Quick mad question on additional contributions!

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916357#Comment_81916357

Normal contributions are by salary sacrifice. In this case it would be a direct lump sum payment. The money will buy further DB benefits. What are you seeing as the potential pitfall? My concern is that some people seem to have had difficulty reclaiming from HMRC in similar circumstances.

https://forums.moneysavingexpert.com/discussion/comment/81916313#Comment_81916313

I'm nit sure I'm reading you right - isn't tax relief available at an individual's highest marginal rate on contributions, i.e. 40% for a higher rate taxpayer?

We have looked into recycling, including IFA input.

DRS1

What are you seeing as the potential pitfall? My concern is that some people seem to have had difficulty reclaiming from HMRC in similar circumstances.

Yes that is the pitfall

I'm nit sure I'm reading you right - isn't tax relief available at an individual's highest marginal rate on contributions, i.e. 40% for a higher rate taxpayer?

For the SIPP contributions the 20% basic rate tax relief is in the SIPP and any higher rate tax relief is reclaimed by the online form or SA. Where you use the DB scheme (as you have mentioned) it may not work like that and you have to reclaim both the basic rate relief and the higher rate relief. That is sufficiently unusual it may give you trouble convincing HMRC of what you have done and what you are reclaiming.

Re. savings tax, you're right, I was forgetting. It'd be £14,392 taking that into account.

Just keep in mind that if you want to get back to £1k of PSA then you need to allow for the £500 that would be taxed at 0% but is in fact in the higher rate band. Your taxable employment income and pension income puts you in the higher rate band on their own so all the taxable savings income will be higher rate income (even though some of it will have a tax rate of 0%) I hope that makes sense.

af1963

I'm nit sure I'm reading you right - isn't tax relief available at an individual's highest marginal rate on contributions, i.e. 40% for a higher rate taxpayer?

If you earn £10 over the 40% threshold, you're a 40% tax payer, but that doesn't mean you can get 40% tax relief on all of your pension contributions - you'd get 40% relief on that £10, and 20% relief on the the rest.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916581#Comment_81916581

Thank you. I was confused as I understood you and @Dazed_and_C0nfused to be saying I could only ever recover the 20% basic rate. I didn't help by confusing the numbers. All that is much clearer and makes complete sense to me including your point on the personal savings allowance.

I share your concerns about the pitfall. I have seen references to people who do this and have no trouble, people who do have trouble but get the relief eventually, and to people who have trouble and never get the relief or give up.

To confirm with a worked example using fictitious numbers, assume I earn £40k PAYE and receive defined benefit pension income that puts me £10k into the higher rate tax bracket. I am taxed 40% on that £10k so pay £4k tax and actually receive £6k. I want to make additional pension contributions to mitigate the tax paid. I am still working and paying in to a second DB scheme. I have the option of additional payments into that DB scheme, or into a new SIPP. I think we are saying:

(1) HMRC rules allow me to claim tax relief by making additional pension contributions while receiving DB pension income (assuming no breach of recycling rules)

(2) Tax relief is available at my highest marginal rate, so in this example the first £10k of additional contributions would attract tax relief at the higher rate i.e. 40% / £4k

(3) If I make additional contributions via a SIPP, the SIPP provider claims basic rate tax for me at 20% (relief at source) and adds it to the SIPP, and I have to claim the higher rate relief directly from HMRC.

(4) Consequently to offset the £10k higher rate income in this example via a SIPP I only have to put in £8k; it is topped up to the £10k by relief at source.

(5) If I make additional contributions via the DB scheme I don't get relief at source and have to claim all the relief direct from HMRC who will pay the relief direct to me, not into the pension.

(6) Claiming full relief direct from HMRC is uncertain and there is a risk of not getting the full relief, or getting relief being hard work and time consuming. Relief by SIPP + higher rate claim is more certain.

I want to get this sorted and payment made or SIPP opened today so thanks to all of you for your help.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81916681#Comment_81916681

1. Correct providing you have the earnings which allow the contrition to be made (that isn't a point about affordability, it's about the rules for making a qualifying contribution).

2. Depends on the facts i.e. not all higher rate payers will get 40% relief on 100% of their contribution as they haven't paid higher rate tax on enough of their income.

6. Is wrong. There is certainty about getting the relief. The uncertain element is how much hassle/time it will take to get the relief.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81916681#Comment_81916681

I agree with 1 - 6. I know what Dazed says about 6 but there is being entitled to something and actually getting it. As you say it may be so much hard work getting it that some people will give up (or some people may not have noticed that they only got higher rate relief instead of the full amount).

The other factor in your decision is that you can use the contribution to buy DB benefits. Even for contributions to DB schemes that is not usual and could well be a powerful reason to put yourself through the potential minefield of claiming the full rate relief.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81917317#Comment_81917317

Thankyou. Re. 6 I read one case where HMRC just stonewalled until the claimant gave up. I don't know if I have fighting HMRC in me.

To the DB pension benefits, a £13350 payment buys £750 a year additional pension, index linked, and 37.5% dependent's pension. It seems to me it's very similar to buying an annuity, and checking annuity calculators suggests an equivalent, probably without dependent's benefit, would cost c. £16k plus, so it's not an exceptional deal but not a bad one.

The alternative is a SIPP which looks attractive for flexibility and not tying the money up for years and is probably safer for the tax relief claim but is obviously less certain depending on fund, market conditions etc. and needs deciding on and managing.

DRS1

The thing is you mainly see posts on here about something which has gone wrong. You may find everything goes smoothly for you (and if it went smoothly then why would anyone bother to post about it on here - they wouldn't). So perceptions can get skewed.

As someone who only ever had access to DC schemes my view of DB schemes may be rose tinted. But it does sound to me like using the DB scheme would be a good idea (of course those annuity quotes might be for an immediate annuity in which case the cost comparison is a bit off).

And of course it would be counter to the spirit of this site to suggest you do something which involves you paying more tax than you need to. But if you do decide not to pay the pension contribution and suffer the higher rate tax (and the loss of the higher PSA) then spend what is left on something you'll remember for a long time.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81917767#Comment_81917767

You do, and that was exactly my thought; you'll see the problems but not the successes.

I think generally a main DB scheme is very good, which is why generally you'd be mad to transfer out of a DB scheme and you have to have financial advice to do so, but additional contributions maybe less so. The additional contributions regime is still very fair, and obviously it's still guaranteed index linked pension etc., but maybe not exceptional for the NHS 2015 scheme at least. Very long term obviously no risk of running out of money which is a major benefit!

We were already to go for the additional DB payment but partner is uncomfortable with having the money tied up so is leaning toward SIPP for flexibility albeit with more uncertainty and risk. I don't know what is better and it feels like we're running out of time to decide, but in fact it's not a one and done as we've got another two years to offset, so what we don't do now we can do in the next financial year.

Thanks very much for your support.