Stop making SIPP contributions?

aroominyork

I need a sense check, please. I'm recently retired (just £1k-£2k earned income for another couple of years) and SP starts in two years. For years I have maxed SIPP contributions and now have about £660k in it. I want to run down my SIPP in future years (withdrawing the max in basic rate, using it for income/ISA/low coupon gilts) since one child/heir might be higher rate taxpayer in retirement, the other is a French tax resident (complicated tax), and of course there are upcoming tax changes. It seems pointless making more SIPP contributions (the £3600 gross that is available) since I might never empty the SIPP and the 6.25% of 'free' money would not compensate for the tax issues I would leave behind me. Is that correct?

phlebas192

How old are you? What other income do you have now and expect to receive in the future? Or to put it another way, how much are you expecting to withdraw from the SIPP each year, currently & in the future? Have you taken your tax-free PCLS from the SIPP or not? If not then how much of the Lump Sum Allowance do you have remaining (taking into account any future amount from DB pensions)?

A so-called 'safe' withdrawal rate (4%) from a £660k SIPP would be only a maximum of about £26.4k pa and likely somewhat less in practice. Without any answers on the above questions, there's nothing to suggest that you couldn't easily run down a rather larger SIPP!

aroominyork

It's not about SWR (OH and I have other assets) but about whether to add to a SIPP if I am simultaneously trying to run it down. Once my SP kicks in I can take c.£50k UFPLS annually to keep within basic rate tax; at 6% annual SIPP growth (not inflation adjusted) it would take about 26 years to empty the SIPP. So the question is whether it would be counter-productive to add to the SIPP for the tax benefit?

Smudgeismydog

I decided not to pay the £2,880 into my SIPP for exactly this reason

Albermarle

Also if there is a possibility that you will hit the tax free limit at some point, then almost no sense in adding more.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/82055964#Comment_82055964

That's unlikely to affect me but it's a good point. Someone with a £600k SIPP pot at retirement, growing annually at 8% and withdrawing 4%, would reach £1,073,100 after about sixteen years. But even if you thought you would exceed that, it would be worth adding to your SIPP if contributing as a higher rate taxpayer but expecting to withdraw at basic rate.

PS I've actually no idea whether sixteen years is correct... ie how contributions/growth/withdrawals are calculated in that context.

aroominyork

Just rethought this. If I contribute £2880 net / £3600 gross to my SIPP, it increases my basic rate limit by £3600 so I can withdraw an additional £3600 of taxable income at basic rate, benefiting from the 6.25% PCLS-associated gain. I would not be recycling because, withdrawing from the SIPP up to the basic rate limit, I would not be using a PCLS to fund the contributions.

Sam_666

https://forums.moneysavingexpert.com/discussion/comment/82129204#Comment_82129204

That is not how recycling rules work, need to read up on it.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/82135461#Comment_82135461

I did not regurgitate all the recycling rules, but I have made larger SIPP contributions during past years (when I was working) apart from last year which was £3600 gross. And with a SIPP pot of some £600k, I would not trigger recycling.

NoMore

I think the point is that using the contribution did not come from PCLS as the reason for not recycling is invalid under HMRC rules, the source of the funding is irrelevant. Its did you receive a PCLS and then all contributions within two tax years before the PCLS and two years after it are under the scope for possible recycling and all the other conditions to be met for recycling to have occurred.

Not saying that you have broken the recycling rules, only your stated reason for why you haven't, isn't correct.

aroominyork

AIUI it there are four rules, all of which must be met for recycling to occur.

• Lump sum amount: You take tax-free cash totalling £7500+ over a 12-month period.
• Significant contribution increase: Your new contributions increase by more than 30% of the tax-free cash taken.
• Testing window: HMRC measures this increase across a 5-year period: the tax year of the lump sum, plus two years before and after.
• Pre-planned intent: The recycling was planned to gain a tax advantage.

In my case, by only contributing £3600 gross after previously contributing the same or more, the second rule means I am not recycling since I am not ‘increasing’.