Paying DB pension payments into a SIPP

daydream007

Having had some sage advice from the good people on here before, I'm after some more (thank you). 

I'm still working (for TfL) which has a DB scheme and paying £540PM (the max) into AVCs (TfL doesn't offer this via salary sacrifice). I'm 40% tax rate, 59-and-a-bit years' old, and expecting to retire at 62, so effectively two-ish years left, maybe a scratch more.

I've also got a DB pension (with BT) that'll start paying out £20K from December (there's little financial gain in deferring it).

I'm thinking to pay all/most of the BT pension into a PensionBee SIPP.

Two questions, please: is this a fairly common sense approach (or completely daft) given I don't need the cash, and is there any legal reason I can't claim pension relief back on what I pay in? 

Thank you for any insight into my situation. 

Albermarle

First point is that you can only get tax relief on pension contributions based on your earnings. Pension income does not count.
However it sounds like your earnings could accommodate £20K pa contribution on top of your current contributions.

There are some rules around recycling of tax free cash. So if you take a tax free lump sum when your BT pension starts paying out, and then suddenly your pension contributions shoot up, you maybe in breach of these rules.

daydream007

Thanks for the above, Albermarle. If I read this correctly, I could effectively use my TfL salary to pay into the SIPP and live off my pension payments? In terms of the tax free lump sum, I'de take the bare minimum which seems to be around £14K (the BT calculator doesn't display a zero cash free lump sum option). 

Dazed_and_C0nfused

daydream007 said:

Thanks for the above, Albermarle. If I read this correctly, I could effectively use my TfL salary to pay into the SIPP and live off my pension payments? In terms of the tax free lump sum, I'de take the bare minimum which seems to be around £14K (the BT calculator doesn't display a zero cash free lump sum option). 

Don't forget if you are making personal contributions as a higher rate payer you will need to claim any additional tax relief due from HMRC (there's a form on gov.uk).

Not quite as simple as the net pay method you presumably use for your existing AVC's.

LHW99

Just wondering does pension input amount (rather than straight gross salary) have any influence on what can be put in the DC, as the OP's current TfL scheme is also DB?

Albermarle

LHW99 said:

Just wondering does pension input amount (rather than straight gross salary) have any influence on what can be put in the DC, as the OP's current TfL scheme is also DB?

Good point.

OP - Separately from my comments about limits on claiming tax relief ( which you understood correctly), there is an Annual Allowance limit of how much can be added to a pension each year of £60K. This includes any money going in, not just yours.
With a DB pension it is not a simple matter to calculate as rather than a specific amount of money going into it, you are gaining the right to a certain amount of pension income.
So you need to find out a figure called a Pension Input amount. I have never done that so I will hesitate in going into more detail, but I think basically this amount will have to be subtracted from the £60K Annual allowance, to see how much headroom you have for the AVCs and payments to the SIPP.

The good news is that if you have not used your full £60K allowance in the last three years, the unused portion can be brought forward.

daydream007

Albermarle said:

LHW99 said:

Just wondering does pension input amount (rather than straight gross salary) have any influence on what can be put in the DC, as the OP's current TfL scheme is also DB?

Good point.

OP - Separately from my comments about limits on claiming tax relief ( which you understood correctly), there is an Annual Allowance limit of how much can be added to a pension each year of £60K. This includes any money going in, not just yours.
With a DB pension it is not a simple matter to calculate as rather than a specific amount of money going into it, you are gaining the right to a certain amount of pension income.
So you need to find out a figure called a Pension Input amount. I have never done that so I will hesitate in going into more detail, but I think basically this amount will have to be subtracted from the £60K Annual allowance, to see how much headroom you have for the AVCs and payments to the SIPP.

The good news is that if you have not used your full £60K allowance in the last three years, the unused portion can be brought forward.

As luck would have it, I've just received my pension statement. My unused allowance this year was 41K, 40K the year before, then 20K in 22/23. Based on that, I think it means I'm clear to pay 15-20K into a SIPP from December  (and claim back the extra relief via my self assessment). The language you used (Pension Input amount) was very helpful as I looked for the very same on my statement. Thanks.

Albermarle

daydream007 said:

Albermarle said:

LHW99 said:

Just wondering does pension input amount (rather than straight gross salary) have any influence on what can be put in the DC, as the OP's current TfL scheme is also DB?

Good point.

OP - Separately from my comments about limits on claiming tax relief ( which you understood correctly), there is an Annual Allowance limit of how much can be added to a pension each year of £60K. This includes any money going in, not just yours.
With a DB pension it is not a simple matter to calculate as rather than a specific amount of money going into it, you are gaining the right to a certain amount of pension income.
So you need to find out a figure called a Pension Input amount. I have never done that so I will hesitate in going into more detail, but I think basically this amount will have to be subtracted from the £60K Annual allowance, to see how much headroom you have for the AVCs and payments to the SIPP.

The good news is that if you have not used your full £60K allowance in the last three years, the unused portion can be brought forward.

As luck would have it, I've just received my pension statement. My unused allowance this year was 41K, 40K the year before, then 20K in 22/23. Based on that, I think it means I'm clear to pay 15-20K into a SIPP from December  (and claim back the extra relief via my self assessment). The language you used (Pension Input amount) was very helpful as I looked for the very same on my statement. Thanks.

All sounds good.

Just be clear in your mind that how much tax relief you can get ( based on your earnings) and the limit on how much you can add in total to a pension each year. are two separate items/issues
We see many people on the forum confusing the two together.

jimi_man

Dazed_and_C0nfused said:

daydream007 said:

Thanks for the above, Albermarle. If I read this correctly, I could effectively use my TfL salary to pay into the SIPP and live off my pension payments? In terms of the tax free lump sum, I'de take the bare minimum which seems to be around £14K (the BT calculator doesn't display a zero cash free lump sum option). 

Don't forget if you are making personal contributions as a higher rate payer you will need to claim any additional tax relief due from HMRC (there's a form on gov.uk).

Not quite as simple as the net pay method you presumably use for your existing AVC's.

That's not strictly true, there are better ways to do it.

OP, this is something that I did it for some 7-8 years. One of your income streams will be based against your existing tax code - in my case it was my pension - but it could be either and as your Tfl salary is (I imagine) currently the main income then use that. For the BT pension income you can ask for that to be taxed as BR, then you'll have to work out how much over the HR limit you will be at the end of the year, divide that by 12 and pay that into a SIPP every month. 

(The advantage of setting your pension against your existing tax code and assigning BR to your Tfl income is that when you retire then you won't have to do anything.)

You may have to call the tax office to do this, but I found them very amenable when I explained what i wanted to do. It saves you a lot of hassle and it saves them work too. 

What I found is that the tax office could sometimes give you a weird tax code for the next year, however you can go into your online HMRC account and change the figures to reflect what you're trying to to do and they'll send you a normal tax code a few days later. I had to do this every year, but it's five minutes work. 

In terms of what gets paid into the SIPP, it makes no difference what it is as it comes out of your account. 

(Having paid it in at 40%, you need to make sure that you take it out at 20%, which is a (nice) problem I'm having as come SPA I'll be an HR taxpayer. With only seven years to go I've left it a bit late to get it all out.)

Dazed_and_C0nfused

jimi_man said:

Dazed_and_C0nfused said:

daydream007 said:

Thanks for the above, Albermarle. If I read this correctly, I could effectively use my TfL salary to pay into the SIPP and live off my pension payments? In terms of the tax free lump sum, I'de take the bare minimum which seems to be around £14K (the BT calculator doesn't display a zero cash free lump sum option). 

Don't forget if you are making personal contributions as a higher rate payer you will need to claim any additional tax relief due from HMRC (there's a form on gov.uk).

Not quite as simple as the net pay method you presumably use for your existing AVC's.

That's not strictly true, there are better ways to do it.

OP, this is something that I did it for some 7-8 years. One of your income streams will be based against your existing tax code - in my case it was my pension - but it could be either and as your Tfl salary is (I imagine) currently the main income then use that. For the BT pension income you can ask for that to be taxed as BR, then you'll have to work out how much over the HR limit you will be at the end of the year, divide that by 12 and pay that into a SIPP every month. 

(The advantage of setting your pension against your existing tax code and assigning BR to your Tfl income is that when you retire then you won't have to do anything.)

You may have to call the tax office to do this, but I found them very amenable when I explained what i wanted to do. It saves you a lot of hassle and it saves them work too. 

What I found is that the tax office could sometimes give you a weird tax code for the next year, however you can go into your online HMRC account and change the figures to reflect what you're trying to to do and they'll send you a normal tax code a few days later. I had to do this every year, but it's five minutes work. 

In terms of what gets paid into the SIPP, it makes no difference what it is as it comes out of your account. 

(Having paid it in at 40%, you need to make sure that you take it out at 20%, which is a (nice) problem I'm having as come SPA I'll be an HR taxpayer. With only seven years to go I've left it a bit late to get it all out.)

I'm not sure how any of that avoids the need to tell HMRC about the personal contributions being made to the SIPP though 🤔

Cobbler_tone

I thought about doing this but stretched myself and already contributing into my DC down to NMW. No point accessing my DB until retirement next year. I can see how it might work for some, depending on the reduction factors and use for the money.