Basic SIPP starter advice

tonycable

Hi All,

I was wondering if I could get some basic advice on a SIPP please, as i'm getting totally confused with what I am reading and want to make sure i'm not missing something obvious before I open one. I'm also confused about the pension follow through.

Firstly, my main reason for opening one is a mixture of tax relief and to have another pension pot for when I retire (but i don't know if i have left it too late in life to get the full benefit of it - i'm 43 years old and would be looking to keep in there until at least 57 without touching it or taking any payments out, and hopefully paying into it close to that age).

I'm a member of a LGPS scheme (been a member since 2005 and have a mix of the older final salary and the newer average earnings), which I pay into from my wages (% of earning), my employer pays into, and I have also a contract to pay an extra contribution on a monthly basis, which also comes for my earnings (this is a set amount each month). These all come out from my pay packet each week at the source of my employer, and I believe this is classed as salary sacrifice.

In the first instance, how much can I put into a SIPP. I'm seeing £60000, but i'm also seeing the maximum that I can put in is no more than my salary (which lets say is £42000 to keep it simple). I'm also assuming that i need to reduce that total based on the amount I am currently putting into my current pension from all three LGPS payments as these count as pension payments against my allowance.

How much can i put into a SIPP to ensure I don't get taxed?

Also with the follow through, how is that worked out (again i'm seeing a number of different ways to calculate it). I believe I need to add together (for a tax year) the three contributions from the above and get that total, then minus either £60000 or £42000, and that leaves me with the amount that i can pay into a SIPP. Doing this for the last 3 tax years then adding them together gives me the total? (by paying in, I mean how much i can pay in without being taxed - i would be looking to get as close to the maximum allowed as possible).

Also, what's the most efficient way to pay into it if i do open one. I believe through a salary is cleaner, but as i'm already doing it for my LGPS contributions and with the amount going down to £2000 in 2029, i'm not sure if that is the best way as my LGPS will keep going, or if a payment from a bank account on a regular basis is better. I'll be the only one paying into it and won't be asking my employer to contribute as they already contribute to the LGPS.

Can someone give me some basic advice on the above please, and see if it is worth me going forward with it. I'm pretty certain I know who i am going to go with if I do proceed. I'm aware it is my choice at the end of the day, but if there is going to be minimal benefit, then it might not be worth it. I'm also aware that my investments may go down. I'm more thing if it is beneficial from a age point of view.

Many thanks.

Albermarle

The maximum you can add and get tax relief is your gross salary. So in a simple example where no workplace pension is involved:

If you were self employed and earned £30k pa , you could add £24K and the DC pension provider ( a SIPP is just one type of DC pension) will add basic rate tax relief of £6K .

The £60K annual allowance is a separate limit of how much can be added to a pension in total each year, so your contributions + tax relief + employers contributions ( for a LGPS scheme these can be significant and are calculated in a certain way, that hopefully someone else will explain) It is possible to bring forward unused allowance for the previous three years ( this carry forward does NOT apply to how much tax relief you can get, which is a common misunderstanding) .

As you are making your work contributions via salary sacrifice, then your remaining taxable income can be used to calculate how much tax relief you can get. If this is £42K ( after salary sacrifice) , you can add up to £33,600 to another pension, unless you are breaching the £60K limit by doing this.

You are making extra contributions at work . Is this to enhance the main LGPS pension, or are you paying into a separate DC pot, usually referred to as an AVC?

tonycable

Thank you for your reply.

The extra contributions are going to the LGPS scheme, same pot to enhance it. This was started in Nov 24, and it was either for 9 or 10 years (I can't remember without the paperwork in front of me).

As a very rough calculation, I'm contributing about £14000 p/a in pension payments to the LGPS scheme (this is the total of pay percentage and the additional payments). I'm assuming that as my salary is £42000, and my current LGPS contributions are £14000, then I can add £28000 to another pension. Have I understood that correctly? Or is it after contributions my 'salary' is £28000 and i can add £32000 to another pension?

I understood that the follow forward wasn't to do with tax relief, just how much extra I could put in.

Albermarle

You mentioned your workplace contributions were by salary sacrifice. This is where your salary is reduced and the employer pays the reduced part into your pension. So the critical question is the £42K your remaining taxable income AFTER salary sacrifice, or is your taxable income actually only £28K after sacrifice has been applied? If you are not sure your payslip or P60 should give a good idea.

tonycable

So my P60 says under the section for Pay and Income Tax details:

Pay In this employment £28,880.28

Tax deducted In this employment £3,260.20

My actual salary is around the £42k mark.

So i'm guessing my salary is £28,880.28 after sacrifice has been applied?

hara____

If you are an active member of a defined benefit scheme, the hardest part of this is working out how much of the annual allowance is used by the 'pension input amount' for that scheme.

I'm not familiar with LGPS but this link seems to cover the key points:

https://www.lgpsmember.org/your-pension/the-essentials/tax/the-annual-allowance/

tonycable

Thank you.

There is a calculator here:

Annual allowance quick check tool :: LGPS

Providing i have input the right figures for the right tax year, it is telling me this:

Estimated amount of annual allowance used £ 31,119.20

The results show that you have not exceeded the standard annual allowance in this tax year.

hara____

I'm not sure if it's exactly the same for LGPS, but with the Civil Service pension the scenario you have to watch out for is a year where the inflation adjustment to the ending pension value is very high and the inflation adjustment to the starting value is modest.

You might be able to see this effect in that calculator if you can check several years. The input amount for 2022-23 might be quite high.

Also worth checking several years to understand how much potential for carry over you might have.

If the allowance headroom ever looks tight, you can wait until late in the tax year before making SIPP contributions, so that you know whether inflation adjustments will lead to a large input amount.

ali_bear

https://forums.moneysavingexpert.com/discussion/comment/81970457#Comment_81970457

Looks right for the standard tax code.

If you took out another DC pension scheme (for example a SIPP) and put in 16310 a year (gross, or 13048 from your take home money) that would leave you paying zero income tax, and 1047 a month to live on.

tonycable

Thank you Ali_Bear, that's very useful, and gives me some figures to look at.

I'll be honest, I've got a number of bonds maturing over the next couple of years that I was going to use to help fund this for the next few years.

I was hit with a big tax bill due to interest earned last tax year, and it's looking like a similar picture going forward, so that's where the tax relief comes from, as well as building up another pension pot in case (for any reason) I can't pay into the LGPS one going forward, or should anything happen to it.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81970847#Comment_81970847

Unless you have a lot of other taxable income on top of your £28k taxable salary, contributing to a SIPP won't give you any personal tax saving.

You will get the basic rate tax relief the pension company adds, so say £2,000 that you pay (net) will become £2,500 in the pension once the basic rate tax relief is added.

But unless you are Scottish resident or have at least £22k+ of other taxable income there won't be any extra saving for you personally.

That doesn't mean it's not a good idea but it might not have the all benefits you seem to be expecting.