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Funding questions

vfoolish100
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Joined: November 6th, 2016, 10:59 pm

Funding questions

#356177

Postby vfoolish100 » November 13th, 2020, 12:21 pm

Hi,
Hoping for some (kind) feedback on my approach to funding my life pre-pension. Any suggestions/feedback is welcome.

General idea is to live off my SIPP for the next 5 years (from April 2021), extracting the personal allowance plus tax free amount until a DB pension kicks in.

The (approx) 15K first lump sum payment I need will be withdrawn March/April 2022, as I will live on redundancy/savings for the 1st year. Taking the payment at the end of the tax year will mean if i have to do any paid work (unforseen circumstances) then I won't take any (or will take less) money from my SIPP.
At the moment i do not think i will need all of this 15K and intend to put back into my SIPP, £2880 every year thereby gaining the 20% uplift from HRMC.

Q1. Is this a sensible strategy or have I missed/forgotten something?

Q2. Does it make sense to put an amount of money equal to my wages in my SIPP for this year (my wages are below my personal tax allowance of £12500) to gain the tax relief?
Q2a. Will i even get the tax relief in this case?

Thanks for reading!

swill453
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Re: Funding questions

#356183

Postby swill453 » November 13th, 2020, 12:30 pm

vfoolish100 wrote:Hi,
Hoping for some (kind) feedback on my approach to funding my life pre-pension. Any suggestions/feedback is welcome.

General idea is to live off my SIPP for the next 5 years (from April 2021), extracting the personal allowance plus tax free amount until a DB pension kicks in.

The (approx) 15K first lump sum payment I need will be withdrawn March/April 2022, as I will live on redundancy/savings for the 1st year. Taking the payment at the end of the tax year will mean if i have to do any paid work (unforseen circumstances) then I won't take any (or will take less) money from my SIPP.
At the moment i do not think i will need all of this 15K and intend to put back into my SIPP, £2880 every year thereby gaining the 20% uplift from HRMC.

Q1. Is this a sensible strategy or have I missed/forgotten something?

Yes it's pretty much what I do. Take a £16,666 UFPLS payment and return £2880 to the SIPP. My wife does something broadly similar. Between us it's enough to live on.

Q2. Does it make sense to put an amount of money equal to my wages in my SIPP for this year (my wages are below my personal tax allowance of £12500) to gain the tax relief?
Q2a. Will i even get the tax relief in this case?

If by wages you mean taxable income from employment then yes, I'd say it makes sense.

Scott.

vfoolish100
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Joined: November 6th, 2016, 10:59 pm

Re: Funding questions

#356325

Postby vfoolish100 » November 13th, 2020, 7:12 pm

Thanks for the speedy reply.

Yes, taxable income from employment.
I have been reading posts on here and have come across one that suggests, if you earn say £12000 (gross) then you can't put in this amount, it has to be the lower amount which when topped up by HRMC, equals the gross earnings. Does that sound right? Or is the net amount you should use (what about pension contributions) - confused now.

swill453
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Re: Funding questions

#356338

Postby swill453 » November 13th, 2020, 8:04 pm

vfoolish100 wrote:I have been reading posts on here and have come across one that suggests, if you earn say £12000 (gross) then you can't put in this amount, it has to be the lower amount which when topped up by HRMC, equals the gross earnings. Does that sound right? Or is the net amount you should use (what about pension contributions) - confused now.

Someone else might need to confirm, but as I understand it the gross amount added to a pension in any tax year is the lower of:
- £40,000 (unless other factors reduce the allowance)
- taxable earnings

So yes if your earnings were £12,000 then you would put £9,600 in the pension and it would be automatically topped up by HMRC to £12,000

Scott.

hiriskpaul
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Re: Funding questions

#356422

Postby hiriskpaul » November 14th, 2020, 10:23 am

Yes, gross amounts apply. If you earn 10,000 before tax and NI deductions and there are no personal contributions to other pensions, you can put 8,000 net into a SIPP. However, that only applies if you have not drawn any income from a DC pension. Pension commencement lump sums are fine, it is income after this you need to worry about. If you have taken income other than tax free lump sums, the amount you can contribute to a SIPP is limited to £4,000 gross. Taking a UFPLS payment would count as taking income.

vfoolish100
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Re: Funding questions

#356553

Postby vfoolish100 » November 14th, 2020, 4:17 pm

Thanks for the answers clarifying the position, much appreciated.

It does seems a bit strange that an uplift is given even though no tax has been paid (where the amount is below the personal allowance) - guess that's what's called a perk!

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Re: Funding questions

#356603

Postby hiriskpaul » November 14th, 2020, 7:18 pm

vfoolish100 wrote:Thanks for the answers clarifying the position, much appreciated.

It does seems a bit strange that an uplift is given even though no tax has been paid (where the amount is below the personal allowance) - guess that's what's called a perk!

For those able to withdraw the uplift without paying tax it is a very good perk. But the amount of tax paid on drawing the pension is not set in stone. It might seem unlikely, but a future government might decide to make more people "Contributing Stakeholders" by slashing the personal allowance to £1k whilst "simplifying" the tax system by merging NI and income tax for a basic rate of 32%. That might be a bit of an extreme example, but the point is the tax regime that will be applied on draw down takes no notice of what up front tax relief was, so the tax relief can be considered a payment for taking the risk of future tax policy changes.

vfoolish100
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Joined: November 6th, 2016, 10:59 pm

Re: Funding questions

#474529

Postby vfoolish100 » January 19th, 2022, 5:59 pm

Hi,
Apologies for replying to my own thread, if not the correct etiquette, but it is related.

My plan was to take £16759 (Personal allowance + tax free sum) in March 2022, my original thinking being that since it was the end of the tax year, I would get my full personal tax allowance (as no earnings this year) for the whole year, paid into my bank account.

However, I'm now beginning to think that although I have generated a tax code (1257L as I took a UFPLS payment of £1 earlier in the year), PAYE rules will still only give me a months personal allowance, so i'll get stung for tax (albeit I can (hopefully) claim it back?).

I'd appreciate any thoughts/practical experience,

Mark

swill453
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Re: Funding questions

#474551

Postby swill453 » January 19th, 2022, 7:14 pm

vfoolish100 wrote:However, I'm now beginning to think that although I have generated a tax code (1257L as I took a UFPLS payment of £1 earlier in the year), PAYE rules will still only give me a months personal allowance, so i'll get stung for tax (albeit I can (hopefully) claim it back?).

I think the tax should be right (i.e. zero) since it's the last month of the year, but I'm not 100% sure.

But in any case it's easy to reclaim tax with the online P55 form, or just wait and it'll be refunded autonatically.

Scott.

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Re: Funding questions

#474593

Postby mearnsfool » January 19th, 2022, 10:13 pm

swill453 wrote:
vfoolish100 wrote:However, I'm now beginning to think that although I have generated a tax code (1257L as I took a UFPLS payment of £1 earlier in the year), PAYE rules will still only give me a months personal allowance, so i'll get stung for tax (albeit I can (hopefully) claim it back?).

I think the tax should be right (i.e. zero) since it's the last month of the year, but I'm not 100% sure.

But in any case it's easy to reclaim tax with the online P55 form, or just wait and it'll be refunded autonatically.

Scott.


vfoolish100 has taken a UFPLS payment from his SIPP of £1.00. Therefore £0.75 was subject to tax and he has a defined benefit pension that means he can only pay £4,000 into the SIPP from the date at the beginning of this current tax year.

Now Scott has advised vfoolish100 that if he is taxed on his larger UFPLS payment which would only happen if the payment is made between 6 March 2022 and 5 April 2022 as advised by vfoolish100 and the tax code vfoolish100 was given is on a week 1, month 1 basis. If that is the case and I do not think it is but if it is. Exactly how will this tax be automatically repaid as this is the last month of the 21 22 year and any payments taken from 6 April 2022 on will be processed in the 22 23 tax year and no automatic tax rebate for tax year 21 22 will be made.

swill453
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Re: Funding questions

#474604

Postby swill453 » January 19th, 2022, 11:05 pm

mearnsfool wrote:Exactly how will this tax be automatically repaid as this is the last month of the 21 22 year and any payments taken from 6 April 2022 on will be processed in the 22 23 tax year and no automatic tax rebate for tax year 21 22 will be made.

If vfoolish100 gets over-taxed via PAYE in the 21/22 tax year then HMRC will eventually work this out for themselves. Whether the tax will be refunded in cash or by modification of the 22/23 tax code I don't know.

Scott.

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Re: Funding questions

#474609

Postby mearnsfool » January 19th, 2022, 11:28 pm

The trick of winning £720 tax free a year from making a personal payment to your SIPP in total of £2,880 a year is getting a bit less easy to do unless you have a relatively small amount of money in your SIPP or a smaller state pension than the full new state pension.

In 2025 the personal tax allowance will still be £12,570 but the basis new state pension will be say £10,700 per year


Let’s take an example.

You are a few years from your state pension therefore the £3,600 with the tax relief added assists if you may be short of money in the SIPP and it could help to bridge the gap until your state pension starts.

If you will get the basic full new state pension and the personal allowance is frozen for 5 years it is reasonable to say that you can only take around £2,000 or so a year from the assumed £2,700 taxable value added to the SIPP unless you pay tax on it and you would be near 80 assuming you carry on contributing the £2,880 a year until 75 years of age, if the current rules last that long.

On the other hand, a lot of people will have some second state pension and SERPS and an amount nearer £10,500 at today’s pension rates may well be the state pension they receive. In this case they can only take say £1,300 per year from the taxable drawdown without paying tax and the extra money in the SIPP will take to say 90 to exhaust the extra funding.

Not saying if paying in £2,880 a year is good or bad but the recent freezing of personal allowances really has to be looked at before deciding if the payment of £2,880 a year from your retirement income until 75 suits you specifically.

vfoolish100
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Re: Funding questions

#475304

Postby vfoolish100 » January 22nd, 2022, 12:10 pm

Thanks for the replies.

Fingers crossed then that I shouldn't pay any tax - my intention is to take it around 15th March. If anyone is interested I will post back the actual result!

The £2880 is a nice bonus for the next few years but you are right that once i start paying tax on my DB pension it would become taxable, so I may stop doing it.

Cheers,
Mark

swill453
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Re: Funding questions

#475308

Postby swill453 » January 22nd, 2022, 12:28 pm

vfoolish100 wrote:The £2880 is a nice bonus for the next few years but you are right that once i start paying tax on my DB pension it would become taxable, so I may stop doing it.

The way I see it is that even if it's taxable it's a free gift of £180 for a few minutes admin per year.

(Basic rate tax saved on the 25% tax free element of the gross £3600 contribution).

Scott.

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Re: Funding questions

#475314

Postby mc2fool » January 22nd, 2022, 12:47 pm

swill453 wrote:
vfoolish100 wrote:The £2880 is a nice bonus for the next few years but you are right that once i start paying tax on my DB pension it would become taxable, so I may stop doing it.

The way I see it is that even if it's taxable it's a free gift of £180 for a few minutes admin per year.

(Basic rate tax saved on the 25% tax free element of the gross £3600 contribution).

Scott.

And it's £2880 you can move out of potential IHT.

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Re: Funding questions

#475363

Postby StayinAlive » January 22nd, 2022, 4:48 pm

Fingers crossed then that I shouldn't pay any tax - my intention is to take it around 15th March. If anyone is interested I will post back the actual result!


FWIW, I always take one UFPLS per year after March 6th (to fall into month 12) and get taxed correctly.
There is a useful little calculator that might help at http://payecalculator.hmrc.gov.uk/PAYE0.aspx
Make sure you enter "monthly" and "no" where asked and it should confirm the expected tax liability and,
as it's an HMRC site, it should be correct!

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Re: Funding questions

#475454

Postby mearnsfool » January 22nd, 2022, 10:58 pm

mc2fool wrote:
swill453 wrote:
vfoolish100 wrote:The £2880 is a nice bonus for the next few years but you are right that once i start paying tax on my DB pension it would become taxable, so I may stop doing it.

The way I see it is that even if it's taxable it's a free gift of £180 for a few minutes admin per year.

(Basic rate tax saved on the 25% tax free element of the gross £3600 contribution).

Scott.

And it's £2880 you can move out of potential IHT.


Agree for those that can do the numbers, calculate that it may only be £180 of a win per year after tax if the money is taxable at basic rate due to their specific income. Others that have spare money and in this other specific case it can add say 15 to 18 years of £2,880 to be taken by their family members or whoever either tax free if they die before 75 or at the receivers' current tax rate if they die after 75.

People need to do some thinking here.

vfoolish100
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Re: Funding questions

#475679

Postby vfoolish100 » January 24th, 2022, 10:02 am

Appreciate the further comments and that's an interesting calculator which clearly shows that month 12 begins after 6th march, thanks for posting the link.
Do you happen to know what "Pay adjustment" is?

Month Number: 12
Total pay to date: £12,570.00
Pay adjustment: £12,579.12


Mark

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Re: Funding questions

#475789

Postby StayinAlive » January 24th, 2022, 4:19 pm

No, I don't know what the pay adjustment figure is. For me, and for you by the looks of it, it is usually £9.12 more than my personal allowance. May be some sort of iteration. Perhaps someone brighter than me has an idea. As it leads to a slightly lower taxable pay, the calculated tax liability is also a couple of pounds out. But "good enough for Government works" as someone once said!


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