Basic SIPP scenario - guidance needed rather than hard advice

Mrtumble

Ok, so I am 59 and plan to retire next year when I hit 60.

I work and I am a higher rate tax payer and have a workplace pension starting at 60.

I have just inherited 100k and exploring options for making this work for my retirement.

A SIPP sounds like a good option on the face of it. So I would plough 60k into this and benefit from tax relief.

I understand that the first 20% tax relief is automatically added by my SIPP provider.

First question: i) Does this mean that my 60k is automatically increased to 72k to include the added 20% relief?

In my next tax return (26-27) I will claim 20% more tax relief on the 60k because I will still be in the higher tax bracket in this, my final year of full time employment.

Second question: ii) is that additional 20% simply refunded to my bank by HMRC?

So, I leave my SIPP to grow for a year or two. Hopefully.

At the age of 63 my fund has increased to let's be wild and optimistically say 90k.

I want to take 25% of this out of the SIPP tax free and leave the remaining 68k to continue to grow.

Presumably thereafter any further withdrawals will be at my marginal tax rate (and I would aim to remain in the lower tax bracket).

Third question: back to the beginning. iii) Might I also be able to invest the entire 100k inheritance into a SIPP? I ask this because in the past 3 years I have contributed about 5k per annum to my workplace pension scheme and I might have 'headroom' for more contributions under the SIPP rules.

Thank you in advance and apologies for a level of ignorance.

Dazed_and_C0nfused

You would pay £48k and the pension company adds 25% so you end up with £60k in the pension (the £12k basic rate relief is 20% of the gross contribution).

There is no way for you to claim "20% more" relief in the way you describe. The gross contribution increases your basic rate band and your tax liability is calculated on the basis that you have a basic rate band of £97,700, not £37,700. Which might save you an extra 20%. But often it doesn't (it can be more or less).

There might not be any refund due, it depends what your overall Self Assessment calculation shows. But if there is a refund due then yes, it would normally go to your bank. It wouldn't be added to your pension.

If you actually paid £60k it would become £75k with the basic rate relief added.

The main issue with your post is you have given no indication that you can actually pay that much into a pension. Being a higher rate payer means very little, you could earn £40k and have loads of investment income or income from property, neither of which are relevant for how much you are allowed to contribute to a pension.

The earnings you expect to see on your 2026/27 P69 is a good starting point for understanding your options. And whether you have any company benefits reported on a P11D.

QrizB

I work and I am a higher rate tax payer and have a workplace pension starting at 60.

To the nearest £1k, how much do you expect to earn (as shown in your P60) this tax year?

How much are you already planning to pay into your work pension this year? And how much is your employer paying into it?

First question: i) Does this mean that my 60k is automatically increased to 72k to include the added 20% relief?

It's £75k. Is your P60 going to say you earned at least £75k this tax year?

In my next tax return (26-27) I will claim 20% more tax relief on the 60k

That's not quite how it works. You'll tell HMRC that you've made a personal pension contribution of £72k, which will increase your basic-rate tax band by £72k (to £122270). Your income tax liability will be recalculated on that basis.

Second question: ii) is that additional 20% simply refunded to my bank by HMRC?

If you're due a refund of overpaid tax, yes that's how it normally works.

Third question: back to the beginning. iii) Might I also be able to invest the entire 100k inheritance into a SIPP?

Potentially, yes.

QQQQQQQQ_Y

Q1 - No - see Dazed and Confused

Q2 - No. The SIPP provider usually reclaim the 20% tax on your net contribution. For the 20% refund you may need to complete P800 online if you do not fill out a self-assessment. HMRC will then make arrangements to refund you the money - usually you complete an online instruction to pay it directly into your bank account.

You also need to understand the difference between "relevant earnings" for pensions purposes versus income - they are not the same.

Marcon

There's a good basic guide to tax relief on pension contributions here: https://freetrade.io/pension/pension-tax-relief

Also worth reading: https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/pension-contributions-tax-relief-limits

I work and I am a higher rate tax payer and have a workplace pension starting at 60. 

I have just inherited 100k and exploring options for making this work for my retirement.

If you can't pay all your inheritance into a SIPP, you could consider living on some of the inheritance and delay drawing your workplace pension. If it's a defined contribution scheme, then it'll go on growing. If it's a defined benefit scheme, does it increase because you are 'retiring late' assuming 60 is the scheme's Normal Retirement Age - and by how much?

Albermarle

As above can you clarify the type of pension you are going to take at 60?

ali_bear

Starting from scratch and making the basic assumption that you will be paying basic rate tax on your retirement income (meaning that will be your marginal income tax rate). Also you do not already have large DC pension fund built up.

Your best course of action is to pay in enough to your workplace or private pension (SIPP or whatever) to bring you down to the higher rate threshold (£50270), or lower, in this tax year. You can pay in up to the total of your income if you wish (is this is over 60k you can use the carry-forward allowance from previous years). If this makes your take-home pay too small you can live off part of the inheritance.

From the inheritance put the maximum you can into some kind of ISA.

Repeat the above each year until you stop working, or you run the inheritance down to zero.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81992402#Comment_81992402

OP has said they are retiring next year.

Marcon

I was in two minds about posting a link to this thread given its complexity: https://forums.moneysavingexpert.com/discussion/6659623/annual-allowance-and-salary/p1

but the post from @hugheskevi correcting a number of misconceptions/misunderstandings about carry forward and earnings makes it worth doing so: