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SIPP Investing: Know Your Limits
28 March 2007
Wealthy UK-based investors looking to make the most of their tax breaks before the end of the tax year have only got about a week to go, but using the pension rules to invest in a self-invested personal pension could go a long way to helping out. This tax year, most of us would think, not unreasonably, that you could invest up to £215,000 into a Sipp and get tax relief on that amount, providing you have paid enough in tax this year to warrant it. Remember, you cannot get more in tax relief in a year than you have given HM Revenue & Customs. However, according to Charles Stanley, you can actually use a new tax concession to invest up to £440,000 this tax year. Hard to believe? Yes, it is, but Robert Gofton-Salmond, head of financial planning at Charles Stanley is adamant that you can use new rules to make the most of ‘input periods’ to benefit from tax relief on this year’s, and next year’s, pension contributions before April 5. The method is, surprisingly for pensions, fairly straightforward. Essentially, when you make the first payment into your pension, an ‘input period’ starts, and you have up to a year later to make your pension contributions. But the neat part is, you do not have to wait a year for it to end, you can choose to end the period at any time, which is what gives you the flexibility to use next year’s allowance early. Charles Stanley gives the extreme example of a scheme member who puts the maximum £215,000 into a pension on March 30 this year, and nominates that the input period ends on April 2. So, the next input period begins on April 3, and another payment for the full allowance for next year - £225,000 – is paid into the fund. This would mean that a full £440,000 is invested in the fund in a single tax year, and providing the investor has earnings of over £440,000, full tax relief should be paid. This is a significant amount of money – as a 40 per cent taxpayer, you would pay £167,700 net in the first payment to get £215,000, and £175,500 net in the second payment to generate a £225,000 investment into your pension. That is a tax rebate of £96,800 in a single year – not something to be sniffed at. Mr Gofton-Salmond said this should only be considered as an option in “exceptional” cases, and for anyone considering this option to take advice before going ahead. He added: “It is absolutely crucial here. The new pension rules which came into force on A-Day (April 6) last year, certainly do permit you to invest up to £440,000 this tax year, but that does not necessarily make it a good idea. If you want to safeguard a windfall, it may be appropriate, but of course you are locking away that money until your retirement, and you are investing almost one third of your lifetime allowance – currently £1.5 million. Young people who benefit from the compound effect of their investments over the years may well reach the lifetime threshold before they retire.” If you do breach the lifetime limit, you will face swingeing tax charges, significantly reducing your benefits. But if you are earning in the league that would make this method of pension planning viable, it is certainly worth a look.