Transferring a Defined Benefit Pension PRACTICALITIES

[PinkDalek]

[Yes, with the pitiful interest rates of recent years we're talking small amounts, but by paying out of unsheltered funds (not the SIPP) I've lowered my tax bill, then and going forward.

You've also, potentially and dependent on your specific circs, saved your Estate some IHT.

[mc2fool]

[Yes, with the pitiful interest rates of recent years we're talking small amounts, but by paying out of unsheltered funds (not the SIPP) I've lowered my tax bill, then and going forward.

You've also, potentially and dependent on your specific circs, saved your Estate some IHT.

Yes indeed, very good point, I'd forgotten about that!

With IHT at 40% and even the highest marginal income tax on pension withdrawals (LTA effects excepted) less at 33.75% (45% of 75%) that makes it, ceteris paribus, a lot more common that ... well, people should figure out what's best for their own situation.

[anython]

If you withdraw it then you are potentially subject to income tax, but you are presenting this as an absolute and it isn't, each person needs to figure their own situation, including considering the bigger picture "further" point.

Okay, I get what you are saying and particularly agree with the last two clauses, but I think you are glossing over reality in the first clause.

If you withdraw it

Well unless we are just doing this for fun, then at some point we, or our beneficiaries, will ultimately withdraw.

potentially subject to income tax

Aside from being able to shield 25% of your pot from income tax, the rest will be treated as taxable income, certainly actually paying tax is avoidable if you ensure your annual income always stays within the personal allowance, but otherwise there will be tax to pay.

Cash or gains within your SIPP are not sheltered from tax the tax reckoning is only deferred to the point where you withdraw funds. Hence if you can pay expenses out of the yet to be taxed funds in your SIPP it is a benefit - or at worst neutral (if you will be keeping withdrawals within the personal allowance).

[scrumpyjack]

If you really want to save tax then make sure you die before hitting 75, then your heirs get your SIP tax free

[mc2fool]

If you withdraw it then you are potentially subject to income tax, but you are presenting this as an absolute and it isn't, each person needs to figure their own situation, including considering the bigger picture "further" point.

Okay, I get what you are saying and particularly agree with the last two clauses, but I think you are glossing over reality in the first clause.

If you withdraw it

Well unless we are just doing this for fun, then at some point we, or our beneficiaries, will ultimately withdraw.

potentially subject to income tax

Aside from being able to shield 25% of your pot from income tax, the rest will be treated as taxable income, certainly actually paying tax is avoidable if you ensure your annual income always stays within the personal allowance, but otherwise there will be tax to pay.

Not so, and far from "glossing over reality" I am reflecting my own and one that, while may not be very common, I know is far from unique, not even amongst members of these boards.

I expect/hope (fingers crossed) to never need to withdraw from my SIPP and I am leaving it to a well known charity. There will be no tax to pay, ever.

Cash or gains within your SIPP are not sheltered from tax the tax reckoning is only deferred to the point where you withdraw funds. Hence if you can pay expenses out of the yet to be taxed funds in your SIPP it is a benefit - or at worst neutral (if you will be keeping withdrawals within the personal allowance).

As shown, personal allowance is not the only way, but putting aside the likes of my case and scrumpyjack's suggestion (which folks can take under advisement ), and considering what I'm sure is a much more common situation, what about IHT?

You would prefer to (eventually, when you would have withdrawn it) save 20% tax on an amount within your SIPP and instead pay 40% IHT on the same amount outside it? That's hardly "at worst neutral"!

[Myfyr]

True, you are not (immediately) taxed on any gains with in your SIPP - but it you actually want to withdraw and spend those gains, they are subject to income tax.

So the point here is essentially that if you can pay the bill from funds within your SIPP, without that being deemed as withdrawing them (and been taxed) then it is certainly a benefit and this is true whether the effective marginal tax rate is 20% or 55%.

Money within your SIPP, whether it is gains or original capital (which potentially was sheltered as it went in). Is fully exposed to income tax.

If you withdraw it then you are potentially subject to income tax, but you are presenting this as an absolute and it isn't, each person needs to figure their own situation, including considering the bigger picture "further" point.

And you've not explained where you think the "benefit" would be in the example I gave. In fact I wasn't quite correct in saying, if you have, say, £5K in your building society savings account and, say, £100K in your SIPP, and you owe your IFA, say, £3K, there is no tax difference between paying the IFA fee from either.

There is in fact a tax difference in that by paying the fee from my building society account I lowered the amount of interest gained by the account and hence the tax on the interest, which I wouldn't have done if I'd paid the fee from the SIPP. Yes, with the pitiful interest rates of recent years we're talking small amounts, but by paying out of unsheltered funds (not the SIPP) I've lowered my tax bill, then and going forward.

You could pay £3,000 from your building society account.

Alternartively pay the £3,000 from the pension fund then take £2,400 from the building society and pay theis into the pension getting it grossed up to £3,000 by the tax relief.

You have £600 more in your pocket by using the second option, possibly more if you are a higher rate taxpayer and get a further £600 higher rate tax refund!

[mc2fool]

You could pay £3,000 from your building society account.

Alternartively pay the £3,000 from the pension fund then take £2,400 from the building society and pay theis into the pension getting it grossed up to £3,000 by the tax relief.

You have £600 more in your pocket by using the second option, possibly more if you are a higher rate taxpayer and get a further £600 higher rate tax refund!

But then (unless you're me, see my immediately prior post) you'd be taxed on the £3K when you withdrew it from the SIPP, which is what anython was trying to avoid.

(Although for a BRT it would be 20% of 75% of it, so actually your net end benefit is £150, not £600. HRT figures left as an exercise for the reader. )

And, even putting aside my prior post, if you are me you are already maxed out with SIPP (and ISA) contributions for the next quite-a-few years (at least) anyway!

[Myfyr]

You could pay £3,000 from your building society account.

Alternartively pay the £3,000 from the pension fund then take £2,400 from the building society and pay theis into the pension getting it grossed up to £3,000 by the tax relief.

You have £600 more in your pocket by using the second option, possibly more if you are a higher rate taxpayer and get a further £600 higher rate tax refund!

But then (unless you're me, see my immediately prior post) you'd be taxed on the £3K when you withdrew it from the SIPP, which is what anython was trying to avoid.

(Although for a BRT it would be 20% of 75% of it, so actually your net end benefit is £150, not £600. HRT figures left as an exercise for the reader. )

And, even putting aside my prior post, if you are me you are already maxed out with SIPP (and ISA) contributions for the next quite-a-few years (at least) anyway!

The £3k will come straight out to the adviser with no tax due, at least that was my view on adviser charging.

So pay direct costs of £3,000 or a lower £2,400 (maybe £1,800) if via the pension first.

Unless I am missing something in this thread that is, which is completely possible!

[mc2fool]

But then (unless you're me, see my immediately prior post) you'd be taxed on the £3K when you withdrew it from the SIPP, which is what anython was trying to avoid.

(Although for a BRT it would be 20% of 75% of it, so actually your net end benefit is £150, not £600. HRT figures left as an exercise for the reader. )

And, even putting aside my prior post, if you are me you are already maxed out with SIPP (and ISA) contributions for the next quite-a-few years (at least) anyway!

The £3k will come straight out to the adviser with no tax due, at least that was my view on adviser charging.

Yes, but you've replaced it with £2400 + £600 which will be taxed when you (eventually) withdraw it from the SIPP.

[Myfyr]

The £3k will come straight out to the adviser with no tax due, at least that was my view on adviser charging.

Yes, but you've replaced it with £2400 + £600 which will be taxed when you (eventually) withdraw it from the SIPP.

Then just let the advisor take the £3k from the pension. It is the equivalent of paying them £2,400 net (£1,800 for HRT) instead of £3,000 from the building society account.

We are either at cross purposes here or I am missing something?

[mc2fool]

Yes, but you've replaced it with £2400 + £600 which will be taxed when you (eventually) withdraw it from the SIPP.

Then just let the advisor take the £3k from the pension. It is the equivalent of paying them £2,400 net (£1,800 for HRT) instead of £3,000 from the building society account.

No, your original method is better, just by not as much as you said.

Start with £3000 in BS a/c and £3000 in SIPP (yes, you'll have more but it's just the £3K we're concerned about).

Lazy method: pay IFA from SIPP. Now £3000 in BS, £0 in SIPP. Nothing to eventually withdraw from SIPP so no tax. Eventually spend the £3000 in BS a/c instead on your favourite real ale.

Your 1st method: pay IFA from SIPP. Transfer £2400 from BS a/c to SIPP & get £600 from taxman. Now £600 in BS a/c and £3000 in SIPP. Eventually withdraw £3000 from SIPP, getting 25% tax free and paying 20% on the rest. £450 to taxman, £2550 net, added to the £600 in the BS a/c. Spend £3150 on your favourite real ale.

[2boi]

Wow I can't believe how long this dicusssion has gone on. It is better to pay any fees from the SIPP rather than your savings. If you can't grasp that you shouldn't be running a SIPP. It's so obvious I'm not going to argue it.

[dealtn]

Wow I can't believe how long this dicusssion has gone on. It is better to pay any fees from the SIPP rather than your savings. If you can't grasp that you shouldn't be running a SIPP. It's so obvious I'm not going to argue it.

Lasted as long as 4 days.

Yet, your contribution comes 77 days later to point that out!

[mc2fool]

Wow I can't believe how long this dicusssion has gone on. It is better to pay any fees from the SIPP rather than your savings. If you can't grasp that you shouldn't be running a SIPP. It's so obvious I'm not going to argue it.

Lasted as long as 4 days.

Yet, your contribution comes 77 days later to point that out!

Indeed, and, as a generalisation, incorrectly so too, as the only thing that's "obvious" is that Johnny-come-lately here hasn't read and/or understood all the nuances in the thread to discover the cases where it's not better.

Still, I'm sure HMRC will be happy for him to leave a greater amount in unsheltered savings that can be hit by 40% IHT when he pops his clogs and a lesser amount in his SIPP that will almost certainly be taxed at a lower rate.

As has been said before, this is one of those things that is quite individual case specific, and anyone that can't grasp that shouldn't be making "obvious" generalisations.....