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

SneakySpectator

Dazed_and_C0nfused said:

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%.

I'm still confused. I understand a normal company pension, I pay in 7.5% of my pre taxed salary and my company matches it. I get a free 7.5% added on each month and it's literally free money. 

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

That's basically what I want to know. 

eskbanker

SneakySpectator said:
OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

That's basically what I want to know. 

The good news is that effectively yes, the £1,000 contribution has 20% tax relief applied, to result in a gross £1,250 balance in the SIPP.

The bad news (in the context of comparing with ISA) is that when you come to withdraw that from the SIPP, you can access 25% of the £1,250 tax-free but are taxed on the rest, so you'd get back £1062.50 net, assuming basic rate taxpayer in retirement and ignoring investment growth.

kempiejon

SneakySpectator said:

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

It's never quite that simple.
No tax is charged on income up to the personal allowance, which is set at £12,570 for 2025/26. If you take home £2k per month, you earn around £30k per year and pay about £3400 in income tax and £1200 national insurance.

Adding £1k per month would get a rebate (£200/m)  £2400 of your tax bill; that year you'd now only pay £1000 tax on £30k. That's a good deal.
If you increase the contribution up to £1500 you'd reclaim £4500 - more than your income tax bill. Hmmm...
There is 25% tax free - though you still pay tax on withdrawls.

Dazed_and_C0nfused

SneakySpectator said:

Dazed_and_C0nfused said:

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%.

I'm still confused. I understand a normal company pension, I pay in 7.5% of my pre taxed salary and my company matches it. I get a free 7.5% added on each month and it's literally free money. 

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

That's basically what I want to know. 

No, you will get 25% added to your £1,000.

Which is 20% of the gross contribution.

You are adding £1,000 net.  Tax relief of £250 is added to make a gross contribution of £1,250.

Basic rate tax relief on a gross contribution of £1,250 is £250.

Your £,1000 becomes £1,200 is something that will never happen unless the basic rate of tax is changed to 16.66%.

jimjames

kempiejon said:

SneakySpectator said:

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

Adding £1k per month would get a rebate (£200/m)  £2400 of your tax bill; that year you'd now only pay £1000 tax on £30k. That's a good deal.

That's not correct in process or numbers. If you pay £1000 into a SIPP you will get £250 of tax relief added to it inside the SIPP, it won't impact your tax bill. If you're a higher rate taxpayer you can claim the additional tax relief which can reduce your tax bill at the end of the year. Basic relief is automatic for a SIPP and is equivalent to 25% of the sum deposited (so equates to 20% of the gross amount - £250 is 20% of £1250)

Aretnap

Dazed_and_C0nfused said:

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%.

And assuming we're talking about a single payment, you won't get £12500 of tax relief on £50000, unless your salary is at least £62500. Which the OP's isn't, unless he has some funny ideas about what is a "low income". 

Jami74

 If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that.

It took me a long time to get my head around this.

If you want £1000 in your SIPP then you need to add £800 from your bank, the other 20% is the tax relief. If you want £1250 in your SIPP then you need to add £1000 from your bank account.

It's because when you earn £1000, the government take 20% tax which leaves you with £800 take-home. If you put that £800 into a SIPP the government give you back the tax they already took off it.

ZeroSum

SneakySpectator said:

Dazed_and_C0nfused said:

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%.

I'm still confused. I understand a normal company pension, I pay in 7.5% of my pre taxed salary and my company matches it. I get a free 7.5% added on each month and it's literally free money. 

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

That's basically what I want to know. 

Pensions are basically deferred pay. So you pay into it, you effectively get the tax back that you paid on that earned income. Then when you draw it down it's then treat as income so subject to usual income tax rules. So whilst it looks like you get a 25% bumper, you're not really you're just depositing untaxed money. Then when you withdraw, you get taxed. And depending on personal situation, depends on how advantageous it is. 

Personally I've gone down the isa route as tax benefits are minimal & trading them off for the increased flexibility & freedoms.

kempiejon

jimjames said:

kempiejon said:

SneakySpectator said:

OK so just to keep things simple. I get paid and after taxes and everything I take home £2,000 per month. If I then transfer from my bank £1,000 into the SIPP, will I get a free extra 20% added onto that. 

Adding £1k per month would get a rebate (£200/m)  £2400 of your tax bill; that year you'd now only pay £1000 tax on £30k. That's a good deal.

That's not correct in process or numbers. If you pay £1000 into a SIPP you will get £250 of tax relief added to it inside the SIPP, it won't impact your tax bill. If you're a higher rate taxpayer you can claim the additional tax relief which can reduce your tax bill at the end of the year. Basic relief is automatic for a SIPP and is equivalent to 25% of the sum deposited (so equates to 20% of the gross amount - £250 is 20% of £1250)

Thanks for the correction I've copied the same error as SS on 20/25%, With the corrected numbers still, I hope, emphasises by adding to the SIPP you can get a rebate reducing ones effective tax rate.

Hoenir

ZeroSum said:

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. 

To a basic rate tax payer there's a 6.25% gain.  Might not sound much but over 40 years saving could amount to a considerable sum. Pay for that once in a lifetime holiday.