My wife and I are both pensioners receiving state pensions. We are both self-employed earning between £5,000 and £10,000 a year each, plus we both receive income from renting a commercial property (total around £20,000 per year).

My wife receives a pension from the NHS of around £7,500 a year.

We both have personal SIPPs in drawdown (after taking out our 25% tax free), which we sometimes draw income from, if needed.

If we sell our commercial property, having paid capital gains tax, would we be allowed to put some or all of our net proceeds of sale (around £300,000) into our SIPPs?

Can we add surplus income to our existing SIPPs and if yes what would be the upper limits? Would we have to set up new SIPPs? 

Graham

Rachel Vahey, AJ Bell Head of Public Policy, says:

Pensions are an extremely tax-advantageous way of saving for later life. Pension contributions receive tax relief, and pension pots receive tax-advantaged investment growth. Plus, someone can usually take up to 25% of their pension pot as a tax-free lump sum when they retire.

Because of these tax advantages there are rules on how much money people can put into pensions. One of the main ones is that someone can only contribute up to 100% of their earnings and receive tax relief. 

When discussing this limit on contributions, the tendency is usually to over-simplify and refer to someone’s income as their employed or self-employed earnings.

WHAT ARE ‘EARNINGS’?

But life is not that simple. Money coming into our ‘wallet’ comes from various sources. So, it’s probably a good idea to take a step back and think about what ‘earnings’ are.

The ‘100% of earnings limit’ applies to ‘relevant UK earnings’. HMRC gives us a list of income that falls into this definition. As you would imagine it covers employed earnings, including bonuses, overtime, and commission. Self-employed earnings are also included and are defined as the income derived from carrying on a trade, profession, or vocation.

Redundancy payments may also count towards relevant UK earnings; but only the part of the payment over the tax-exempt threshold of £30,000.

So that’s what counts towards relevant UK earnings. What doesn’t?

Pension income whether it comes from a private pension or as a state pension benefit does not count towards relevant earnings. (But some other state benefits such as statutory sick pay and maternity pay do count.)

Dividends and most rental income are also on the ‘no’ list. The exception is that some rental income may be included if it’s in respect of a UK or EEA furnished holiday lettings business. Capital made on selling assets – such as property – would also not be included.

Once someone has worked out what relevant earnings they may have, they also need to be aware of a couple of other limits on their contributions. The other main one is the annual allowance which is set at £60,000 a year and includes both employer and gross individual contributions.

OTHER ALLOWANCES

There are two other annual allowances which can apply instead. One is the money purchase annual allowance (MPAA), which is set at £10,000, and is triggered if the individual ‘flexibly accesses’ their pension, say by taking a taxable income through drawdown. The other is the tapered annual allowance which applies to very high earners. The taper can reduce the £60,000 annual allowance to as little as £10,000, depending on the individual’s income level.

Another key point is that tax relief on pension contributions is only available up to age 75. After that people, in theory, can continue to contribute to a pension, say a SIPP, but they won’t receive tax relief on that contribution. In practice, however, many pension providers won’t accept these contributions.

Finally, whether someone can pay into the same SIPP account as they are drawing income from will depend on the pension provider and how they administer the pension. Some may allow it, but others may ask you to set up a new pension account.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information 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.

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