Pension nuances

[jade]

Hello,

I hope you're all well.

The main questions I wanted to ask are
1) does it make sense for my husband to take out a SIPP?
2) if so, can he / should he contribute retrospectively for the past three years as well as this year?

Background :

I'm 45 and hubby is 50. We live on approx £10-11k a year. Hubby is now retired & I take home approx £18k per yr and plan to work for at least four more years. Our house is paid off.

We currently have 72k in his ISA and 10k in mine (both VLS 60) to bridge us till other income becomes available.

I have 8k in a SIPP also with vanguard & that is where we're putting our savings currently (approx 8k+ a year).

Hubby also has an NHS pension which he can access from 50 & in today's money would give him around £2k a year but we're putting off withdrawing for now.

I contribute 11% & my employer 21% to my workplace pension. I've been doing this for about four years. My pot to date will give me about £1.5k a year at 55 (more likely 57 with proposed changes) but I will hopefully continue contributions over the next four years or so of working hopefully so it should be more (at least 3k pa? when I'm 55/57.

Currently all our savings our going into my SIPP. We're now wondering about whether it would also make sense to put £2880 a yr into hubbys SIPP starting this year, as, as someone else pointed out here on another post I made, that we could access that five/seven years earlier than mine. We seem to have (just) enough money in the ISAs to bridge us to further pensions & state pension based on our spending patterns but aware that if we have the choice to access his SIPP earlier, even a relatively small pot of 10-20k (a year or two of our living expenses) it might make sense?

In the process of looking into this, I also read about it sometimes being able to use the previous three years pension allowance too. We're wondering if we can do that for him & if so, if it's worth doing so? I.e. contributing 2880 for this year and at least 2880 for the past three years. He stopped work in March 2020 so presumably could contribute 2880 for last year & this year.  he earnt 10k the year before that & 8k the year before that. I'm thinking if he can, we just put 2880 a year into the SIPP for the previous four years in total & then keep contributing 2880 a yr on top of what's going into my SIPP going forward.

Also does it matter if we 'go over' pension contributions other than not getting the tax relief going in?

He would have also been contributing approx 2% to the NEST pension in the previous working years, so is & was part of a pension scheme during those four years (which I believe is one stipulation for retrospectively contributing) but only working /contributing for two.

We are coming to the conclusion it's worth opening a SIPP for him but wanted people's opinions in case we've missed something & also about if we can & should contribute 4 yrs in total this year, accessing the previous three years too?

We're aware that 10—15yrs down the track we may need to juggle withdrawals from the SIPPs and pensions so as ideally not go over the tax threshold esp when the state pension(s) comes on board.

I hope this makes sense, let me know if not!

Many thanks in advance.

[former player]

I'm not up on SIPP details and someone else may be better able to help you on that.  The only reason to set up a SIPP for your husband is if it will mean you get money back from the taxman by doing it, so I think you need to look at your tax position in detail to answer whether it makes sense to invest that way, and how much.

I would put two cautions.  The first is costs: you are investing through Vanguard so should be OK but there may still be a cost penalty by having two SIPPs instead of one.

The second caution is: please check what you each have in National Insurance contributions (easily done on line) and work out whether your husband might get a better return by making voluntary NI contributions (less easily done on line, you have to ring up and ask how much the cost will be) to get up to the maximum pension pay out - usually making voluntary contributions is a screaming good deal and at 50 your husband will probably not have reached the full 35 years of contributions from wages.

[jade]

Thanks formerplayer.

Thanks to another post we made here, we ascertained that sipp's are probably the best way forward for us with the tax uplift but not sure if we're over thinking it regarding my hubby.

We hadn't thought that it might cost more having two sipps. We'll look into that.

Hubby has three years NI to go & I have four which I'll hopefully make through work. We have been looking into buying those three for him. Good to get validation that this is the right way to go too.

[PhilB]

I'm afraid you can't make backdated contributions for hubby.  This is a regular source of confusion for people, because there are two separate limits that BOTH have to be met, and only one of them allows backdating.

One rule is that you can't contribute more than the Annual Allowance of £40k pa.  This one does allow carry forward or unused allowance for three years so you could theoretically contribute £10k for three year then £130k in the fourth.

The other rule is that you can't contribute more than your pensionable income in the tax year when you make the contribution.  This one does NOT allow any carrying back or forward.  The income has to be contributed in the same tax year that it was earned.  This is the rule that has the tweak to say that you can still contribute £2,880 a year net / £3,600 gross even if your income is lower than that / nil, but again this can't be carried back.

If your hubby will be able to get this out tax free, because he will have unused personal allowance in the years between pension access age and his state pension starting, then this is a great deal as you stand to make £720 a year profit.  If he will already have enough income to use up all his personal allowance then that profit drops to £180.  In both cases that is before any costs involved with the SIPP.

Shop around carefully when choosing his SIPP.  A percentage fee broker will likely work out cheaper than a flat fee one for these amounts.  In particular, remember to look at the costs of getting the money back out again.  Some providers charge additional fees for using drawdown - although in some cases you can get around that by taking money out as UFPLS lump sums.  Of course you could always put the money into one SIPP that was cheapest while accumulating, then transfer it to another that was cheaper for withdrawing - depending on whether the first SIPP makes any charges for transferring out.  That probably all sounds scarier and more complicated than it really is!

[jade]

I'm afraid you can't make backdated contributions for hubby.  This is a regular source of confusion for people, because there are two separate limits that BOTH have to be met, and only one of them allows backdating.

One rule is that you can't contribute more than the Annual Allowance of £40k pa.  This one does allow carry forward or unused allowance for three years so you could theoretically contribute £10k for three year then £130k in the fourth.

The other rule is that you can't contribute more than your pensionable income in the tax year when you make the contribution.  This one does NOT allow any carrying back or forward.  The income has to be contributed in the same tax year that it was earned.  This is the rule that has the tweak to say that you can still contribute £2,880 a year net / £3,600 gross even if your income is lower than that / nil, but again this can't be carried back.

If your hubby will be able to get this out tax free, because he will have unused personal allowance in the years between pension access age and his state pension starting, then this is a great deal as you stand to make £720 a year profit.  If he will already have enough income to use up all his personal allowance then that profit drops to £180.  In both cases that is before any costs involved with the SIPP.

Shop around carefully when choosing his SIPP.  A percentage fee broker will likely work out cheaper than a flat fee one for these amounts.  In particular, remember to look at the costs of getting the money back out again.  Some providers charge additional fees for using drawdown - although in some cases you can get around that by taking money out as UFPLS lump sums.  Of course you could always put the money into one SIPP that was cheapest while accumulating, then transfer it to another that was cheaper for withdrawing - depending on whether the first SIPP makes any charges for transferring out.  That probably all sounds scarier and more complicated than it really is!

Thanks very much for the explanation, PhilB - much appreciated. We'll just go ahead and do the £2880 a year from this year onwards then but its good to understand more about how it works.

As you said, it is a great deal with the £720 uplift, especially in the years where he has an unused personal allowance too.

We plan to get his SIPP via Vanguard (like mine) as there's an annual 0.15% fee capped at £375. From what we understand there's no fees for drawdown and we'll make sure we balance things to keep it below his personal allowance

[jade]

Hello, with regards to the advice I got here a while back, we've been paying into my SIPP on a monthly basis however wondered if there's ever any instances where it might make sense to switch back to the ISA for a while as the SIPP seems to be performing badly whereas the ISA (VG life strategy 60) is performing well. Obviously the uplift will always be a pro for the SIPP. We don't have a lot of knowledge on these things and are aware to leave things alone as much as possible but wanted to check in? Cheers!

[never give up]

Hi jade. The SIPP and ISA are just different types of investment vehicles with different tax approaches. They aren’t investments in themselves. What funds/investments is your SIPP invested in? If your SIPP was invested in VGLS60 it would perform the same as your ISA. So I assume this is invested in something different?

[jade]

Hi jade. The SIPP and ISA are just different types of investment vehicles with different tax approaches. They aren’t investments in themselves. What funds/investments is your SIPP invested in? If your SIPP was invested in VGLS60 it would perform the same as your ISA. So I assume this is invested in something different?

I'll just check 🤦‍♀️😆

[jade]

Hi jade. The SIPP and ISA are just different types of investment vehicles with different tax approaches. They aren’t investments in themselves. What funds/investments is your SIPP invested in? If your SIPP was invested in VGLS60 it would perform the same as your ISA. So I assume this is invested in something different?

I'll just check 🤦‍♀️😆

Target Retirement 2030 Fund - Accumulation...

[never give up]

Ok that is likely to have a similar asset allocation to VGLS60. My concern was you weren’t comparing like for like and the SIPP was more cautiously invested.

Do you have considerably more invested in the ISA than the SIPP so that the ISA looks to be performing better but percentage wise it may be similar? Can you compare the performance between the two funds using the fund fact sheets? Why do you believe the SIPP is performing badly?

[jade]

Thanks for your help.

In my account I have more in the SIPP than ISA  so it's the other way round @never give up .

SIPP: personal return -2.97%
ISA: personal return +4.20%

I'll have a look at the fund fact sheets and see if I can work it out.

[never give up]

Ok and is that over the same timescale? I’m sure it will become obvious if you’re able to look at the fund factsheets. Good luck getting to the bottom of it.

[jade]

I opened the ISA in March 20 and SIPP in Mar 21.

I think I mistakenly thought the % would be the same regardless but I'll look at the sheets. It's good to learn a bit more.

[jade]

                                                                                       3 m   6 m   1 y   3 y   
Vanguard Target Retirement 2030 A Acc GBP   5.1   0.2   -2.8   9.5

                                                                                    3 m   6 m   1 y   3 y   
Vanguard Lifestrategy 60                                           4.9   -0.1   -3.9   7.8   

I found the figures which look roughly similar over 3 yrs as a whole, so I think I understand more now in that the length of time will also affect things.

So then if they're not hugely dissimilar in terms of performance, the uplift with the SIPP would still make it the top choice...?

[never give up]

So a target date fund will amend the asset allocation over time, reducing the allocation to stocks as it gets closer to its target date. Where the LifeStrategy fund will maintain the 60:40 stocks/bonds split forever more. So although they have similar allocations right now that will shift over time. They are very different funds trying to achieve different things. Going back three years the target fund would have had more invested in stocks hence the better three year performance.

You are right to say the timing of your investments will make a difference. Last year was a tough one for funds like these. There is no best fund here, just differences depending on what your goals are.

[jade]

Thanks NGU - that's really helpful! We're going to double check everything against our goals.