Reply to: Zero income tax

[ASB]

Due to hideously vague HMRC guidance it seems opinion is split on whether you can only match 100% of salary or go way, way beyond that - my accountant won't give a clear answer of what I should do, they just act like some kind of scared parrot (SJD btw)

Do a seach on salary sacrifice. Might be a way round. Basically pay yourself 100k and sacrifice 100k of salary for pension contributions.

[mailric]

Instead of these ridiculous schemes which will end you up in all sorts of trouble (search for TRM, Redding, AML), if you want to pay no tax then you might be better off just not declaring any income at all... and take the risk of being caught. Probably less risky than these schemes!

Otherwise, take it on the chin and pay up like the rest of us...

with a few deductions here and there, of course

[GreenerGrass]

At the moment I am only paying a relatively small amount into a SIPP through company contributions, but with a bigger bench fund in place and more of the mortgage paid off I will increase these to be equivalent to 100% of salary.

Due to hideously vague HMRC guidance it seems opinion is split on whether you can only match 100% of salary or go way, way beyond that - my accountant won't give a clear answer of what I should do, they just act like some kind of scared parrot (SJD btw).

But tim makes a good point about not being able to fully enjoy the money over a certain age, and having to live to 90 to claw everything back.
As such I will probably never pay in over 100% of salary (typically about 12k pa for many of us) even if allowed, and a 1k p/m contribution seems plenty given the uncertainty of ever being able to spend it all.
Maybe if you are near retirement, have paid off the mortgage, are not having to make sacrifices in other areas of life, and need to boost your pension pot then I can see the point in ploughing everything into a SIPP.

It definately seems worthwhile to build a big enough SIPP pot to give you an income of something like 10k pa after you have taken the 25% tax free lump sum, and boosting this with ISAs etc. and maybe BTL property so you also have investments where you can access 100% of the capital if required.
Also I want to start taking my pension at 55, not waiting to build it up ever higher until I am 75 and then dropping dead at 76. There is much you can do in your 50s that you can't in your 70s.

[Fred Bloggs]

I believe you can will the pension pot but it is subject to a penal tax rate, 84% IIRC. Something to do with a concession that was originally made for a religious sect called the Plymouth Brethren. Again, IIRC, they can't take annuities for some reason it's against their beliefs.

Something like that anyhow..............

[tim123]

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.

OK I have been and read the rules and they only allow you to transfer the pension payments to a dependent, not the capital.

tim

[Fred Bloggs]

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

What Moorfield said.

I believe that there are precedents now for putting almost all your company turnover in a SIPP. I'm sure an IFA effectively said this had effectively been given the OK by HMRC now.

[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!!!!

[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]

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?

[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]

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.

[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

[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.

[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.

[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