Pension Lump Sum + Further Pension Contributions

carbonfiberbike

Hi
I am 65 and have two pensions, a workplace salary sacrifice pension (£80k) and enjoy tax relief (I am a 40% tax payer) together with a SIPP (£320k). If I take a lump sum of say £70k from my SIPP and increase my workplace pension contributions (not greater than £60k / year), what tax relief can I receive via my workplace pension following the lump sum withdrawal? Also, I do not currently pay into the SIPP, just into my salary sacrifice workplace pension.

Albermarle

If you only take a tax free lump sum, then this has no effect in what ongoing tax relief you can get in pension contributions If you take any taxable income then you will be subject to restrictions- the MPAA.
However if you take any taxable tax free lump sum, and then your pension contributions increase significantly, you could be breaking recycling rules 
Also note that the £60k annual allowance also includes your employers contribution.

ali_bear

Do you have any other savings to live off? As you're getting near to retirement it makes absolute sense to maximise contributions to avoiding paying tax. Best way to do that is through the SS, paying the maximum you can under the rules and your immediate need for income. 

Something you could try is to get an estimate of your retirement income, and try to live with that income before retirement, see if you can get used to it. 

carbonfiberbike

Hi Albermarle
Thanks for the reply.
I thought that I was just indeed taking a one-off 'tax free lump sum' being well within the 25% permitted?
You then mention that this would have no effect in what ongoing tax relief I can get in pension contributions which is what I want to do.
However, you then mention that if I take any 'taxable income' then I would be subject to restrictions- the MPAA. I did not think that the £70k lump sum was taxable / taxable income i.e. it was tax free? And I am continuing to work for a couple more years, taking no more out of my pensions. 
Not sure what 'taxable tax free lump sum' is given the 25% tax free lump sum?
Finally, my pension contributions would increase as I intend to use my imminent state pension to deposit that amount monthly into my workplace pension, but not exceeding the £60k limit.
I am simply trying to take a £70k tax free lump sum from my SIPP to buy a motorhome, avoiding taking out a loan & maximising what tax I can avoid by paying into my workplace pension or some other way.

Albermarle

carbonfiberbike said:

Hi Albermarle
Thanks for the reply.
I thought that I was just indeed taking a one-off 'tax free lump sum' being well within the 25% permitted?
You then mention that this would have no effect in what ongoing tax relief I can get in pension contributions which is what I want to do.
However, you then mention that if I take any 'taxable income' then I would be subject to restrictions- the MPAA. I did not think that the £70k lump sum was taxable / taxable income i.e. it was tax free? And I am continuing to work for a couple more years, taking no more out of my pensions. 
Not sure what 'taxable tax free lump sum' is given the 25% tax free lump sum?
Finally, my pension contributions would increase as I intend to use my imminent state pension to deposit that amount monthly into my workplace pension, but not exceeding the £60k limit.
I am simply trying to take a £70k tax free lump sum from my SIPP to buy a motorhome, avoiding taking out a loan & maximising what tax I can avoid by paying into my workplace pension or some other way.

In your OP, you just said ' If I take a lump sum of say £70k from my SIPP 
A lump sum could just be the tax free part of the SIPP, or it could have been just part tax free cash, and part taxable. It was not clear.

Not sure what 'taxable tax free lump sum' 
That was a typo sorry.

However you should be aware of the recycling issue.
HMRC do not like people taking a tax free lump sum, and then upping their pension contributions. It is seen as getting two bites at the cherry.
There some guidelines/rules .
Recycling of tax-free cash - Royal London for advisers

It seems that HMRC are not very active in pursuing 'offenders' but you should be aware of the rules.

carbonfiberbike

Albermarle
Thank you for the explanation.
My concluding question is therefore:
Given I take £70k cash from my £320k SIPP, then increase my pension contributions to my workplace pension, how much can I contribute per year with tax relief (I thought I had seen £10k somewhere?), the rest being taxed in the normal way?
My objective is to use the £70k rather than take a loan out to buy a vehicle and use my forthcoming state pension together with the last payment on a loan (January 2026) to put these into my workplace pension fund or into my SIPP. If I have to pay tax on some of my increased pension payments, that is OK, but how much?

Albermarle

The £10k limit only kicks in if you take taxable income from your SIPP. IF you only take tax free money it does not apply.
The amount of tax relief you can get from pension contributions will not be affected by you taking this lump sum.
It is only related to your gross employment earnings.

So you could salary sacrifice at work down to the National Minimum Wage ( you are not allowed to go any lower) .
If you could afford it you could then add to your SIPP the equivalent of the NMW per year.

However as already mentioned if your pension contributions suddenly shoot up after receiving a tax free lump sum, you may fall foul of recycling regulations.

HedgehogRulez

Much better to keep the lump sum in the pension and rent a motor home when you want to use it.

carbonfiberbike

HedgehogRulez said:

Much better to keep the lump sum in the pension and rent a motor home when you want to use it.

I agree, but not if you use it say 15+ times a year and need the flexibility to just go away whenever you want. Good point though - thanks.

carbonfiberbike

Albermarle said:

The £10k limit only kicks in if you take taxable income from your SIPP. IF you only take tax free money it does not apply.
The amount of tax relief you can get from pension contributions will not be affected by you taking this lump sum.
It is only related to your gross employment earnings.

So you could salary sacrifice at work down to the National Minimum Wage ( you are not allowed to go any lower) .
If you could afford it you could then add to your SIPP the equivalent of the NMW per year.

However as already mentioned if your pension contributions suddenly shoot up after receiving a tax free lump sum, you may fall foul of recycling regulations.

Thanks for this, it is becoming clearer.
So I take the £70k from my SIPP now.
I do increase my pension contributions by Salary Sacrifice into my workplace pension as follows / month:
Past & current total contribution = £1,736
Add State Pension from September 25 = £2,657
Add a paid off loan amount from January 26 = £3,224 continue for 18 months then retire.
If the above is classed as recycling as I have enjoyed tax relief on the SS contributions, how do I calculate what to pay in tax back OR only claim tax relief up to what figure of my contributions? 

Finally, I could pay the additional contributions into my SIPP (would prefer not to) but would need to claim tax relief via self assessment which I am wanting to avoid?