30 years and with compounding, its £345.75 (80x1.05^30). Then put it into your pension (assuming sufficient allowance) and the 25% relief makes it £432.19.

Vs put £100 into a pension with an annual return of 5% over 30 years and with compunding, its 100x1.05^30 = £432.19

ZeroSum

MEM62 said:

SneakySpectator said:

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. 

Of course it is compounding.  Put £80 into your ISA and, assuming an annual return of 5% for arguments sake, your £80 is compounding at 5% per years.  Put £80 into your pension and you have £100 compounding at 5% per year.  Over a few decades the difference is significant.    

Makes no difference. Pay £100 into ISA & it doubles, drawdown £200
Pay £100 into pension, with tax relief, it doubles, get £250 which is £200 after tax

I know I've ignored the 25% tax free bit just to illustrate the maths simpler. 

However, for the benefit of OP, if basic rate tax payer, effectively you get 20% deduction going in, then pay 15% going out (75% of 20%). However this is based on current tax rates. If a future government were to reduce the tax free bit from 25% to 10% then merge NI with income tax, then having had a 20% going in, you'd then pay more going out. It's why having an ISA alongside pension is preferable since there's less government interference.

boingy

ZeroSum said:

Makes no difference. Pay £100 into ISA & it doubles, drawdown £200
Pay £100 into pension, with tax relief, it doubles, get £250 which is £200 after tax

I know I've ignored the 25% tax free bit just to illustrate the maths simpler. 

The maths might be simpler but you've ignored the whole advantage of a pension! You get tax relief on everything you put in and can withdraw a quarter of it without paying any tax. That's an absolutely huge advantage over ISAs. To balance that, you do have to wait until you are 55/57 to do so.

SneakySpectator

dunstonh 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.

No.

Pensions get tax relief.  Not an addition.   You get 20% relief.    i.e. You contribute £10,000 to a pension but only make an £8,000 payment.    

If you want to describe the relief as a bonus (which is risky to do as it can lead to mistakes) then it equates to 25%.   That is assuming basic rate relief or lower.

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.

The pension wrapper and ISA wrapper can share the same investments at the same cost.   If you have sufficient earnings later to dump the lot into the SIPP from the ISA then that is fine as long as the rules don't change.

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

a) you can't do that as its above the annual allowanc
b) figures of that size suggest higher rate relief could apply

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.

No you cannot.  You can only draw 25% of uncrystallised benefits.   Once they are crystallised, you cannot draw another 25% from them.

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?

There is the option of carry forward if you are a higher earner.    However, this suggests you are in the higher rate tax band which gets 40% relief on contributions in that band.

But you then say in a later post you are a low earner. So, £60k a year would not be possible (nor carry forward).

Thanks for explaining. 

So just to clarify if I deposited £50,000 into a SIPP, my balance would remain £50,000 and not become £60,000? 

Call it tax relief or a bonus or a contribution whatever you want but is it extra real money that I can withdraw at pension age or not?

Dazed_and_C0nfused

SneakySpectator said:

dunstonh 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.

No.

Pensions get tax relief.  Not an addition.   You get 20% relief.    i.e. You contribute £10,000 to a pension but only make an £8,000 payment.    

If you want to describe the relief as a bonus (which is risky to do as it can lead to mistakes) then it equates to 25%.   That is assuming basic rate relief or lower.

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.

The pension wrapper and ISA wrapper can share the same investments at the same cost.   If you have sufficient earnings later to dump the lot into the SIPP from the ISA then that is fine as long as the rules don't change.

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

a) you can't do that as its above the annual allowanc
b) figures of that size suggest higher rate relief could apply

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.

No you cannot.  You can only draw 25% of uncrystallised benefits.   Once they are crystallised, you cannot draw another 25% from them.

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?

There is the option of carry forward if you are a higher earner.    However, this suggests you are in the higher rate tax band which gets 40% relief on contributions in that band.

But you then say in a later post you are a low earner. So, £60k a year would not be possible (nor carry forward).

Thanks for explaining. 

So just to clarify if I deposited £50,000 into a SIPP, my balance would remain £50,000 and not become £60,000? 

Call it tax relief or a bonus or a contribution whatever you want but is it extra real money that I can withdraw at pension age or not?

You have completely misunderstood.

If you paid in a qualifying contribution of £50,000 using the relief at source method, i.e. personal contribution to a SIPP or personal pension, then the pension company would add £12,500 in basic rate tax relief.

Giving you a pension fund of £62,500.

Tax relief is 20%, not 16.66%.

ZeroSum

boingy said:

ZeroSum said:

Makes no difference. Pay £100 into ISA & it doubles, drawdown £200
Pay £100 into pension, with tax relief, it doubles, get £250 which is £200 after tax

I know I've ignored the 25% tax free bit just to illustrate the maths simpler. 

The maths might be simpler but you've ignored the whole advantage of a pension! You get tax relief on everything you put in and can withdraw a quarter of it without paying any tax. That's an absolutely huge advantage over ISAs. To balance that, you do have to wait until you are 55/57 to do so.

I haven't. We're talking about a SIPP over & above work place pension. I'm assuming the work place pension will be at least personal allowance, so the tax benefits are minimal & it's a trade off with greater flexibility in the ISA.