I'm a 56 year old man & my wife is 59. We have Stocks and Shares ISAs, SIPPs & workplace pensions in our own names. We both work for my Limited company on £12,700 wages. We have minimal outgoings. The company funds our SIPPs directly, so no need to reclaim tax. It's likely that I will be receiving a significant amount in compensation in the coming months. We will be making use of the ISA allowances, but is it possible to pay SIPP contributions from the compensation payment? If it's possible, what are the limits? £40,000 per year each, up to 100% of earnings each year? Or if we decide not to work, £2880 per year with tax relief, making it £3,600. If pension significant contributions are not possible, what might we consider when looking for a tax efficient home for the compensation?
You seem to have a good understanding of pension funding rules, and in terms of making personal contributions you have stated the right limits.
If the compensation is paid to you
Assuming the compensation is paid to you personally and is not “pensionable” (unlikely), then there is little more you can do in terms of pension funding, although you could look to “carry forward” any unused allowance from the previous 3 years.
However you have to enough income in the current tax year to make this effective as a personal contribution, which in turn would require that you increase the salary from your company, which would then suffer both employee and employer National Insurance on that increased salary… you can see how this quickly gets rather complex!
I suspect that you’ll need to look at other investment opportunities.
A simple idea might be to consider a pair of General Investment Accounts or GIAs.
These are not tax “wrappers” unlike Pensions and ISAs, and so any income from the underlying investment (normally dividends) would be taxable as would any profits (Capital Gain). However there are attractive allowances you can use to offset against these taxes, such as your £2,000 per annum dividend allowance, and £12,000 per annum CGT allowance. You and your wife will each qualify for these.
Other benefits of GIAs are that they tend to be available across most investment platforms, are typically cheap and simple to manage, offer a wide variety of underlying investment choice and are also accessible at any time.
I hope this is helpful and best of luck.
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