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Pension question

macbrains
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Pension question

#392688

Postby macbrains » March 5th, 2021, 12:00 pm

Dear Lemonfools - I'm hoping that someone may be able to answer the following re pensions.

Mrs M is 67 years of age and receives her state pension and a small occupational pension. She is (only just) not a taxpayer.
Apparently it is possible to open a new SIPP, pay into it the full amount of £2880, and the fund can claim tax relief of £720, making it up to the full £3600.

The pension is then withdrawn and the whole process repeated (if allowable).

1. Is this still an option?
2. What might be the costs of doing this with, say, Hargreaves Lansdown, who we have ISAs with? Or does anyone know of a more cost effective provider with decent customer service?
3. Would we lose any gains on this, by having to pay tax on the amount withdrawn.
4. I am also 67, retired and drawing both occupational and state pension. However, I am a basic rate taxpayer - can I do this as well?

Any thoughts, anyone? many thanks
M

Alaric
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Re: Pension question

#392692

Postby Alaric » March 5th, 2021, 12:12 pm

macbrains wrote:4. I am also 67, retired and drawing both occupational and state pension. However, I am a basic rate taxpayer - can I do this as well?


If you are a basic rate taxpayer with income above the allowance, an additional income of £ 3600 gives rise to additional tax of £ 720

JohnB
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Re: Pension question

#392704

Postby JohnB » March 5th, 2021, 12:37 pm

My HL SIPP is well run, but is better suited to large sums. The custody charge at 0.45% is high, but capped at £200 p/a for ETFs (but not funds, so avoid the latter), which is fine for large sums, but would be expensive starting off.

ursaminortaur
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Re: Pension question

#392751

Postby ursaminortaur » March 5th, 2021, 2:01 pm

Alaric wrote:
macbrains wrote:4. I am also 67, retired and drawing both occupational and state pension. However, I am a basic rate taxpayer - can I do this as well?


If you are a basic rate taxpayer with income above the allowance, an additional income of £ 3600 gives rise to additional tax of £ 720


You are forgetting that 25% will be withdrawn tax free. So an extra £3600 will give you £900 tax free with the remaining £2700 taxed at 20% ie you will pay £540 in tax. Hence even as a basic rate tax payer you come out a little ahead though whether that is worth the hassle (and whether you can find a provider whose charges are small enough not to wipe out that gain) is something you would have to decide.

When doing this you need to minimise the fees and also watch out for any gotchas. For instance A J Bell's Youinvest will slap on a charge of £295 + vat if you start a SIPP and then close it down within 12 months.

mc2fool
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Re: Pension question

#392758

Postby mc2fool » March 5th, 2021, 2:24 pm

macbrains wrote:The pension is then withdrawn and the whole process repeated (if allowable).

Yes, but only annually. You can only put in the £2880 once in each tax year.

1. Is this still an option?
Yes.

2. What might be the costs of doing this
Dig around. This is a good starting point: https://monevator.com/compare-uk-cheapest-online-brokers/

3. Would we lose any gains on this, by having to pay tax on the amount withdrawn.
You can get 25% of it out tax free and the rest at your marginal rate. So, if you are a basic rate taxpayer that effectively means you'll pay 15% tax on the £3,600 withdrawn, so the net benefit is £180. (In: £2880. Out: £3600 - £540 = £3060)

4. I am also 67, retired and drawing both occupational and state pension. However, I am a basic rate taxpayer - can I do this as well?
Yes.

DeepSporran
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Re: Pension question

#392765

Postby DeepSporran » March 5th, 2021, 2:54 pm

You can avoid unnecessary charges by using Hargreaves Lansdown’s SIPP. Provided you stay in cash, there are no charges at all. So you can put in your £2880, wait for the extra £720 to be added by HMRC and then withdraw the lot. Better to leave a small balance (apparently £10 is sufficient) however to make it easier to repeat the following year - it’ll save having to reopen an account.

Your withdrawal will have tax deducted so you may have to reclaim from HMRC to fully benefit from the “free” £720 (non tax payer) or at least £180 (basic rate tax payer). There’s a very long thread on MSE

https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired

which covers all the ins and outs.

As long as you get your £2880 subscribed by April 5th you can make use of your 2020/2021 allowance.

vrdiver
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Re: Pension question

#392772

Postby vrdiver » March 5th, 2021, 3:01 pm

Nb. You don't have to find the £2,880 as a lump sum.

You could fund the SIPP with the minimum (e.g. £1,000) then set up a monthly payment of £240. Then start a UFPLS drawdown of £300 per month (as they'll credit you £60 tax, a month or so after the £240 was credited). You'd need to make sure the tax credit was in before you started the withdrawal, just to ensure you don't cross the minimum balance threshold of your SIPP provider.

You'd also need to account for whatever annual fees the SIPP provider charges, but if, say they charge £120/year, just withdraw £300-(1/12 of £120=)£10 so £290 per month. Again making sure your payments in and out and the timing of their annual charge (or quarterly or whatever the SIPP scheme is) don't take you below any minimum SIPP value, as you wouldn't want the SIPP to be closed by accident!

It might sound a bit fiddly, but if she is under the personal allowance tax limit then it's a recurring £720 (less costs) every year for almost no work. If the £2,880 pension payment (as £720 would be tax free) puts her over the limit, obviously there would be some additional tax to pay, but even then, it's "free" money once the SIPP is up and running. Better returns than a savings account and she can get her deposit money back should she need it (by closing the SIPP).

VRD

macbrains
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Re: Pension question

#393086

Postby macbrains » March 6th, 2021, 1:17 pm

Many thanks to all who replied - really helpful

M


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