Inheritence into a SIPP

izoomzoom

Hiya, I've recently inherited some funds. I'm in my 50s and have been SE my whole life. I have never contributed to a pension.

I understand I can put some of it into a SIPP. I'm a 20% tax payer, and my SE income is less than £60K per year.

Can I put £60K into the SIPP, or can I only put whatever my SE income is for this year - which is a bit hard to work out, as it can change by £8K from one year to the next. I haven't done last years return yet, but my annual income ranges from £16K to £24K.

Marcon

Technically you can pay in any amount to your SIPP, but to make tax-relievable contributions you can only contribute a gross amount (ie including tax relief at basic rate) equal to your profits in the tax year in which you make the contribution. So you'd pay in 80% of those profits to your SIPP, and the 'tax top up' would bring you up to 100%.

Currently you have no scope for 'carry forward' for two reasons: you haven't been a member of a pension scheme in any previous years; and you don't earn enough. If at any point your earnings have a mega-increase, it may be a possibility - for more information see https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

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DRS1

You may want to ask your chosen pension provider what they do if you contribute too much (ie more than the amount which qualifies for tax relief).

I suspect most of them don't want to keep the excess and there is something called the excess contribution lump sum which allows the pension to pay you back the over contribution (and give HMRC back the related tax relief).

I believe the excess contribution lump sum is designed for people in your position - self employed but don't know what their profits will be until after the end of the tax year. In your case it would allow you to contribute during the tax year on the assumption your profits will be £24k but get the refund if it turns out you only made a profit of £16k.

You might think it would be sensible to just contribute assuming a profit of £16k but if after the tax year has ended you find you actually made £24k it is then too late to make up the difference with a further contribution (because the tax year has ended)

I don't know what the pension providers make of people who regularly contribute "too much" and need a refund. It probably does not happen that much as most people aren't contributing 100% of their profits to a pension.

Secret2ndAccount

I am self employed, and contributed too much a few years ago. As the OP points out, it's a bit complicated because you have to make the contribution before you know what your exact profits are. I didn't have to contact my SIPP provider or try to unwind anything. Through self assessment, the excess tax relief is worked out and added back to your tax bill - you just pay it back. Pro's and cons of being self employed.

To the OP: estimate your profit for the current tax year (err on the low side). Multiply by 0.8. Contribute this to a SIPP. The other 0.2 gets added as tax relief into the SIPP. Also note that you can pay 20k per year into an ISA, and invest in all the same things as a SIPP. ISA is generally free, whereas SIPP's charge a fee. ISA can be emptied at any time tax free. Payments from the SIPP are 25% tax free - that's why you should contribute to a SIPP - but the rest is treated as income, and adds to your tax bill. For many people, the SIPP wins by a few %, but it's fine to have a mixture of both, particularly when you can't get it all into a SIPP in one year.

LHW99

ISA is generally free

Isas are tax-free when withdrawn (and on growth / dividends etc) but there will be fees on funds if you use an S&S ISA, and not all will be free of provider fees. You would need to compare providers/platforms.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82069032#Comment_82069032

Agreed - it's simplistic to assert that "ISA is generally free, whereas SIPP's charge a fee" when both wrappers will generally entail both platform and fund fees if making meaningful like-for-like comparisons!

Sam_666

"ISA is generally free, whereas SIPP's charge a fee."
What a an ambiguous statement.

Savings accounts are free (of charge). Investments most of time have a fee.
If you cant distinguish between what is savings and what is investment, then its time to get professional advice.

Secret2ndAccount

I have an ISA with Trading212. There is no annual fee. I bought shares of Eli Lilly, Caterpillar, and CitiBank. There was no charge for the trades. Even the currency exchange to buy US shares in $ was carried out at close to the interbank rate. There is no ongoing cost to own these shares. So it’s literally free. You can also get a free ISA with InvestEngine or iWeb. I believe some other providers offer a free ISA if you already pay for a SIPP.

If you buy funds, you will pay the fund manager a fee. That’s generally the same in a SIPP or an ISA. For many people, the benefit of cycling money through a SIPP is 6%. However, that 6% gets eaten away every year by the fees paid to the SIPP manager. After 15 years, it could be down to 3%.

If you contribute by salary sacrifice, SIPP wins. If you are a 40% taxpayer, SIPP wins. If you retire early and can get some money out tax free, SIPP wins. Personally, this year, I am not planning to pay into my SIPP. I would only get 20% tax relief, and I am concerned I would have to pay 30% tax to get the money back out.

For a basic rate taxpayer, who only has 10k per year to contribute, we have always told them that SIPP beats ISA. I think, for an increasing number of people, great care is needed to understand what you are doing. Do you want to lock your money away for many years for a very small benefit? If you have paid in 10k per year for 35 years, and seen even moderate growth, you might now be asking yourself if you can get the money out without hitting 40% tax, or even hitting the tax free lump sum limit, and getting no benefit at all.

I recommended to the OP to open both a SIPP and an ISA. I think that was a sound recommendation.

If you hold cash in a savings account, there might not be a large sign on the door, stating their fees, but you could still be getting taken to the cleaners. If you are earning 4% you are doing fine. If you are getting 2% then most of the benefit of your money is going to the bank, not to you. That’s not my idea of free.

bjorn_toby_wilde

Very true. You’re still paying for a cash ISA but the charges are implicit rather than explicit.