Living off pensions and paying salary in to a new SIPP

[IanVester]

Hi, in 2.5 years I will be receiving my final salary pension but can continue working. I am wondering if it would be tax efficient to pay some of my salary (say anything much over the 40% tax limit) into a new SIPP. This would mean that I can then take 25% of that money every few years tax free and place that pension into drawdown. If I want, I could then repeat the process.

Would this be a tax efficient way of arranging things?

[Alaric]

Hi, in 2.5 years I will be receiving my final salary pension but can continue working. I am wondering if it would be tax efficient to pay some of my salary (say anything much over the 40% tax limit) into a new SIPP.

I think you will find HMRC are aware of this wheeze and have various rules in place to limit the amount of contribution you can make to a second pension scheme once you are drawing benefits from a first.

https://www.gov.uk/tax-on-your-private- ... -allowance

The maximum you would be allowed to put in would be £ 10,000 a year. In some circumstances, it can reduce to £ 4,000 a year. The "no questions asked" amount is £ 3,600, which applies even without any income.

As to whether it's tax efficient, you get relief on the way in. It's beneficial when you have to pay tax on the way back out at a lower rate than the relief and the gain hasn't been eaten by charges.

[IanVester]

Crikey, I think I'm gonna have to read that tomorrow.

So if I have a final salary pension, I would only be able to invest a max of £10k a year tax free anyway?

[gadgetmind]

I'm not at all sure that's right. The rules as I understand it apply to taking more than tax free from a defined contribution pension and I see nothing about defined benefit ones. The (separate) recycling rules only apply to 25% tax free being stuck back into a pension so OP needs to confirm if that's part of the intention.

[gadgetmind]

Deferring the FS pension is also something to consider.

[IanVester]

No, I wouldn't be looking to put the 25% tax free lump sum back into a pension. I'm considering taking my final salary pension then enough salary to take me up to the 40% tax limit. If I could then pay the rest of my salary into a new pension claiming the 40% tax back, I would seriously consider that. Delaying FS pension isn't something I've looked at either but I'm not that old yet

My partner only works part time so I would also consider having my FS pension paid to her but I don't think I can do that (although she will get 50% after I peg out)

[mearnsfool]

Talk to your existing employer and if they allow you to treat their AVC pension and the FS pension as the same pot as my employer did.

You can put all your salary that would attract 40% tax into their AVC pension and then when you can take your FS pension it works like this.

Say the FS pension is £20k a year. HMRC multiply this annual pension 20 to calculate the capital value of that pot in this case £400k. In most cases a FS pension will be towards index linked therefore you may not want to commute any money if that is a poor deal

If the FS value is £400k that in theory becomes 75% of the pension pot therefore you can put up to another £133k of AVC's in there so total value £533k 25% tax free £133k. Now if you only have a few years left you cannot reach the £133k in your but what you can do is take all the AVC pension tax free that is what I did some years ago.

[IanVester]

My FS pension is with a different employer