SIPPing a pension fund?

reheat

Hi,

In my mid 50s and still have a lot of debt, which I would very much like to clear - too much debt for too long!

A friend has told me that what they did was to use a deferred pension fund of theirs and transfer it into a SIPP. This apparently enabled them to do something you cannot do with normal pensions: draw their tax free lump sum, but without having to then start drawing their pension at the same time. So they got their tax free lump sum, but still have a pension fund with the remainder in. My friend reckons it was simply a case of saying "I'd like to take the lump sum please", but then not bothering to say "I want to start drawing my pension". Is this legit, or were they just lucky?

I also have a deferred pension fund so am interested in this approach. But there are big commitments and big decisions riding on this, so I would hate to find when it came to the crunch, that my friend is just lucky, and the system is not really supposed to work that way!

Does anybody have any further info / advice on this please?

TH1878

There is no reason why you can't do this through Income Withdrawal, but your whole pension fund will be classed as 'crystallised' (i.e in payment) and treated in a different way in the event of your death.

You would take your 25% tax-free cash, and then select an income of 0% per annum. However, if you were to die before age 75, there are 3 main options:

1) The remaining fund could be returned as a lump sum less tax at 35%
2) Your spouse can purchase an annuity
3) Your spouse can continue with the income withdrawal until they are 75.

However, the money would no longer be protected by a trust and any cash benefits could potentially be liable to Inheritance Tax. At the moment, if you were to die, the money would fall outside your estate.

Worth speaking to a financial adviser on this one - https://www.unbiased.co.uk

TH1878

reheat

TH1878 wrote: »

There is no reason why you can't do this through Income Withdrawal, but your whole pension fund will be classed as 'crystallised' (i.e in payment) and treated in a different way in the event of your death.

You would take your 25% tax-free cash, and then select an income of 0% per annum. However, if you were to die before age 75, there are 3 main options:

1) The remaining fund could be returned as a lump sum less tax at 35%
2) Your spouse can purchase an annuity
3) Your spouse can continue with the income withdrawal until they are 75.

However, the money would no longer be protected by a trust and any cash benefits could potentially be liable to Inheritance Tax. At the moment, if you were to die, the money would fall outside your estate.

Worth speaking to a financial adviser on this one - www.unbiased.co.uk

TH1878

Many thanks for that. Could you clarify two things please ...

1. What would be the tax implications if my wife purchased an annuity?

2. What is the situation for me or my wafe after the age of 75?

Thanks

TH1878

reheat wrote: »

Many thanks for that. Could you clarify two things please ...

1. What would be the tax implications if my wife purchased an annuity?

2. What is the situation for me or my wafe after the age of 75?

Thanks

1) Any annuity income would be taxed as income tax at the relevant level (0%, 20% or 40%)

2) Your pension must be secured in the way of an annuity or an Alternatively Secured Pension (ASP) at age 75 which is similar to Income Withdrawal but has different income limits.

dunstonh

This apparently enabled them to do something you cannot do with normal pensions: draw their tax free lump sum, but without having to then start drawing their pension at the same time.

That is incorrect. There are a number of personal pensions that do this. SIPP is not the only option. However, it is the current media fashion.

My friend reckons it was simply a case of saying "I'd like to take the lump sum please", but then not bothering to say "I want to start drawing my pension". Is this legit, or were they just lucky?

Its not as simple as that but it is basically what happens.

1. What would be the tax implications if my wife purchased an annuity?

She cannot with your pension.

2. What is the situation for me or my wafe after the age of 75?

Depends on the annuity you purchase.

I also have a deferred pension fund

Can you clarify what you mean by this. Are you saying you have a paid up money purchase pension or a final salary pension scheme or is it a section 32 buy out bond?

TH1878

Just as a footnote - you don't have to do this through a SIPP. Some Life Offices do offer the ability in a standalone contract (Clerical Medical or Scottish Widows for instance).

Edit: Dunstonh wrote his reply whilst I was writing mine!

TH1878

dunstonh wrote: »

She cannot with your pension.

I think he meant if he died, in which case she can, can't she?

reheat

dunstonh wrote: »

That is incorrect. There are a number of personal pensions that do this. SIPP is not the only option. However, it is the current media fashion.

Ah - I had not realised that.

dunstonh wrote: »

She cannot with your pension.

Sorry, my comment only makes sense in the context of replying to TH1878. I'm doing what I get annoyed with other people about - leaving half the useful information unspoken in my head! It was in the case if I died before my wife.

dunstonh wrote: »

Can you clarify what you mean by this. Are you saying you have a paid up money purchase pension or a final salary pension scheme or is it a section 32 buy out bond?

I paid into a money purchase scheme for 9 years, and I left the company and scheme 11 years ago, so it is currently a deferred pension as I understand it. The current transfer value is around £76K, so I'm assuming I could extract about £19K as a tax free lump sum.

dunstonh

On death before crystallisation its paid to her as a tax free lump sum. On death after crystallisation she can take over the drawdown or take the fund subject to a tax penalty. Unless an annuity is purchased, in which case the terms of the annuity will apply.

EdInvestor

TH1878 wrote: »

However, the money would no longer be protected by a trust and any cash benefits could potentially be liable to Inheritance Tax. At the moment, if you were to die, the money would fall outside your estate.

Not so AFAIK. Income drawdown plans are still payable to the beneficiary in trust, same as unvested pensions.

What you want to do is quite feasible.

You may find that the lifecos are not interested as they often want a fund of at least 100k.If your pension includes "protected rights" (contracted out) money, there may also be a short delay in moving to a SIPP until regulations change in October.

But basically it's no problem to do what you have in mind Here are a few providers you may wish to check out.What you want to do is called "income drawdown" (aka Unsecured pension USP).

https://www.sippdeal.co.uk
https://www.h-l.co.uk
https://www.alliancetrust.co.uk

They will answer questions about how it works if you email them without charging a fee, though they won;t give you "advice".

dunstonh

You may find that the lifecos are not interested as they often want a fund of at least 100k.

Ed keeps posting that but its not true.

If your pension includes "protected rights" (contracted out) money, there may also be a short delay in moving to a SIPP until regulations change in October.

Although personal pensions and hybrid SIPPs can take it now.