£2880 pay from drawdown

MetaPhysical

Thanks @molerat. So the £2880 "system" is only for the current tax year you are in?  No "backwards" allowance?

SVaz

If you will be paying more in tax in double taxation ( out, tin and out than the eventual tax free cash you will get back then you are losing money, it’s really that simple.

It would mean the money paid into the pension would have to remain invested until a point where it’s grown beyond what you would lose in tax when taking it out. 

molerat

SVaz said:

If you will be paying more in tax in double taxation ( out, tin and out than the eventual tax free cash you will get back then you are losing money, it’s really that simple.

It would mean the money paid into the pension would have to remain invested until a point where it’s grown beyond what you would lose in tax when taking it out. 

As a 20% tax payer you start off with £3600 "income", pay £720 tax leaving £2880. That £720 tax is gone for ever so no point even thinking about it. You can put that £2880 into a savings account and earn maybe £144 taxable interest in a year, spend it on beer and women or .......

You pay that £2880 into a pension and the taxman grosses it up to £3600

You withdraw that £3600 and receive £900 tax free and £2700 taxed so £3060 received

Spend or save £180 then

You pay £2880 into a pension ...........................

The gift that keeps on giving and better than a savings account, a 6.25% uplift or around 30% AER.

Also whilst in the pension as cash for around 2.5 months it will be earning interest and whilst not in the pension it is in a savings account.

Now do you get it ?

And as a non tax payer that is a free £720 each year with love from the tax man.

GunJack

I'm looking at a slight variation on this theme...I plan on 10 years of 2880 in, but no withdrawals so the tax relief gets added and the investment can grow. Then take the 25pct tfls for a holiday, car, whatever then pay any tax due on the rest, or leave it as another inheritable lump for Mrs G-J should I pop my clogs first (not that she wants me to go first!!)...

...all provided this provision lasts for another 14 years of course, 4 till retiring then 10 to implement.

NoMore

SVaz said:

If you will be paying more in tax in double taxation ( out, tin and out than the eventual tax free cash you will get back then you are losing money, it’s really that simple.

It would mean the money paid into the pension would have to remain invested until a point where it’s grown beyond what you would lose in tax when taking it out. 

You don't get it.

Let's say you have a pension with exactly £3600 in, and you have no personal allowance left (if you do the following will work out better but let's keep it simple) but still have lump sum allowance left, you are a basic rate taxpayer.

You withdraw £3600 from the pension, so the pension now is £0 and after tax you have £3060 outside the pension.

Pay £2880 back into the pension and that becomes £3600 so pension is back to its original position, but you have £180 in your pocket that is extra money that you didn't have before. Repeat the next year and you have another £180. How is that losing money? 

molerat

As a 40% tax payer it is even more fun

You have £4800 income and pay £1920 tax leaving £2880

Put that £2880 into a pension and the taxman adds £720 so £3600

Withdraw that £3600, £900 tax free and £2700 taxed at 40% netting £2520.

Tell the taxman you have put £3600 into your SIPP and he sends you £720 giving you a total of £3240 from your £2880, £360 up.

You then put the £2880 into a pension .........

Triumph13

molerat said:

MetaPhysical said:

QQ related to this.

Say you're new to this and person in question has not made any pension contributions and has had no income for the past three years.  Can you also pay the £2880 in the past three years as well?  SO in other words you can make 4 x 2880 contributions (this year's and the past three year's worth)?

Quick answer is no, no doubt someone will be along with the long answer re sufficient income.

I'll bite.  There are two separate limits to how much you can contribute and you have to meet both of them:

1. Your earned income in the tax year when you make the contribution, or £3,600 if lower; and
2. Your annual allowance, plus any unused annual allowance carried forward.

Carry forward only exists for the second rule.

GenX0212

https://forums.moneysavingexpert.com/discussion/comment/81660336#Comment_81660336

I've been crunching numbers on this and I get the net benefit for higher rate tax payers to actually be £514 not £360

Item	No SIPP payment	SIPP £3600 40%
Gross SIPP withdrawal	£67,026	£70,112
Tax-free portion (25% of SIPP)	£16,757	£17,528
Taxable portion (75% of SIPP)	£50,270	£52,584
Total taxable income	£50,270	£52,584
Personal Allowance used (0%)	£12,570	£12,570
Amount in basic rate band (20%)	£37,700	£37,700
Amount in higher rate band (40%)	£0	£2,314
Tax at 20%	£7,540	£7,540
Tax at 40%	£0	£926
Total income tax	£7,540	£8,466
Gross income received	£67,026	£70,112
Net income received	£59,486	£61,646
SIPP Contribution (Net)	£0	£2,880
SIPP Contribution (Gross)	£0	£3,600
Additional higher-rate relief reclaimable	£0	£720
Overall net cash in hand (incl. reclaim added)	£59,486	£59,486
SIPP Balance	-£67,026	-£66,512
Gain on SIPP balance		£514

The 1st column is flying just under the 40% threshold with no SIPP contribution

The 2nd is with the £3600 gross SIPP contribution and £720 tax reclaimed. The 2nd ends up with £514 more left in your SIPP

NoMore

https://forums.moneysavingexpert.com/discussion/comment/81923014#Comment_81923014

You seem to be comparing a different thing to molerat.

Molerat just did a simple if you are a 40% taxpayer for all of the £3600 contribution, you will make £360 net from a 2880 contribution and then withdrawing it.

I'm not sure I follow what you are trying to show, as you are comparing what's left in the SIPP (which is gross) when taking out different amounts (the difference in withdrawal is £3096, I don't know the reason for that). Unless you want to compare taking the same amount + 2880, I don't see what you are doing.

Also you have a mistake in your second column, you don't get £720 higher rate tax relief as you're not at least £3600 above the higher rate tax band. It would only be £462.80, you could claim.

GenX0212

https://forums.moneysavingexpert.com/discussion/comment/81923038#Comment_81923038

"You seem to be comparing a different thing to molerat.

Molerat just did a simple if you are a 40% taxpayer for all of the £3600 contribution, you will make £360 net from a 2880 contribution and then withdrawing it. 

I'm not sure I follow what you are trying to show, as you are comparing what's left in the SIPP (which is gross) when taking out different amounts (the difference in withdrawal is £3096, I don't know the reason for that). Unless you want to compare taking the same amount + 2880, I don't see what you are doing."

Trying to show that flying just below/on the 40% threshold isnt the most advantageous approach (which I had originally thought was). Although it might sound counterintuitive, by paying in the £2880, withdrawing more, and paying some 40%tax you can still achieve the exact same cash in hand but end up with £514 more left in your SIPP than by not paying it.

"Also you have a mistake in your second column, you don't get £720 higher rate tax relief as you're not at least £3600 above the higher rate tax band. It would only be £462.80, you could claim"

Fair play, that's a good shout. I had started by trying to model my circumstances which include a DB pension but had then tried to make it simpler for my post. Here's where I started, still £514 better off by my calculations but if I have made a mistake would be glad of the help to spot where:

Item	No SIPP payment	SIPP £3600 40%
Defined benefit pension (taxable)	£14,500	£14,500
State Pension
Gross SIPP withdrawal	£54,597	£57,683
Tax-free portion (25% of SIPP)	£13,649	£14,421
Taxable portion (75% of SIPP)	£40,948	£43,262
Total taxable income	£55,448	£57,762
Personal Allowance used (0%)	£12,570	£12,570
Amount in basic rate band (20%)	£37,700	£37,700
Amount in higher rate band (40%)	£5,178	£7,492
Tax at 20%	£7,540	£7,540
Tax at 40%	£2,071	£2,997
Total income tax	£9,611	£10,537
Gross income received	£69,097	£72,183
Net income received (-tax)	£59,486	£61,646
SIPP Contribution (Net)	£0	£2,880
SIPP Contribution (Gross)	£0	£3,600
Additional higher-rate relief reclaimable	£0	£720
Overall net cash in hand (Net income minus net SIPP contribution plus reclaim added)	£59,486	£59,486
Remaining SIPP Balance	-£54,597	-£54,083
Gain on SIPP balance		£514