I’m aware that this is a very unusual situation, possibly unique, but has anyone used AFPS05 EDPs as “relevant UK earnings” for the purposes of SIPP contibution tax relief?
Why am I asking? Well let me explain......
I left the RAF as a Flt Sgt aged 48 after 30 years service and received my lump sum and EDPs under AFPS05. I fell into a well paid job in civvy street and set up a SIPP as a tax efficient means of saving my excess income. Having a tiny mortgage and very good income the SIPP soon built up. I then re-married and as we both had houses we sold them and purchased a single joint property, I maxed out my annual allowance over 2 years and increased my SIPP fund further. On reaching 55 I had a good look at our financial situation and established that neither of us need work any more so we both retired (happy days!) topping up my EDPs with drawdown from the SIPP. Unsurprisingly, a couple of years later we both became orphans and inherited a lump sum each from our parent's estates. We jointly invested that pot in a General Investment Account (GIA) and ISAs. For the purposes of tax efficiency we stopped drawing down from the SIPP and made withdrawals from the joint funds.
Despite living a very comfortable lifestyle we still had some disposable income left over so we decided to make a contribution to the SIPP and here is where it gets interesting…
With no income other than EDPs and a small widowers pension (previous marriage) I was advised that my contributions to the SIPP were limited to £3600pa as HMRC rules do not permit pension income to count as ‘relevant UK earnings’ (HMRC Manual PTM044100 is quite specific on that point). As I had a vague recollection about EDPs being ‘different’ I put the question to JPAC asking them to define the status of EDPs. Their response was that, “the Armed Forces Pension Scheme 05 (AFPS 05) Early Departure Payment (EDP) is not regarded as a pension payment under AFPS 05 scheme rules but is treated as income derived from your pensionable service.”. They also went on to say, “…we cannot advise on how HMRC interpret AFPS 05 income for tax purposes...”. Next stop – HMRC, to find out how they interpret EDPs, except that trying to contact anybody relevant at HMRC is slightly more difficult than herding ducks whilst plaiting fog. If anyone does answer the phone it always seems to be someone from the wrong department.
Obviously, having previously drawn money from the SIPP I am limited to the Money Purchase Annual Allowance (MPAA), currently £10k although I don’t have that much to add. I do however have enough to cover the taxable portion of my EDPs (just over £5k) above my personal tax free allowance of £13,830. The difference between the £2880 and £5k is not a vast sum of money and might not be worth the hassle were it not for the fact that the treasury are freezing and cutting allowances to increase the tax burden and so a couple of grand added to my SIPP is not just a financial gain but a rather nice way of fighting back. My reason for asking the question is that if anyone else has tried and it has been flanned I can save myself the grief and stick to the lower limit and if anyone has I can check that I have ticked all the right boxes.
Why am I asking? Well let me explain......
I left the RAF as a Flt Sgt aged 48 after 30 years service and received my lump sum and EDPs under AFPS05. I fell into a well paid job in civvy street and set up a SIPP as a tax efficient means of saving my excess income. Having a tiny mortgage and very good income the SIPP soon built up. I then re-married and as we both had houses we sold them and purchased a single joint property, I maxed out my annual allowance over 2 years and increased my SIPP fund further. On reaching 55 I had a good look at our financial situation and established that neither of us need work any more so we both retired (happy days!) topping up my EDPs with drawdown from the SIPP. Unsurprisingly, a couple of years later we both became orphans and inherited a lump sum each from our parent's estates. We jointly invested that pot in a General Investment Account (GIA) and ISAs. For the purposes of tax efficiency we stopped drawing down from the SIPP and made withdrawals from the joint funds.
Despite living a very comfortable lifestyle we still had some disposable income left over so we decided to make a contribution to the SIPP and here is where it gets interesting…
With no income other than EDPs and a small widowers pension (previous marriage) I was advised that my contributions to the SIPP were limited to £3600pa as HMRC rules do not permit pension income to count as ‘relevant UK earnings’ (HMRC Manual PTM044100 is quite specific on that point). As I had a vague recollection about EDPs being ‘different’ I put the question to JPAC asking them to define the status of EDPs. Their response was that, “the Armed Forces Pension Scheme 05 (AFPS 05) Early Departure Payment (EDP) is not regarded as a pension payment under AFPS 05 scheme rules but is treated as income derived from your pensionable service.”. They also went on to say, “…we cannot advise on how HMRC interpret AFPS 05 income for tax purposes...”. Next stop – HMRC, to find out how they interpret EDPs, except that trying to contact anybody relevant at HMRC is slightly more difficult than herding ducks whilst plaiting fog. If anyone does answer the phone it always seems to be someone from the wrong department.
Obviously, having previously drawn money from the SIPP I am limited to the Money Purchase Annual Allowance (MPAA), currently £10k although I don’t have that much to add. I do however have enough to cover the taxable portion of my EDPs (just over £5k) above my personal tax free allowance of £13,830. The difference between the £2880 and £5k is not a vast sum of money and might not be worth the hassle were it not for the fact that the treasury are freezing and cutting allowances to increase the tax burden and so a couple of grand added to my SIPP is not just a financial gain but a rather nice way of fighting back. My reason for asking the question is that if anyone else has tried and it has been flanned I can save myself the grief and stick to the lower limit and if anyone has I can check that I have ticked all the right boxes.
