Many people are looking for the best ways to boost their income for later life, with the state pension increasingly viewed as a safety net. An expert has highlighted one way to do so, which she has described as “often overlooked”.
Bed and SIPP allows people to top up their pension by using their existing investments as contributions to their SIPP.
A SIPP is a self-invested personal pension, which serves as a “wrapper” to allow Britons to save, invest and build up a pot of money for when they retire.
Individuals can sell some stocks and shares investments, and rebuy them inside their SIPP.
It works in a practically identical way to a Bed and ISA, which is increasing in popularity.
Alice Guy, personal finance editor at interactive investor, explained: “Using a Bed and SIPP means that more of your investments will be protected from tax inside a pension wrapper.
“They can grow free of dividend income tax and capital gains tax.”
Pension savers also benefit from tax relief, which is a major draw for millions of people each year.
For example, if someone were to contribute £80 to their pension, the taxman would boost this by £20 – taking a total contribution to £100.
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Higher rate taxpayers can claim an extra 20 percent in tax relief, while additional rate taxpayers can claim an extra 25 percent – but only if they submit a tax return or write to HMRC.
People could also benefit through this method when it comes to inheritance tax.
Anything left to beneficiaries in a SIPP is considered as outside of the estate for inheritance tax purposes.
But Britons must also bear in mind some important tax changes which are looming fast over the horizon.
Ms Guy continued: “You need to act now if you want to take advantage of the current tax allowances before they are reduced in April.
“For example, you could sell some shares, keeping your gains below the current CGT exemption of £12,300 and rebuy them within a SIPP or an ISA.
“The tax changes mean that even small investment portfolios could now attract a big tax bill in the future.
“For example, an investor with a portfolio of £50,000 held outside an ISA or SIPP and £2,000 dividend income would currently pay no dividend income tax, but would owe £38 dividend tax next year and £506 dividend tax the following tax year.”
People should consider Bed and SIPP carefully, as they could trigger a capital gains tax charge by selling their investments.
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Other tax liabilities such as income tax should also be considered when it is time to draw a pension.
Similarly, if a person is hoping to access their investment wealth in the short term, a SIPP may not be the best course of action.
Currently, the normal minimum pension age – the point at which pension cash can be accessed without a hefty charge – is 55.
But this is set to rise to 57 in 2028, and continue to gradually rise as the state pension age increases.
However, Britons should always be aware with investment, capital is at risk. People could get back less than they originally put in.
In a similar sense, investment may not be suitable for everyone, and it can be important to seek advice before making major decisions.
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