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I've just started to organise my personal finances - I have some money (~40k) depreciating away in a low interest savings account. I have a question that I've tried in vain to find an answer to on the googles.

My situation is that I'm a higher rate earner (I earn about 60k) working for the NHS. I have already maxed out my ISA allowance for this year, and I would like to move the rest into a SIPP.

Now, I know that as a higher rate earner, I can claim an extra 20% tax relief paying into a SIPP up to the amount I earn above the 40% tax bracket...

For some toy numbers similar to my situation, I quote an example from https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief (but I increase where it said 15k to 40k, since that's closer to my situation):

You earn £60,000 in the 2024 to 2025 tax year and pay 40% tax on £10,000. You put £40,000 into a private pension. You automatically get tax relief at source on the full £40,000.

You can claim an extra 20% tax relief on £10,000 (the same amount you paid higher rate tax on) through your Self Assessment tax return.

You do not get additional relief on the remaining £30,000 you put in your pension.

So it seems to me I have two scenarios for moving this 40k into a SIPP:

A) I could move all 40k in a single go, and get the basic 20% (8k) and claim the extra 20% tax on 10k of that (2k). So in total I get 10k in tax relief.

B) I could move 10k into the SIPP each year, get the basic 20% (2k) and claim the extra 20% tax relief each time (2k), until the money is all in the SIPP. So in total I get 16k in tax relief.

It seems to me (perhaps naively?) that option B would net me an extra 6k in tax relief over 4 years? So it comes down to whether that extra 6k in tax relief would be more or less than the expected compound investment growth caused by less time in the market...

Happy to give any extra info that may be relevant! And thank you for any help you can give me!

mattb
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It depends on what contributions you plan on making in the next few years.

If you do not plan on making any additional contributions (over the 40k) to your SIPP over the next few years then your math is correct. You should spread the contributions over four years (probably, see below). However if you were planning on making an additional £10,000 contribution next year, and the others after that, then you should put all the £40,000 in a single go.

The point is that in any year £10,000 of your contributions will qualify for the higher rate relief (assuming no changes in your finances or in government tax rates). You should therefore by trying to make sure you make at least £10,000 in contributions every year to take advantage of this. As long as you do this then every other piece of money you don't need at achieve it should be put in the SIPP as soon as possible, so as to maximise the advantage of tax-free growth.

There comes a point where keeping money outside the SIPP for many years just so you can make a higher-rate relief contributions will lose you more money (in tax on the growth of that money) than it will gain. Also you need to beware of changing circumstances. If you keep lots of money outside the SIPP and then your income goes down drastically you may lose the opportunity to make contributions.

Another useful thing to do is keep much of your money in a non-retirement tax free savings account like an ISA. You can then transfer from the ISA to the SIPP in a controlled way to maximise your tax relief.

Any competent financial advisor should be able to give you the details and the best strategy for your situation.

DJClayworth
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