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Sipp or NEST for 1 year

busybee
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Sipp or NEST for 1 year

#113250

Postby busybee » January 25th, 2018, 11:38 am

My chum Jean retired at the beginning of April 2017 after working for the NHS for 45 years. She is now receiving her Occupational Pension. She has returned to work for the NHS with the same Trust part-time (18.75hr per week as opposed to 37 hours week) since end of Aug 2017. This part-time work finishes end of Aug 2018.

What are the pros and cons of contributing to a SIPP and NEST for the short term? Jean would like to take advantage of the tax relief of pension contribution and intends to make a the maximun amount which she is allowed.

Jean has a small pot of SIPP with AJ Bell and intends to amalgate her pension contributions all in 1 pot when she is fully retired.

Thanks in advance.
Busybee

Alaric
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Re: Sipp or NEST for 1 year

#113260

Postby Alaric » January 25th, 2018, 11:53 am

busybee wrote:What are the pros and cons of contributing to a SIPP and NEST for the short term? Jean would like to take advantage of the tax relief of pension contribution and intends to make a the maximun amount which she is allowed.


You've probably said it, the tax relief on contributions assuming the earnings are not required for immediate spending. I would have thought it SIPP or NEST rather than both, but perhaps NEST is compulsory.

busybee wrote:Jean has a small pot of SIPP with AJ Bell and intends to amalgate her pension contributions all in 1 pot when she is fully retired.


I doubt you would be allowed to transfer an NHS pension in payment to a SIPP and what are the rules for transferring NEST?

busybee
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Re: Sipp or NEST for 1 year

#113272

Postby busybee » January 25th, 2018, 12:11 pm

hello Alaric,

Jean is not transferring her NHS pension into a SIPP. She is currently taking her NHS pension. She is also aware that it is either SIPP or NEST and was wondering which would be her better option as it is only for a short term.

NEST is not compulsory for her as she has already got a full NHS pension pot.

Thanks,
Busybee

Alaric
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Re: Sipp or NEST for 1 year

#113285

Postby Alaric » January 25th, 2018, 12:36 pm

busybee wrote:She is also aware that it is either SIPP or NEST and was wondering which would be her better option as it is only for a short term.


Adding to the existing SIPP would have the advantage of not needing to go through a transfer process. Otherwise wouldn't it just be down to the respective levels of fees and investment choices?

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Re: Sipp or NEST for 1 year

#113539

Postby DrBunsenHoneydew » January 26th, 2018, 6:16 pm

busybee wrote:hello Alaric,

Jean is not transferring her NHS pension into a SIPP. She is currently taking her NHS pension. She is also aware that it is either SIPP or NEST and was wondering which would be her better option as it is only for a short term.

NEST is not compulsory for her as she has already got a full NHS pension pot.

Thanks,
Busybee

If she joins NEST she will get the bonus of employer contributions.
If under State Pension Age she will be auto enrolled in NEST and needs to opt out if she doesn't want it.
If older than her SPA, she can still ask to join NEST to get the employer contributions.

Alaric
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Re: Sipp or NEST for 1 year

#113542

Postby Alaric » January 26th, 2018, 6:26 pm

DrBunsenHoneydew wrote:If she joins NEST she will get the bonus of employer contributions.


If the rules work that you get the benefit of employer contributions in NEST but not in a SIPP, that would seem to tilt the decision in favour of NEST.

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Re: Sipp or NEST for 1 year

#113552

Postby Chrysalis » January 26th, 2018, 6:41 pm

I agree with Alaric. Get the free contributions. Pulling it over into the SIPP after the work finishes shouldn’t be too difficult - but just check the costs from the SIPP provider to make sure it is worthwhile in relation to the contributions.

busybee
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Re: Sipp or NEST for 1 year

#114215

Postby busybee » January 30th, 2018, 11:29 am

Jean has read through the T&Cs of NEST. It has a contribution charge of 1.8% and an annual management charge of 0.3% . Jean's employer (NHS Trust) will contribute 1% (2017/18) and 2% (from April 2018). Given the charges, is it more straightforward for Jean to make her pension contribution for 2017/8 into a SIPP (with AJ Bell) instead of setting up NEST?

Jean is drawing her Occupational Pension (NHS) and being on a final salary pension did get a lump sum on retirement. How much pension can she contribute a year into her SiPPs without infringing the rules.

Thanks once again.
busybee

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Re: Sipp or NEST for 1 year

#114230

Postby pochisoldi » January 30th, 2018, 12:46 pm

busybee wrote:Jean has read through the T&Cs of NEST. It has a contribution charge of 1.8% and an annual management charge of 0.3% . Jean's employer (NHS Trust) will contribute 1% (2017/18) and 2% (from April 2018). Given the charges, is it more straightforward for Jean to make her pension contribution for 2017/8 into a SIPP (with AJ Bell) instead of setting up NEST?


The charges are X percent of the contribution (for the contribution charge), or X percent of the pot (AMC), not X percent of gross earnings.

Or put another way, until April 2018, the NEST account has (100% - 1.8%) of 2% of earnings going into it.

Put simply for every £1 of gross pay contributed to the NEST pension pot, £1.964 gets invested.

If you put £1 gross in a SIPP, you would have no more than £1 to invest.

My rules - if someone wants to put money in my pension pot, I'll sign up straightaway.

PochiSoldi

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Re: Sipp or NEST for 1 year

#114235

Postby melonfool » January 30th, 2018, 12:55 pm

busybee wrote:Jean has read through the T&Cs of NEST. It has a contribution charge of 1.8% and an annual management charge of 0.3% . Jean's employer (NHS Trust) will contribute 1% (2017/18) and 2% (from April 2018). Given the charges, is it more straightforward for Jean to make her pension contribution for 2017/8 into a SIPP (with AJ Bell) instead of setting up NEST?

Jean is drawing her Occupational Pension (NHS) and being on a final salary pension did get a lump sum on retirement. How much pension can she contribute a year into her SiPPs without infringing the rules.

Thanks once again.
busybee


The SIPP will have charges too and, depending what she invests in within the SIPP, there will also be management charges in there but they may be harder to find.

She will still benefit more from the employer contribution than she could guarantee growth on her own investment choices - remember the 1.8% is 1.8% *of* the 1% (if she contributes nothing).

If she's unsure, she can have both can't she?

She allows the employer to set up the NEST and they pay their contribution into it, she pays only whatever is the min she needs to pay for it to be set up. She can also pay into the SIPP.
If the NEST is set up as 'salary sacrifice', then it's a better deal than paying into a SIPP as while the SIPP is tax-free, the sal sac is also NI-free, which is the only way to avoid NI, so she needs to ask about that.

As for how much she can pay into pensions (tax free) - it's £40k pa, or your earnings for the tax year, whatever is higher, but you can also use unused allowances from up to three years in the past (she'll need to look at what she paid in the last three years).

Re tax - unless she is a higher rate tax payer (unlikely?) then she's not really likely to be saving much overall as she will pay tax on her pension when she draws it.

To me, in this situation, the only driver is getting and maximising the employer contribution and any NI saving if it is salary sacrifice (my employer also donates back 50% of their sal sac saving, so adds another 6% of my pension contribution into my scheme).

Mel

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Re: Sipp or NEST for 1 year

#114236

Postby Alaric » January 30th, 2018, 1:00 pm

melonfool wrote:As for how much she can pay into pensions (tax free) - it's £40k pa, or your earnings for the tax year, whatever is higher, but you can also use unused allowances from up to three years in the past (she'll need to look at what she paid in the last three years).


As she has already "retired" and taken benefits from the NHS scheme, isn't the amount that can be put in seriously restricted? The figure of £ 4000 a year comes to mind, which is not that much more than the £ 3600 gross, that everyone has regardless of their working or pensioner status.

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Re: Sipp or NEST for 1 year

#114237

Postby melonfool » January 30th, 2018, 1:04 pm

Alaric wrote:
melonfool wrote:As for how much she can pay into pensions (tax free) - it's £40k pa, or your earnings for the tax year, whatever is higher, but you can also use unused allowances from up to three years in the past (she'll need to look at what she paid in the last three years).


As she has already "retired" and taken benefits from the NHS scheme, isn't the amount that can be put in seriously restricted? The figure of £ 4000 a year comes to mind, which is not that much more than the £ 3600 gross, that everyone has regardless of their working or pensioner status.


I thought that restriction (yes, it's £4k, from April I think, £10k currently) was only if you had taken benefits from a money-purchase type scheme?

I'll check...

Mel

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Re: Sipp or NEST for 1 year

#114238

Postby ursaminortaur » January 30th, 2018, 1:04 pm

busybee wrote:Jean has read through the T&Cs of NEST. It has a contribution charge of 1.8% and an annual management charge of 0.3% . Jean's employer (NHS Trust) will contribute 1% (2017/18) and 2% (from April 2018). Given the charges, is it more straightforward for Jean to make her pension contribution for 2017/8 into a SIPP (with AJ Bell) instead of setting up NEST?

Jean is drawing her Occupational Pension (NHS) and being on a final salary pension did get a lump sum on retirement. How much pension can she contribute a year into her SiPPs without infringing the rules.

Thanks once again.
busybee


The reduction in annual allowance for DC pension contributions only applies if you take more than the tax free lump sum out of a money purchase pension in drawdown. Hence if Jean doesn't have a pension in drawdown but just a pension from the NHS DB scheme then her annual allowance should still be £40,000. Pensions do not count as relevant earnings so assuming her salary for 2017/18 is less than £40,000 then the maximum gross contribution she could make to her SIPP would be her entire salary.

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Re: Sipp or NEST for 1 year

#114239

Postby melonfool » January 30th, 2018, 1:07 pm

Yes, that restriction is only if you have taken a money purchase type of pension:

https://www.pensionsadvisoryservice.org ... -allowance

"The Money Purchase Annual Allowance was introduced on 6th April 2015 and was set at £10,000 gross p.a. The government has now reduced the MPAA to £4,000 gross p.a. which applies to contributions made from 6th April 2017."

It says here it is the £4kpa, though I really thought that had been postponed until April 2018, but I'm not 100% sure.

As far as I know, there is no similar restriction on taking a final salary/defined benefit pension.

Mel

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Re: Sipp or NEST for 1 year

#114240

Postby melonfool » January 30th, 2018, 1:08 pm

ursaminortaur wrote:
Pensions do not count as relevant earnings so assuming her salary for 2017/18 is less than £40,000 then the maximum gross contribution she could make to her SIPP would be her entire salary.


And the clawback of previous years unpaid allowance? I mean, I doubt she wants to pay in more than £40k but even so....?

Mel

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Re: Sipp or NEST for 1 year

#114243

Postby ursaminortaur » January 30th, 2018, 1:23 pm

melonfool wrote:
ursaminortaur wrote:
Pensions do not count as relevant earnings so assuming her salary for 2017/18 is less than £40,000 then the maximum gross contribution she could make to her SIPP would be her entire salary.


And the clawback of previous years unpaid allowance? I mean, I doubt she wants to pay in more than £40k but even so....?

Mel


Yes in the event that her salary is more than £40,000 she could make use of the carry-forward rules to use up any unused annual allowances from the previous 3 years. The maximum though would still be her salary for the 2017/18 year or the maximum of the annual allowance + previous 3 years unused annual allowances whichever is smaller. And just for completion if she was really earning a lot she would have to look out for the tapering of the annual allowance https://www.aegon.co.uk/support/faq/adviser-technical/adviser-technical/pensions/tax-allowances/What-is-tapered-annual-allowance.html

There is one other potential complication. Since she has taken a tax free lump sum she might also be restricted by the recycling rules

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

If the tax-free lump sum was less than £7500 or she doesn't contribute more than 30% of the tax free lump sum or increase her contributions to the SIPP by more than 30% she would be OK.


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