Can we pay DB pension benefits directly into a brand new SIPP to get tax relief on it?
15 November 2021
Question by Mark
My wife is 62 and currently receives a pension from both BA and Thomas cooks – both were defined benefits pensions. As we don’t currently need this money as I am still working and whilst she does save in an ISA – could we set up and pay this in to a brand new SIPP in her name to get the tax relief on it as well. Also do these defined benefits pension trigger the MPAA so the maximum can pay in is £4000 or will she have the full £40,000 allowance (not that she would be paying in that much). And will she still get the full tax allowance even though she has no income other than these pensions.
We were just looking at all options and though this may be another way to put away the money but also gain from the tax relief for when we do need it - or to leave to the children if we don’t use it.
Answered by Andrew Neligan
Yes, your wife can save into a pension and benefit from the tax relief. Defined Benefit pensions do not count against the money purchase annual allowance, but because pension income doesn't count as 'relevant earnings for tax-relief and they are her only source of income she is limited to paying in £3,600 gross in each tax year. This would mean a personal contribution of £2,880 to which the 20% (£720) tax relief gets added.
It might not be much but over time it can form a tax-efficient legacy for your children, particularly because pension funds are currently outside of the estate for IHT purposes.
Depending upon your own earnings and pension contributions any excess income could be used to increase your annual pension contributions too.
I hope this helps.
Chartered & Certified Financial Planner.
Typically, I work with individuals and couples who have got to the point in their lives that they have important questions about money they want answering. They may be thinking about retirement in the next 5 to 10 years but they are worried they won’t have enough so they want to make sensible decisions now. Or, they really want to retire sooner, but either they don’t know if they can afford to, or they are afraid they will make decisions that they may later regret.