Pension Calculation

Hoenir

If you outlive your wife. Then the dependent's pension has a considerable benefit to you in the year's to come. The greater the pension the larger the benefit. 

Never let the tail wag the dog. 

QrizB

... but that's ignoring growth.
The NHS pension will increase with CPI annually. The SIPP will go up and down with its investments.
Also during those 11 years, the personal allowance is likely to change.

So it's likely she'll have to pay tax on a different amount (possibly zero, hopefully several tens of thousands). And I say "hopefully" because tax on investment growth that leaves you with 80% of that growth is much, much better than having no growth, no tax and 100% of nothing.

(Sorry for the delayed reply, some sort of forum glitch.)

rothers

QrizB said:

... but that's ignoring growth.
The NHS pension will increase with CPI annually. The SIPP will go up and down with its investments.
Also during those 11 years, the personal allowance is likely to change.

So it's likely she'll have to pay tax on a different amount (possibly zero, hopefully several tens of thousands). And I say "hopefully" because tax on investment growth that leaves you with 80% of that growth is much, much better than having no growth, no tax and 100% of nothing.

(Sorry for the delayed reply, some sort of forum glitch.)

I'm grateful for your time! The "maintenance" is slightly frustrating isn't it?

Is it possible to take an amount out of the SIPP without any tax free amount? If so, how would the 25% tax free part be calculated in later years when she does start to take it?

QrizB

rothers said:

Is it possible to take an amount out of the SIPP without any tax free amount? If so, how would the 25% tax free part be calculated in later years when she does start to take it?

You have to take the tax-free part before (or simultaneously with) the taxable.

But, depending on what else you've got going on you could take a lump of tax-free cash and reinvest it in an SSISA. It's then out of the SIPP and yours (hers) to use as you want without worrying about taxes.

rothers

QrizB said:

rothers said:

Is it possible to take an amount out of the SIPP without any tax free amount? If so, how would the 25% tax free part be calculated in later years when she does start to take it?

You have to take the tax-free part before (or simultaneously with) the taxable.

But, depending on what else you've got going on you could take a lump of tax-free cash and reinvest it in an SSISA. It's then out of the SIPP and yours (hers) to use as you want without worrying about taxes.

Ah right, thanks for that, and for the rest of your help, it's much appreciated.

hugheskevi

QrizB said:

rothers said:

I just want to get as much out tax free as possible before her state pension kicks in and takes her over the annual allowance.

If the personal allowance doesn't change for the duration, 11 years of £12570 is £138270.

rothers said:

Lets say, for example, that her sipp is £130,000.

I'm going to ignore growth in the SIPP or the NHS pension for now.

Of that £130k, £32500 is tax-free.

That leaves £97500 that's potentially taxable.

Over the same 11 years, she'll receive £44000 of NHS pension.

£97500 + £44000 = £141500. So at some time in that period she'd have to pay tax on £3230.

The odds strongly favour all of the Personal Allowance between age 55-67 being used in this scenario. The counterfactual option is taking more from the SIPP and delaying taking the NHS pension.

Taking £16,760 p/a from the SIPP would drain it fully after 7.76 years (ignoring growth and changes in Personal Allowance), so that would be around age 63. At that point the NHS pension would presumably be commenced, but would not use up the full Personal Allowance until State Pension was payable at age 67. Hence the individual would be unable to use up all of their Personal Allowance between age 55-67, unlike in the scenario where they commence their NHS pension at age 55.

There is a similar guessing game about future returns and govt policy on thresholds for all changes in marginal rate. In general, the greater priority you put on paying the lowest amount of tax, the more that favours early commencement of DB pension.

However, tax treatment is far from being the only consideration here, and possibly not even the most important.

Albermarle

rothers said:

QrizB said:

rothers said:

Is it possible to take an amount out of the SIPP without any tax free amount? If so, how would the 25% tax free part be calculated in later years when she does start to take it?

You have to take the tax-free part before (or simultaneously with) the taxable.

But, depending on what else you've got going on you could take a lump of tax-free cash and reinvest it in an SSISA. It's then out of the SIPP and yours (hers) to use as you want without worrying about taxes.

Ah right, thanks for that, and for the rest of your help, it's much appreciated.

With the SIPP, before you make any withdrawals it is known as uncrystallised funds. To withdraw any money at all you have to crystallise some of it. When you do this 25% of what you crystallise is paid out as tax free payment, and the remaining 75% is now crystallised funds and anything you withdraw from that is classed as taxable income.
An example.
£100K uncrystallised pension.
You want to withdraw £10K tax free only.
So £40K is crystallised.
So-
You get a payment £10K tax free
There is £60K still left uncrystallised
£30K is crystallised.

To take taxable income you need to have crystallised funds to take it from. Crystallising automatically generates a tax free sum. 

Is it possible to take an amount out of the SIPP without any tax free amount? So now you know the answer and why.