Market crash/correction - piling in via a SIPP

[Newroad]

Hi All.

My wife and I are both higher rate tax-payers, with a fair bit of free cash and topping out our ISA's. Hence, I'm looking at our SIPP's as being the place which would need to take the slack to keep our investments all tax free. Separately, I think there is a fair chance of a market correction, possibly (though far less likely) a crash, during 2021. Even if it did correct/crash, it wouldn't surprise me if the market ended higher on the year.

Bringing the above two thoughts together, it might make sense to wait for the putative market correction then pile in some of the free cash into the SIPP (via the broker II if relevant). The following relates to this "plan".

My understanding is as follows

You can contribute up to your annual income to a SIPP - we're haven't got that much free cash that breaching this will be a problem!
You can invest that instantly
You then get 20% (basic rate) tax relief by default in a month or two - presumably this is deposited (topped up?) into your broker's account?
However, you have to apply for higher rate tax relief via your tax return - presumably this is given by way of a lower tax bill?
There is a lifetime limit relating to pensions - once again, we are unlikely to breach this - and certainly not soon

Do I understand the above approximately correctly and is there anything else pertinent to the plan I should be aware of?

Feel free to comment on the bit about a market correction should you choose - however, that is not the main point of the post - so I'd rather this not get hijacked for that purpose. I may be wrong about that and it may mean I don't invest anything additional. What is important is that I know what to do so I can execute quickly if needed!

Regards, Newroad

[UncleEbenezer]

There is a lifetime limit relating to pensions - once again, we are unlikely to breach this - and certainly not soon

If you're sheltering serious money for long, I wouldn't be too sure of that one. The lifetime limit is no longer generous.

I'm well over halfway there, based on just three years high income, and 40-50k contributions in each of those years, plus another four or five years on middling four-figure contributions. If I'd had many more years of sufficient income to pay higher-rate tax, I'd be struggling with it.

The ironic thing is that with money so devalued as it is this century, my pot is worth about the same as the basic state pension, measured by the level of "guaranteed" income it'll buy. Or rather less, if this "triple lock" survives covid.

Apart from that, what you say sounds sensible. With the proviso that trying to time a market correction is usually a mugs game.

[mc2fool]

You can contribute up to your annual income to a SIPP - we're haven't got that much free cash that breaching this will be a problem!
You can invest that instantly
You then get 20% (basic rate) tax relief by default in a month or two - presumably this is deposited (topped up?) into your broker's account?
However, you have to apply for higher rate tax relief via your tax return - presumably this is given by way of a lower tax bill?
There is a lifetime limit relating to pensions - once again, we are unlikely to breach this - and certainly not soon

You can contribute up to your annual earnings, to a max of £40,000pa.

Yes, you can invest it straight away.

Yes, your contribution will be grossed up, with the extra 25% deposited directly into your SIPP after a couple of months. (You put in £1000, HMRC adds £250).

Yes, you have to apply for higher rate tax relief via your tax return. What that basically does is raise your starting point for higher rate tax by the amount of the contribution, so instead of paying 40% on it you pay 20%, which you've already got back into the SIPP.

Yes, there is a lifetime limit, it's currently £1,073,100.

[mc2fool]

Note that if you are an employee, you cannot contribute to the extent that your earnings fall below the minimum wage.

You cannot enter a salary sacrifice arrangement that reduces your pay below the minimum wage. https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

E.g. if you are earning £40,000 (gross) you can't take a salary sacrifice of the whole lot, reducing your pay to zero, in exchange for your employer sticking it all into your pension. You can, however, take the £40,000 (gross) and stick the whole lot into your pension yourself.

I am not 100% sure about this, but the £40,000 contribution cap is the gross contribution rather than the net contribution? So, you contribute the net amount and the government tax uplift takes it to the £40,000 limit?

Yes, correct, the £40,000 is the gross (of BRT relief) amount.

[hiriskpaul]

You can contribute up to your annual income to a SIPP - we're haven't got that much free cash that breaching this will be a problem!
You can invest that instantly
You then get 20% (basic rate) tax relief by default in a month or two - presumably this is deposited (topped up?) into your broker's account?
However, you have to apply for higher rate tax relief via your tax return - presumably this is given by way of a lower tax bill?
There is a lifetime limit relating to pensions - once again, we are unlikely to breach this - and certainly not soon

Mostly right. You can only contribute up to your income from employment. Investment or property income does not count. There is also an annual cap of £40k gross.

Basic rate tax relief does indeed turn up in your SIPP after a few weeks. So pay in 8k, and the government adds 2k. But that only applies to personal contributions, not those coming from employers. Yes as well, higher rate tax relief comes through the tax system, so does not end up in the SIPP.

If you can arrange it, having your employer make the contribution can work out more tax efficient than having your employer pay you, then you making a personal contribution. This only applies though if NI can be saved, eg through salary sacrifice. This is also a good choice for those working through personal service companies. Employer contributions are not subject to the pay cap, just the 40k cap.

Strictly speaking the caps only limit the amount of tax relief available. For most people though, it is not worthwhile making pension contributions that don't benefit from tax relief.

Best not to be too dismissive of the Lifetime Allowance. This applies to the value of the pot when benefits are taken, including the basic rate tax relief, not to the amount paid in! Having said that, higher rate taxpayers who DO exceed the LTA can still end up better off than they might otherwise have been had the saved into an ISA instead, so don't be too fearful of exceeding the LTA.

[Newroad]

Hi All.

Thanks for the prompt and largely confirmatory, as least with respect to procedure, replies.

Noted on those who mentioned be wary about the lifetime allowance - will do. It's a first world problem though and one of the better kind to have - if it becomes an issue, so be it.

For those who asked about (or perhaps more accurately, questioned my thoughts on) a crash/correction*, or its timing, I understand - but as I said, it's not the main question for me. I could give a much longer answer, but in short, I think if it happens this year, it's more likely Q1 than later. In that case, I want to be in a position to take advantage and know what I need to do. I wasn't in a position to do so in March 2020 - was still getting my ducks in a row about what I wanted to be in at all - and in any case, it would have taken some courage at the time.

If no crash/correction in Q1 2021, no problems - I'll then start some pound/cost averaging sort of thing (with an annual timeframe) before the end of the tax year - putting money in anyway, but most likely less than I would have had there been a correction/crash. A nice way to rebalance the SIPP's easily - which currently don't get regular cashflow like the ISA's do.

Regards, Newroad

* the usual definition of a 10-20% being a correction and 20+% being a crash seems reasonable

[PinkDalek]

... You can only contribute up to your income from employment. Investment or property income does not count. ...

In case of relevance for the OP, here's a helpful list:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

(Noting, for the record only, certain property income can be included.).

[PinkDalek]

... However, you have to apply for higher rate tax relief via your tax return - presumably this is given by way of a lower tax bill? ...

That's how most who complete a Tax Return obtain higher rate relief (those who don't can call or write to HMRC).

What I don't know and would be interested in ascertaining, is it possible to get HMRC to amend a current tax year Notice of Coding to grant relief (provisionally in advance of submission of the Tax Return as it were) such as via here https://www.gov.uk/check-income-tax-current-year including tell HM Revenue and Customs (HMRC) about changes that affect your tax code ?

Edited to include the link etc.

[monabri]

Market Crash? No thanks...just had one of them a few months back. Give me some time to build up funds if you really insist!

[Adamski]

See you got plenty on advice already on pensions.. Complicated topic! And the extra pension tax relief is low hanging fruit for Rishi so don't expect that'll be there long.

Re market corrections, I drip feed money in the market. Yes you sacrifice returns that way, but until you gain confidence, good way of doing it. I started with small monthly contributions into isa and sipp into a world tracker and lifestrategy 60, and built up from there as got more confidence. A correction could be 1, 3, 12 months away, and risk of being out means missing returns. Just having to accept volatility and losses are price to pay for high long term returns.

[Newroad]

Hi Adamski.

Drip feeding is what I have been doing for a decent time - best part of 20 years I'd say. Before recently though, it was into one global investment trust per "sub-portfolio" - so ATST for the SIPP's, FCIT for the JISA's then more recently WTAN for the ISA's.

Due to some closures (Alliance Trust Savings, Witan Wisdom etc) it's forced me to think and ultimately consolidate, before then branching out into a more true portfolio approach. Having got existing investments sorted out in the last 18 months or so, it's now time to consider what to do with the optionality given with spare cash. This post potentially pertains to that - the alliteration being an accident!

Another one shortly in the brokers topic also potentially pertains to the same.

Regards, Newroad