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Pension contributions for non-earners

hiriskpaul
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Pension contributions for non-earners

#356457

Postby hiriskpaul » November 14th, 2020, 11:45 am

I have a friend with no earnings who is contributing £3600 per year to a pension. She would like to contribute more than this to obtain inheritance tax benefits. As far as I am aware this is fine isn't it? You can contribute what you want to a pension but if you exceed your Personal Annual Allowance you don't get tax relief on the excess.

Assuming I am right about a non-earner being able to contribute more than £3600 to a pension, how would this work in practice? Let's say she exceeded her £3600 annual allowance by £10,000, paying £10,880 net into her pension with the pension provider claiming tax relief to take this to £13,600 gross. This would mean receiving £2,000 too much tax relief. I thought the way the excess tax relief was repaid to HMRC was through self assessment, with the gross excess amount added to income. But in this case the £10,000 contribution in excess of her personal annual allowance would still fit within her income tax personal allowance, so she would not be taxed. Or would HMRC apply some special rule here in self assessment and ask for the £2,000 back?

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Re: Pension contributions for non-earners

#356462

Postby swill453 » November 14th, 2020, 11:55 am

My SIPP provider asks what my annual income is if I try to pay in more than £2880 (before tax relief).

I presume this means there won't be any excess tax relief claimed from HMRC.

Scott.

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Re: Pension contributions for non-earners

#356465

Postby tikunetih » November 14th, 2020, 12:20 pm

I think that if you make contributions in excess of the greater of £3,600 / 100% of relevant UK earnings, receiving tax relief that is not actually due to you, then you should either deal with it via self-assessment and/or inform your scheme administrator so that they can return the excess tax relief to HMRC, and more than likely refund your excess contributions to you since as I understand it most schemes have a policy not to accept excess "non-relievable" contributions.

If you were intentionally planning to make excess "non-relievable" contributions then you'd be sensible to discuss this intention with your scheme provider prior to doing it, to see that they were onboard and so that they avoided claiming excess relief. My guess is that you'd struggle to find someone, but you never know.

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Re: Pension contributions for non-earners

#356472

Postby Arborbridge » November 14th, 2020, 12:59 pm

I did this accidentally one year, through ignorance. My broker claimed the tax relief, and it took quite some effort for them to sort it out when I realised what had happened.

My advice is not to do it: too much of a muddle. How about putting the excess amount in an ISA? There's not much benefit in a SIPP if there is no income tax relief, as one has to pay tax on the way out, downstream. No such problem with an ISA.

Arb.

hiriskpaul
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Re: Pension contributions for non-earners

#356474

Postby hiriskpaul » November 14th, 2020, 1:07 pm

swill453 wrote:My SIPP provider asks what my annual income is if I try to pay in more than £2880 (before tax relief).

I presume this means there won't be any excess tax relief claimed from HMRC.

Scott.

That's interesting. I have just checked the Vanguard SIPP which I look after for a disabled relative and they simply state "It is your responsibility to ensure that the payment you are making will not exceed your maximum annual allowance.". I will ask Vanguard what happens if more than the annual allowance is paid in.

hiriskpaul
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Re: Pension contributions for non-earners

#356475

Postby hiriskpaul » November 14th, 2020, 1:10 pm

Arborbridge wrote:I did this accidentally one year, through ignorance. My broker claimed the tax relief, and it took quite some effort for them to sort it out when I realised what had happened.

My advice is not to do it: too much of a muddle. How about putting the excess amount in an ISA? There's not much benefit in a SIPP if there is no income tax relief, as one has to pay tax on the way out, downstream. No such problem with an ISA.

Arb.

I suspect she already maxes out her ISA - she is fairly wealthy. She does not expect to need to draw on her pension, just using it as an IHT avoidance vehicle, which ISAs are not.

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Re: Pension contributions for non-earners

#356480

Postby hiriskpaul » November 14th, 2020, 1:17 pm

tikunetih wrote:I think that if you make contributions in excess of the greater of £3,600 / 100% of relevant UK earnings, receiving tax relief that is not actually due to you, then you should either deal with it via self-assessment and/or inform your scheme administrator so that they can return the excess tax relief to HMRC, and more than likely refund your excess contributions to you since as I understand it most schemes have a policy not to accept excess "non-relievable" contributions.

If you were intentionally planning to make excess "non-relievable" contributions then you'd be sensible to discuss this intention with your scheme provider prior to doing it, to see that they were onboard and so that they avoided claiming excess relief. My guess is that you'd struggle to find someone, but you never know.

Someone may have more than one DC pension scheme. If contributing to more than one, how would a scheme administrator determine that a "non-relievable" contribution would be made to their plan?

This is an interesting point though and I don't know who her pension plan provider is or what their policy on this might be.

It must be possible to over contribute though as I know a couple of people with vast DC pensions (many millions) that were contributed to by their employers, with annual contributions much greater than their annual allowances.

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Re: Pension contributions for non-earners

#356507

Postby PinkDalek » November 14th, 2020, 2:52 pm

hiriskpaul wrote:[She does not expect to need to draw on her pension, just using it as an IHT avoidance vehicle, which ISAs are not.


I’ve seen that written a few times recently on TLF, maybe by you.

Whilst not disagreeing on your point re SIPPs, as my SIPP contributions are at the minimum, I attempt to use my ISA as a potential IHT saving device. That’s assuming BPR is not abandoned (no need to discuss on here, much has been said elsewhere on this possibility). Mind you, in recent years I’ve probably lost enough of my gains at AIM to cancel out about half of the potential IHT saving (not that I bother with spreadsheets etc to prove the point).

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Re: Pension contributions for non-earners

#356528

Postby tikunetih » November 14th, 2020, 3:26 pm

hiriskpaul wrote:Someone may have more than one DC pension scheme. If contributing to more than one, how would a scheme administrator determine that a "non-relievable" contribution would be made to their plan?


Presumably because you'd inform them that your contributions were in excess of your earnings/3.6k and therefore not all eligible for relief. I suppose you'd have to determine which administrator(s) you wanted your eligible relief to be credited with and tell the other(s) that some or all of those contributions were ineligible and then it'd be "over to them" as to how to proceed: whether just to ensure they returned any excess relief to HMRC and depending on the scheme's policy whether they decided to actually return to you your contribution that led to the excess relief.

I think for your friend it'd be a question of talking to their scheme(s), explain to them their intention to contribute in excess of earnings/3.6k and find out what each scheme's policies are: are they OK with it and will just ensure the relief credited is correct, or will they not be happy and wish to return contributions thereby defeating your friend's objective.

In your friend's shoes, all routes would lead me to talk to the scheme(s) as a first step.

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Re: Pension contributions for non-earners

#356570

Postby hiriskpaul » November 14th, 2020, 5:50 pm

Arborbridge wrote:I did this accidentally one year, through ignorance. My broker claimed the tax relief, and it took quite some effort for them to sort it out when I realised what had happened.

My advice is not to do it: too much of a muddle. How about putting the excess amount in an ISA? There's not much benefit in a SIPP if there is no income tax relief, as one has to pay tax on the way out, downstream. No such problem with an ISA.

Arb.

How was this resolved? eg was the pension contribution repaid to you and tax relief to HMRC? Or was it a matter of you paying the pension contribution back to HMRC?

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Re: Pension contributions for non-earners

#356571

Postby hiriskpaul » November 14th, 2020, 5:51 pm

PinkDalek wrote:
hiriskpaul wrote:[She does not expect to need to draw on her pension, just using it as an IHT avoidance vehicle, which ISAs are not.


I’ve seen that written a few times recently on TLF, maybe by you.

Whilst not disagreeing on your point re SIPPs, as my SIPP contributions are at the minimum, I attempt to use my ISA as a potential IHT saving device. That’s assuming BPR is not abandoned (no need to discuss on here, much has been said elsewhere on this possibility). Mind you, in recent years I’ve probably lost enough of my gains at AIM to cancel out about half of the potential IHT saving (not that I bother with spreadsheets etc to prove the point).

Good point.

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Re: Pension contributions for non-earners

#356573

Postby Arborbridge » November 14th, 2020, 5:57 pm

hiriskpaul wrote:
Arborbridge wrote:I did this accidentally one year, through ignorance. My broker claimed the tax relief, and it took quite some effort for them to sort it out when I realised what had happened.

My advice is not to do it: too much of a muddle. How about putting the excess amount in an ISA? There's not much benefit in a SIPP if there is no income tax relief, as one has to pay tax on the way out, downstream. No such problem with an ISA.

Arb.

How was this resolved? eg was the pension contribution repaid to you and tax relief to HMRC? Or was it a matter of you paying the pension contribution back to HMRC?


I don't remember the details. I remember it took many weeks and was resolved between A J Bell and HMRC. They must have sent back my contribution eventually leaving it back to where it should have been - £3600 gross contribution.

Unfortunately, time have run out for me: as I understand it, I'm considered too old now at 75 to make any more contributions.

Arb.

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Re: Pension contributions for non-earners

#356575

Postby hiriskpaul » November 14th, 2020, 6:00 pm

tikunetih wrote:
hiriskpaul wrote:Someone may have more than one DC pension scheme. If contributing to more than one, how would a scheme administrator determine that a "non-relievable" contribution would be made to their plan?


Presumably because you'd inform them that your contributions were in excess of your earnings/3.6k and therefore not all eligible for relief. I suppose you'd have to determine which administrator(s) you wanted your eligible relief to be credited with and tell the other(s) that some or all of those contributions were ineligible and then it'd be "over to them" as to how to proceed: whether just to ensure they returned any excess relief to HMRC and depending on the scheme's policy whether they decided to actually return to you your contribution that led to the excess relief.

I think for your friend it'd be a question of talking to their scheme(s), explain to them their intention to contribute in excess of earnings/3.6k and find out what each scheme's policies are: are they OK with it and will just ensure the relief credited is correct, or will they not be happy and wish to return contributions thereby defeating your friend's objective.

In your friend's shoes, all routes would lead me to talk to the scheme(s) as a first step.

Yes, this does not seem to be a straightforward yes/no issue and the policy may well vary with product providers and pension administrators. What might be fine for administrators of company pension schemes receiving large contributions for company executives may not be fine for retail SIPP or stakeholder pension schemes.

I have my doubts over the merits of this proposal anyway, compared with other ways of reducing IHT such as through outright gifts. I might suggest some other options, such as AIM companies to her as well.

I will ask Hargreaves Lansdown and Vanguard what their policies are on this.

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Re: Pension contributions for non-earners

#357395

Postby hiriskpaul » November 17th, 2020, 2:36 pm

I have had some interesting feedback on this from HL and Vanguard. HL have said they can accept pension payments in excess of the personal allowance (non-relievable). This can be done over the phone and you simply state it is a gross contribution and that tax relief should not be claimed.

Vanguard do not have the option to do this. They claim tax relief on all personal contributions so it would be necessary to inform HMRC about excess payments and to repay it. They don't appear to have a problem with anyone overpaying though (I have asked for confirmation of this).

HMRX notification can be done through the Additional Information pages of the SA return (page 4, box 10). There will then be an annual allowance charge. These tax pages call contain more details (section 5): https://www.gov.uk/government/publicati ... arges-2020

So this looks doable and acceptable with some pension providers. The desirability of making contributions in excess of the annual allowance is questionable though. 40% Inheritance tax can be avoided, but beneficiaries may still end up paying income tax when drawing the money from the inherited pension fund.

I guess if someone had some terminal illness so that they are unlikely to live more than 7 years, then this might be a worthwhile thing to do as money paid into a pension fund should be instantly removed from someone's estate, unlike with gifts. Unless the HMRC are wise to this and have plugged it as an IHT avoidance strategy!

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Re: Pension contributions for non-earners

#357437

Postby mc2fool » November 17th, 2020, 5:32 pm

hiriskpaul wrote:HMRX notification can be done through the Additional Information pages of the SA return (page 4, box 10). There will then be an annual allowance charge.....

FYI, there seems to be a "Scheme Pays" system, both mandatory and voluntary, under which the annual allowance charge can be paid out of the SIPP.

https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_scheme_pays.pdf

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Re: Pension contributions for non-earners

#357450

Postby hiriskpaul » November 17th, 2020, 6:17 pm

hiriskpaul wrote:I guess if someone had some terminal illness so that they are unlikely to live more than 7 years, then this might be a worthwhile thing to do as money paid into a pension fund should be instantly removed from someone's estate, unlike with gifts. Unless the HMRC are wise to this and have plugged it as an IHT avoidance strategy!

I actually I think there are rules about that sort of thing and I know the IHT forms require details of any contributions to pension schemes in the 2 years before death. I think if you make contributions to a pension scheme solely to avoid IHT, then the HMRC consider a transfer of value to have taken place and will include the contributions in the IHT calculation. Something like that anyway.


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