Continuing contributions after benefits taken

[CryptoPlankton]

I didn't want to hijack zico's similar thread so I am posting this separately.

If someone is capital rich, taxable income poor (no income other than tax-sheltered dividends, unsheltered dividends < 2K, interest of no more than £3k-4k and modest "miscellaneous") and has a SIPP, which of the following are acceptable:

1) They could take a lump sum, drawdown to just below the Personal Allowance and still gain £720 per year by adding £2880 to the same (or, if not, another) pension?

2) They could do the above if they didn't take the lump sum?

3) They could use UFPLS to withdraw to greater than the Personal Allowance (exact amount depending on other income) and still gain £720 the same way?

Or am I just way off the mark?!

TIA, CP

[swill453]

As long as you remain a non taxpayer, including any taxable drawdown you make, you can do it any way you like.

Scott.

[mearnsfool]

You are suggesting that the person can afford put in £2,880 a year to a pension even if they do not drawdown cash from their SIPP to re fill their ready cash pot.

I am wondering unless they want to put a relatively small amounts of extra money in the SIPP and even over 10 years that is only £28,800 to protect it from inheritance tax and they will not be able to remove that sum say of £28,800 after 10 years as a lump sum without paying 20% tax therefore losing a chunk of the £2,880 a year tax relief they gained in the way in.

What is their reason for doing this other than a small amount of Inheritance Tax Planning.

This seems a good option for someone who has only a taxable income of say £8,000 a year and can withdraw the full £3,600 after adding on tax relief and they are neither capital or income rich but have enough capital to allow them to do the £2,880 annual premium.

[CryptoPlankton]

You are suggesting that the person can afford put in £2,880 a year to a pension even if they do not drawdown cash from their SIPP to re fill their ready cash pot.

Erm, I might be, but anyway...

I am wondering unless they want to put a relatively small amounts of extra money in the SIPP and even over 10 years that is only £28,800 to protect it from inheritance tax and they will not be able to remove that sum say of £28,800 after 10 years as a lump sum without paying 20% tax therefore losing a chunk of the £2,880 a year tax relief they gained in the way in.

What is their reason for doing this other than a small amount of Inheritance Tax Planning.

Simply, to add £3600 a year to their modest pension pot at a cost of £2880 while beginning to draw down a modest amount of the pension itself, keeping their total taxable income below the Personal Allowance and thereby profiting by £720.

This seems a good option for someone who has only a taxable income of say £8,000 a year and can withdraw the full £3,600 after adding on tax relief and they are neither capital or income rich but have enough capital to allow them to do the £2,880 annual premium.

Okay, so does it seem like a good option for this (hypothetical!) someone:

Considerable tax sheltered capital, dividends and interest (ISAs, out of the equation...)
Two properties (also out of the equation)
SIPP pot = £100k
Unsheltered capital = £200k
Unearned income (rent) = £6k
Unsheltered dividends = £2k
Taxable interest = £3k

1) Assuming that from next year the Personal Allowance is £12k, can they draw down £6k from their SIPP each year (thereby avoiding Income Tax altogether) and add £2880 to it to effectively make £720 tax free? The plan would be to also subscribe the full ISA allowance each year. When (if?!) the State Pension kicks in, they would effectively replace the rental income with it by selling the property generating it and then continue as before.

2) If this is acceptable, can the same be done after taking a 25% tax free lump sum from the SIPP?

3) Could they take £8k UFPLS each year instead (£2k tax free so still not exceeding the Personal Allowance)?

It's really just about whether someone with those circumstances can play the system to get an extra £720 per year out of taxpayers' money...

[swill453]

Asked and answered already I think.

Scott.

[CryptoPlankton]

Asked and answered already I think.

Scott.

Indeed and thank you once again

(Was really trying to understand what mearnsfool was getting at...)

[mearnsfool]

You did not give enough detail in the previous posts.

I have gone through a few friends numbers to see if they can do the £2,880 in and £3,600 out procedure without paying basic rate tax mainly women with a partner who has an occupational pension.

The partner cannot get the full £720 prize tax free as they have to pay tax to get the £2,880 out the pension pot without leaving it in for a good number of years until their SIPP exhausts its value or their occupational pension is a final salary one.

Basically people who have started the state pension this year without big SIPP values or occupational pension.

The problem with them all was that the new state pension plus say a £30k to £40k SIPP in reasonable drawdown was getting them near to the personal allowance and they could not get much of the £2,880 in out without paying tax at the basic rate. They wanted to enjoy spending money in retirement.

You have not advised when the possible peoples state pension will start.

You are appearing to suffer the same daftness as me at times by doing everything not to pay tax and to an extent not getting on with life as the tax relief sounds as if it is the most important thing in your goals.

At the end of the day they have a SIPP to spend before they die.

If we take their rental income that is £6k so that leaves a spare £6k in their personal allownace to play with.

The interest and unprotected income will look after itself.

It will take 16 years to drawdown their SIPP of £100k at £6k a year.

Now you are putting £2,800 a year into the SIPP that comes out as 75% of the gross £3,600 basically £2,700 until they are 70. Assume they are 55 now.

Therefore it they will only be able to draw down £12k less £2.7k from the SIPP as you put that money in every year, therefore that £100k SIPP now takes longer to draw down and that maybe will be after they pop their cloggs.


Only you no the full details, do your numbers but do not let the tax relief tail wag the dog.

Life is for living.