‘How much can I pay into a SIPP when I’ve also got a defined benefit pension?’
I’m a civil servant and fortunate to have a defined benefit pension. I plan to retire prior to my scheme’s normal pension age and intend to leave this pension preserved as long as possible.
I will be receiving a lump sum in the region of £60,000 from some investments and I’m considering adding this to a SIPP I have just opened. I plan to draw this pension down before I start to take my civil service pension.
My current gross salary is £32,150. How much can I pay into my SIPP per year to gain benefit from the pension tax rebate?
Tom Selby AJ Bell Senior Analyst says:
The amount you can pay into your pension (or pensions) each year depends on your ‘relevant’ UK earnings and the annual allowance.
For most people the maximum annual allowance in the current tax year is £40,000.
If you have relevant UK earnings below the £40,000 annual allowance, your earnings will be the maximum you can put into a pension and receive tax relief in the current tax year. In your case, total relevant earnings of £32,150 means you can pay up to £25,720 into a pension in 2019/20, with tax relief boosting this by £6,430.
If your earnings are more than £40,000 you might think the annual allowance is the limit. But you may still be able to pay in more than £40,000, by making use of something called ‘carry forward’. More information is available here.
If you want to find out more about what counts as relevant earnings, this HMRC page is a good place to start.
You should be aware that if you did set up a SIPP and took taxable income from it, either through drawdown or ad-hoc lump sums, the money purchase annual allowance (MPAA) would kick in, reducing what you could pay into your SIPP to £4,000, regardless of your level of earnings.
If you chose to take an income from your defined benefit scheme, on the other hand, this would not trigger the MPAA and you would retain a £40,000 maximum allowance.
CALCULATING THE ANNUAL ALLOWANCE
The amount of your annual allowance will be reduced by any part of it used up in your civil service pension.
The following example illustrates how the annual allowance is calculated in defined benefit schemes.
Take someone earning £30,000 who has been a member of a defined benefit scheme with a 1/60th accrual rate for 20 years, with CPI inflation running at 3%. There are three steps to figure out how much annual allowance this will use in the current tax year.
First, you need a value for the start of the tax year. This is the value of the pension accrued up until that point in time, multiplied by your salary at that point and then increased in line with CPI inflation.
So in this example, it’s 20/60ths x £30,000 x 1.03 x 16 = £164,800.
Second, you need a value for the end of the year. To do this, just multiply the current year’s accruals by 16.
We’ll assume the salary is the same, so in this example it’s 21/60ths x £30,000 x 16 = £168,000.
Finally, subtract the start of year number from the end of year number. In this example, that’s £168,000 - £164,800 = £3,200 annual allowance used.
If you don’t want to do this calculation yourself, ask your administrator if they can figure it out for you or speak to a regulated adviser.
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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.