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SIPPS Inquiry

Including Financial Independence and Retiring Early (FIRE)
WindhoverDave
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Joined: October 17th, 2021, 6:38 pm

SIPPS Inquiry

#458095

Postby WindhoverDave » November 15th, 2021, 10:22 am

Dear all

My job is coming to an end at the end of this year with no redundancy, age nearly 64.

I’ve got a Defined Contribution (DC) pension worth £400,000, in global shares excluding UK tracker and an emerging markets index tracker

I’ve got two stocks and shares ISA’s in British stocks (one my wife’s) worth £300,000.

Mortgage paid but three dependent children (ages 9, 15, 17) and a wife aged 48 earning £12,000 a year.

And a final salary pension worth £8,000 that I can take out from January 2023 age 65 should I wish.

My wife’s got £55,000 in an old DC pension for a company she no longer works for, in a global shares index tracker

My thinking – get a SIPP for my wife with Vanguard, transfer in her £55,000 and top it up next tax year with £40,000 from my tax free DC pension which represents her last three years salary and qualifies her for 20% tax back. Put it into a Vanguard global shares index tracker. Also put in as much of her 2022 salary into it as possible to keep the 20% keeping coming.

Take altogether £70,000 tax free from my DC pension from new tax year April 2022 to provide a family income and funds for wife’s SIPP. Take it in monthly instalments of £6,000 and drip feed it into wife’s SIPP while having sufficient for family to live off.

Take £30,000 tax free the following tax year year – 2023-24 – from my DC pension for family to live on and keep wife’s salary going into her SIPP.

Then 2024, my state pension kicks in and I start to collect my final salary pension circa £18,000 plus divvy’s from the ISAs plus a little drawdown where necessary to top up to £30,000 annually.

By then, I should still have £300,000 in the two ISAs and £300,000 in the drawdown pension and a wife still contributing to a £100,000 plus SIPP of her own.

Of course stocks and shares can go up and down, but if they flatten out or keep going up, where’s the catch??

Or does that make sense to much wiser and more canny heads than mine??

Your views very much desired,
Best
WD

Urbandreamer
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Re: SIPPS Inquiry

#458114

Postby Urbandreamer » November 15th, 2021, 11:12 am

1'st, welcome to TLF.

WindhoverDave wrote:.....and a wife aged 48 earning £12,000 a year.
...
My thinking – get a SIPP for my wife with Vanguard, transfer in her £55,000 and top it up next tax year with £40,000 from my tax free DC pension which represents her last three years salary and qualifies her for 20% tax back.


Sorry, but the rules don't allow her to contribute more than the £12k she earns a year into a pension.

Now if she earned more, ie £120k, then she could use contributions that she didn't use in the previous years to top up her pension fund (provided that she had a pension scheme in those years). But sadly she doesn't earn enough to take advantage of "carry forward".

Yes I know it's not fair, but those are the rules. You can't contribute more into a pension scheme than you earn in a year.

ursaminortaur
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Re: SIPPS Inquiry

#458130

Postby ursaminortaur » November 15th, 2021, 11:45 am

Urbandreamer wrote:1'st, welcome to TLF.

WindhoverDave wrote:.....and a wife aged 48 earning £12,000 a year.
...
My thinking – get a SIPP for my wife with Vanguard, transfer in her £55,000 and top it up next tax year with £40,000 from my tax free DC pension which represents her last three years salary and qualifies her for 20% tax back.


Sorry, but the rules don't allow her to contribute more than the £12k she earns a year into a pension.

Now if she earned more, ie £120k, then she could use contributions that she didn't use in the previous years to top up her pension fund (provided that she had a pension scheme in those years). But sadly she doesn't earn enough to take advantage of "carry forward".

Yes I know it's not fair, but those are the rules. You can't contribute more into a pension scheme than you earn in a year.


Yes, unfortunately you have to use up this years annual allowance (£40,000) before you can use carry-forward which means you have to have relevant earnings of more than £40,000.

WindhoverDave
Posts: 8
Joined: October 17th, 2021, 6:38 pm

Re: SIPPS Inquiry

#458141

Postby WindhoverDave » November 15th, 2021, 12:10 pm

Hi there

So that's helpful to know - thanks.

So she can stick £12,000 in this year so long as she does it before end of tax year?

And then £12,000 a year from then on?

Is that how it works?

Best
dave

Urbandreamer
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Re: SIPPS Inquiry

#458160

Postby Urbandreamer » November 15th, 2021, 1:03 pm

WindhoverDave wrote:Hi there

So that's helpful to know - thanks.

So she can stick £12,000 in this year so long as she does it before end of tax year?

And then £12,000 a year from then on?

Is that how it works?

Best
dave


It's a bit more complicated, but in principle, yes.
The complication is that the limit is that she can contribute her full salary and not a penny more.
If she has already made other contributions then she will have less that she is able to contribute.

I suspect that the limit is also a gross limit. That is to say that if her top line (before tax and NI) is £12k then she could contribute £9600, which would be topped up to £12k. However I can't confirm that.

I also believe that the fact that £12k is within her personal allowance, ie she does not in fact pay tax, has no bearing upon the 20% uplift that she will get.

Possibly someone else could confirm those facts. I'm not a tax specialist.

terminal7
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Re: SIPPS Inquiry

#458193

Postby terminal7 » November 15th, 2021, 2:26 pm

Of course you can set up SIPPs for your children and get the tax breaks - of course this is long-term.

Alternatively you could set up ISAs and hopefully build up reasonable pots that they can take out when for instance they go to Uni, thereby alleviating some of the drain from the Bank of Mum and Dad at that stage. There are annual caps that you can look up easily with the usual suspects.

T7

Adamski
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Re: SIPPS Inquiry

#458215

Postby Adamski » November 15th, 2021, 2:57 pm

Agree with above, you contribute the net amount £9,600, and topped up automatically with tax relief, so total amount £12,000.

Noticed your plan is into global trackers, looks good now in a bull market but depends if happy with the risk and volatility. Do you need much further accumulation, or is wealth preservation more important?

I'd consider whether to diversify into a lifestyle and/or defensive funds. Obviously comes with lower returns but sleep easier.

EthicsGradient
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Re: SIPPS Inquiry

#458265

Postby EthicsGradient » November 15th, 2021, 5:14 pm

WindhoverDave wrote:My wife’s got £55,000 in an old DC pension for a company she no longer works for, in a global shares index tracker

My thinking – get a SIPP for my wife with Vanguard, transfer in her £55,000 and top it up next tax year ...

Presumably this is because the ongoing charges with Vanguard are low, which they are, but check exactly what the charges in the DC company pension are - I have one that I've left where it is, because the (large) company got a very good deal on the charges - better than I, as an individual, can get in the market. If the idea is you want flexibility the company pension doesn't offer, then you may want to transfer it anyway.

Charlottesquare
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Re: SIPPS Inquiry

#458723

Postby Charlottesquare » November 17th, 2021, 11:32 am

WindhoverDave wrote:Hi there

So that's helpful to know - thanks.

So she can stick £12,000 in this year so long as she does it before end of tax year?

And then £12,000 a year from then on?

Is that how it works?

Best
dave


Is that not wasteful re her personal allowance?

Why place in a SIPP which may well end up taxed in retirement when really little relief is received at the front end.

Instead she could just have her income, use her PA and throw the funds into more ISAs.

I appreciate you are looking at the uplift . (Contribute £8,00 net get £10,000) but given you are wasting the PA is it really that worthwhile constraining the funds and possibly having them liable to IT on withdrawal (remembering that it is not impossible all family income may be solely her income by the time she draws from her SIPP.)

I like pensions but not sure I would be tying up in a taxable shell just for the uplift at 20%.

Urbandreamer
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Re: SIPPS Inquiry

#458741

Postby Urbandreamer » November 17th, 2021, 12:13 pm

Charlottesquare wrote:Is that not wasteful re her personal allowance?

Why place in a SIPP which may well end up taxed in retirement when really little relief is received at the front end.
...

I like pensions but not sure I would be tying up in a taxable shell just for the uplift at 20%.


Why would she be taxed in retirement? Ok, we do have to make a few assumptions.

IF we assume that the personal allowance remains frozen and that RPI continues at 6% or increases, then yes she would need to draw more than the personal allowance to cover expenses, even if she retires early.

However she would recieve 20% on all contributions. When she takes the money 1/4 will be tax free and only a portion of the taxable amount will be above the personal allowance.

I intend not paying income tax for five years. All that money will have benefited from a 20% uplift and I shall pay no tax.
I can do so by taking £15,713pa as pension. That would be £12570 nominally taxable and £3,143 as a tax free amount. Can I live on that? well I don't have to as I can take the rest out of my ISA.

Five years later a DB pension kicks in that will pay more than the personal alowance and I shall have to pay some income tax, but only on part of what I take or have paid in. Then after another two years I recieve the state pension, which will be entirely taxed as it will probably all be above the personal allowance.

As for tying money up, you have a point. However WD's familly don't seem short of the stuff and his wife could access the pension at 57 or in 9 years time.

swill453
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Re: SIPPS Inquiry

#458744

Postby swill453 » November 17th, 2021, 12:23 pm

Urbandreamer wrote:I intend not paying income tax for five years. All that money will have benefited from a 20% uplift and I shall pay no tax.
I can do so by taking £15,713pa as pension. That would be £12570 nominally taxable and £3,143 as a tax free amount.

You can take out £16,760, of which 25% (£4190) is tax free leaving £12,570 nominally taxable.

Scott.

Urbandreamer
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Re: SIPPS Inquiry

#458755

Postby Urbandreamer » November 17th, 2021, 12:55 pm

swill453 wrote:You can take out £16,760, of which 25% (£4190) is tax free leaving £12,570 nominally taxable.

Scott.


I multilpied £12,570 by 1.25 to get my numbers, which is obviously incorrect. What I should have done is divide by 3/4.
Oh well, the point is made.

Other things that don't effect WD, because he is retiring, is that pension contributions can reduce your taxible pay or your disposable income. This can allow a wife to claim child benefit or effect how much can be claimed on a student loan.

Please, blame the government for the complexity.

Charlottesquare
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Re: SIPPS Inquiry

#458760

Postby Charlottesquare » November 17th, 2021, 1:10 pm

Urbandreamer wrote:
Charlottesquare wrote:Is that not wasteful re her personal allowance?

Why place in a SIPP which may well end up taxed in retirement when really little relief is received at the front end.
...

I like pensions but not sure I would be tying up in a taxable shell just for the uplift at 20%.


Why would she be taxed in retirement? Ok, we do have to make a few assumptions.

IF we assume that the personal allowance remains frozen and that RPI continues at 6% or increases, then yes she would need to draw more than the personal allowance to cover expenses, even if she retires early.

However she would recieve 20% on all contributions. When she takes the money 1/4 will be tax free and only a portion of the taxable amount will be above the personal allowance.

I intend not paying income tax for five years. All that money will have benefited from a 20% uplift and I shall pay no tax.
I can do so by taking £15,713pa as pension. That would be £12570 nominally taxable and £3,143 as a tax free amount. Can I live on that? well I don't have to as I can take the rest out of my ISA.

Five years later a DB pension kicks in that will pay more than the personal alowance and I shall have to pay some income tax, but only on part of what I take or have paid in. Then after another two years I recieve the state pension, which will be entirely taxed as it will probably all be above the personal allowance.

As for tying money up, you have a point. However WD's familly don't seem short of the stuff and his wife could access the pension at 57 or in 9 years time.


She might be, especially if she say inherits her spouse's pensions in part at some point (which given the age differential is distinctly possible)

Edit-It is each to their own re pensions, I can see the attraction getting 40% relief investing 20% tax in retirement, but when fiscally neutral(ish) not so convinced the tax break rewards the risk of politicians messing about even more with my money.

My personal approach will be to loot my own SIPP as fast as possible once I cease being an HR taxpayer, utilising my HR band fully in retirement and withdrawing within my HR band ,so I control the funds far more distantly from the meddling politicians (even if say ISA's lost their benefits the funds would at least be mine to control). This philosophy worked fine contracting out and I see no reason to change, tax shelters come with compliance costs and risks, caveat emptor.


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