Zero income tax

[expat]

You can pay zero tax legally in the UK. You pay yourself below the NI/income tax threshold then you put the rest of the ltd co income into a SIPP. Providing you are >50 years of age, you then pull 25% out of the SIPP as a tax free lump sum.

Simple.

Which still leaves 50% of your income in a fund that you can never spend

tim

No it doesn't. If you are over 50 (55 from 2010) then you can start to draw your "pension" from this SIPP. Technically as soon as you take a 25% lump sum out of it, you have started drawing a pension, but you can begin by withdrawing £0 per month.You can withdraw up to a calculated amount, roughly speaking 120% of what you could get from an annuity with the same capital.

Your pension is subject to Income Tax but not NI (you already got the tax-free bit on the way in), so most people will leave it until they stop contracting. Personally I don't expect that to be "never".

[tim123]

No it doesn't. If you are over 50 (55 from 2010) then you can start to draw your "pension" from this SIPP. Technically as soon as you take a 25% lump sum out of it, you have started drawing a pension, .

But you never, ever, get access to the capital.

All you get is the interest/growth from that capital and a small amount of the principle each year.

OK if you live to 90 you might just get all of it back, but ISTM putting 50% of your earnings at age 35 into a pension just on the off chance that you live to 90 is silly IMHO. Even if you do live to 90, the chances of you being mentally and physically able to enjoy the money is small. Personally, I'm going to spend my retirement savings whilst I'm fit enough to enjoy it and when I'm only capable of shuffling to the rest home's dining room for a game of bridge I'll live of what the government give me.

Comparing with an annuity is irrelevant, if you weren't going to use your savings to buy an annuity.

tim

[Ruprect]

...As the conversation bumbled along it became clear to me he had no idea how the scheme worked nor had he checked if his "take home" was in fact 82% of his gross billable.

Same here - how someone can have that much trust in an "accountant" without knowing the ins and outs of it is beyond me.

[moorfield]

But you never, ever, get access to the capital

Yes you cannot acces your capital directly, but the whole point of a pension is to provide an income innit?

If you are drawing an income that meets your needs in retirement then the capital value is irrelevant.

And with SIPPs you can avoid the annuity purchase, and therefore pass on the remaining pot to provide an income for your dependants when you peg it.

[tim123]

Yes you cannot acces your capital directly, but the whole point of a pension is to provide an income innit?

Correct. But the suggestion tht I am countering here is that it should be used as a tax saving device.

If you are drawing an income that meets your needs in retirement then the capital value is irrelevant.

And with SIPPs you can avoid the annuity purchase, and therefore pass on the remaining pot to provide an income for your dependants when you peg it.

No you can't. Even with a SIPP you still have to buy an annunity eventually.

tim

[expat]

Well, some figures may help. I wouldn't mind an accountant checking this, but ISTM that there are 2 ways to do this SIPP contribution (if you own the company).

1. Company contribution, net of all Income Tax and PAYE. And take out 25% as soon as you can (that's now, for me).
2. Get your salary net and stick it in a SIPP personally.

Assuming realistically in both cases that you are not putting it all in, just a part of your income that is all in the 40% tax band, I get:

In 1, 6000 net would be 11471 in the SIPP, take out 2868, leaving 8603 in the fund, to be paid out ultimately at basic rate tax, so 6883.
In 2, 6000 net would be 7500 in the SIPP, but also HRT relief of 2500 on your SA; and take out 1875, leaving 5625 in the fund, to be paid out ultimately at basic rate tax, so 4500.

Upshot? 2 ways of looking at it:

(A) total ultimate payout:
1 gets a total payout of 2868 + 6883 = 9751.
2 gets a total payout of 2500 + 1875 + 4500 = 8875.

(B) look at the net salary you are giving up to do this, i.e. 6000 - net short-term payout:
1 gives up 3132 cash and gets 6883 pension payout.
2 gives up 1625 cash and gets 4500 pension payout.

So the net gain over cash given up is 275% for 1, and 346% for 2.
My point here is: if you are driven to maximise your total payout including pension, go for Company SIPP contributions; but if you are stuck with a given amount of potential net salary that you can afford to put aside, go for personal SIPP contributions.

I would appreciate comments on that.

[KackAttack]

You can pay zero tax legally in the UK. You pay yourself below the NI/income tax threshold then you put the rest of the ltd co income into a SIPP. Providing you are >50 years of age, you then pull 25% out of the SIPP as a tax free lump sum.

I agree with this to a large extent. The main grey area as I see it is that you may not be entitled to pay > 100% of your low salary into your pension - depending upon how you (or IR) interpret the rules.

[expat]

I agree with this to a large extent. The main grey area as I see it is that you may not be entitled to pay > 100% of your low salary into your pension - depending upon how you (or IR) interpret the rules.

Is it not that you may not, but your company may?

[moorfield]

Even with a SIPP you still have to buy an annunity eventually.

tim

No, this is something not realised by many I think.

You can take an "alternatively secured pension" income at 75 rather than purchasing an annuity. The rules I think only allow you to take up to 90% equivalent income that an annuity would provide (hence encouraging you to take the annuity) but you retain ownership of your pot, not the lifeco giving you the annuity, and therefore can pass it to your beneficiaries upon death.

[expat]

No, this is something not realised by many I think.

You can take an "alternatively secured pension" income at 75 rather than purchasing an annuity. The rules I think only allow you to take up to 90% equivalent income that an annuity would provide (hence encouraging you to take the annuity) but you retain ownership of your pot, not the lifeco giving you the annuity, and therefore can pass it to your beneficiaries upon death.

Anyway I did an online life expectancy calculator and it gave me 75 as the end. So stuff the annuity!!!!