Pensions taxed at 40%

[was8v]

Mum is very lucky and has unbelievable pensions: State, Final Salary pension, half of my deceased dads final salary pension.

This year nudges her into 40% income tax rate. She wasn't fussed about losing winter fuel allowance.

I set her up a SIPP to put in £200/mo to take her under the 40% threshold. I figured her estate is valued as Pensions+ISAs+other assets. If the money goes to pension she saves paying £80/mo tax. She's unlikely to ever draw the SIPP unless she needs expensive care, in which case happy to pay the income tax at that point. When she dies therefore the estate will be worth £80 a month more this way.

She is now over 75, now can't make pension contributions! Seems ageist, she might live for 25 years+ yet!

So now shes got to pay 40% tax on that money and then her estate will pay IHT on the money again, instead of pre age 75 situation of no income tax and then SIPP will be liable to IHT.

I'm guessing theres no way to keep the money in the pension and never have it paid out in the first place given the nature of State and FS schemes?

[Rufus Stone]

was8v said:

Mum is very lucky and has unbelievable pensions: State, Final Salary pension, half of my deceased dads final salary pension.

This year nudges her into 40% income tax rate. She wasn't fussed about losing winter fuel allowance.

I set her up a SIPP to put in £200/mo to take her under the 40% threshold. I figured her estate is valued as Pensions+ISAs+other assets. If the money goes to pension she saves paying £80/mo tax. She's unlikely to ever draw the SIPP unless she needs expensive care, in which case happy to pay the income tax at that point. When she dies therefore the estate will be worth £80 a month more this way.

She is now over 75, now can't make pension contributions! Seems ageist, she might live for 25 years+ yet!

So now shes got to pay 40% tax on that money and then her estate will pay IHT on the money again, instead of pre age 75 situation of no income tax and then SIPP will be liable to IHT.

I'm guessing theres no way to keep the money in the pension and never have it paid out in the first place given the nature of State and FS schemes?

She has no net relevant earnings to base the pension contributions on, so I'm surprised you claim she received higher rate tax relief. Did she file a tax return to claim it?

The SIPP provider accepted it because it was less than £2880 pa, and were allowed to reclaim up to £720 in tax relief.

[modeller]

EIS investments ? 30% tax relief.

[nick_grice]

What about paying in to children’s or grandchildren’s pensions. Whilst she won’t see any tax saving, the children or grandchildren will receive tax relief at 20% when going in so would net 20% tax to HMRC although not in her pocket.

Plus the pension for the children or grandchildren won’t form part of their estate and they cannot touch it until they retire.

[was8v]

Rufus Stone said:

She has no net relevant earnings to base the pension contributions on, so I'm surprised you claim she received higher rate tax relief. Did she file a tax return to claim it?

The SIPP provider accepted it because it was less than £2880 pa, and were allowed to reclaim up to £720 in tax relief.

No tax return as I only set it up just before she turned 75 in April, which coincided with when her pension took her over the 40% threshold.

[was8v]

nick_grice said:

What about paying in to children s or grandchildren s pensions. Whilst she won t see any tax saving, the children or grandchildren will receive tax relief at 20% when going in so would net 20% tax to HMRC although not in her pocket.

Plus the pension for the children or grandchildren won t form part of their estate and they cannot touch it until they retire.

Interesting.

Can she pay into my pension and I claim the extra relief on my tax return?

[SunsetZed]

was8v said:

nick_grice said:

What about paying in to children s or grandchildren s pensions. Whilst she won t see any tax saving, the children or grandchildren will receive tax relief at 20% when going in so would net 20% tax to HMRC although not in her pocket.

Plus the pension for the children or grandchildren won t form part of their estate and they cannot touch it until they retire.

Interesting.

Can she pay into my pension and I claim the extra relief on my tax return?

Yes, if you're the person who's pension pot it's being paid into and you're a higher rate taxpayer then you can claim the tax relief.

[LeoSayer]

SunsetZed said:

was8v said:

nick_grice said:

What about paying in to children s or grandchildren s pensions. Whilst she won t see any tax saving, the children or grandchildren will receive tax relief at 20% when going in so would net 20% tax to HMRC although not in her pocket.

Plus the pension for the children or grandchildren won t form part of their estate and they cannot touch it until they retire.

Interesting.

Can she pay into my pension and I claim the extra relief on my tax return?

Yes, if you're the person who's pension pot it's being paid into and you're a higher rate taxpayer then you can claim the tax relief.

Unless it's a work pension scheme eg. salary sacrifice when contributions are paid gross so there's no tax relief.

[was8v]

Thanks all

[PeterTTT]

Not sure if Inheritance tax (IHT) is an issue on your Mums Estate? Assuming it is, she can give away excess income and it can be immediately outside of the Estate for IHT purposes (no need to wait 7 years)
Few things to be aware of though, it needs to be a regular pattern of gifting (or at least intended to be so) and it needs to be excess income (ie she does not need to draw on the capital from savings/investments to facilitate her day to day needs).
Need to keep good records (bank account statement for the year showing income/out goings and a signed and dated letter from her saying it is to be a regular payment pattern.
HMRC details here https://www.gov.uk/inheritance-tax/gifts
When person is deceased make sure you have the details to complete IHT403.
Also can find lots of articles just googling "regular gifting excess income IHT"
Any gifts you receive then can be put into your pension (up to your annual earnings).
Of course, all IHT and Pension rules can change at the whim of any particular Government and we know the current one has quite some funding shortfall for their ever increasing State spending so use it until you lose it.