SIPP - Why not go into draw down?

ognum

I apologise if this seems a naive question but I have agreed to ask it for a friend.

Person is 60s, still working in a well paid job, no debts, has spouse and no dependant children.

Has SIPP and another company pension where payment are currently being paid from work.

Why should he NOT go into drawdown with the SIPP, take the lump sum and invest it elsewhere. If he died suddenly what would happen to the money in his SIPP, would it be better to get the cash out and invest elsewhere?

Thanks in advance?

atush

The money in the sipp would be 100% inherited by the spouse.

Generally, speaking, if you dcon't need the money don't take it if you are still working and paying tax. AS if you waited, your tax rate might be lower.

SeniorSam

If he took the tax free tax now, it would be in his estate and grow there, rather than in Trust. It is invested and he may be able to select the funds he wishes to invest into. Depending on those investments, he may have far more chance of enlarging his tax free lump sum where it is. If in doubt, he should consult an independent, qualified financial adviser and se what he suggests.

Sam

dunstonh

Why should he NOT go into drawdown with the SIPP, take the lump sum and invest it elsewhere.

pensions have virtually whole of market access to conventional investments. So, why make the pension taxable (death benefits) just to use investments that you can use inside the pension anyway and keep them tax free?

jamesd

Death benefits are only taxable in drawdown if paid to something other than the pension of a spouse (or financial dependent) so for many that wont' be a worry. For benefits not going to a spouse an insurance policy can be used to cover the 55% tax charge that will be made.

There are some significant advantages to using drawdown as soon as possible:

1. Lump sum that can gradually be moved into investments within a S&S ISA to generate ongoing tax free income later. This is potentially of value in reducing the chance of losing age allowance or getting into higher rate tax later - the growth in the ISA is still tax free while growth in a pension would increase the taxable income and risk of losing age allowance or paying higher rate tax.
2. Option to recycle some lump sum to get a second chunk of tax relief. Must be done, if at all, within the limits for recycling lump sums.
3. Option to take the maximum GAD capped income level and recycle the money into more pension contributions to get more tax relief and another tax free lump sum. Aside from the lump sum the tax may be break even but if salary sacrifice is used there'll be a benefit from the saved NI as well.
4. Option to take the income and invest it outside the pension to allow drawing on it at a rate faster than allowed by the GAD limit.
5. The percentage of the lifetime allowance that is used is calculated at the time you go into drawdown. Do it now and it'll be a percentage of £1.8 million, wait and it'll be a percentage of £1.5 million instead. After doing this the pot can grow to an unlimited amount without ever having to be checked against the lifetime allowance again, potentially saving someone whose investments do very well a lot of money. Meanwhile the remaining lifetime allowance percentage is available for use with the recycling pot, if those options are used.

Be sure that the beneficiaries are handled as desired with insurance if necessary but the options are generally beneficial provided that the money taken out is invested.

For the reasons above it's likely that I'll go into drawdown as soon as the law allows me to, regardless of whether I'm retired or not.

He may also be able to transfer the company pension pot or part of it to the SIPP if he's interested in using drawdown with that or getting a broader range of investments, or maybe lower costs, depending on the costs in the work pension. Only applicable really if it's a defined contribution pension as well. If it's final salary it's probably better to leave it alone.

middlepuss

I agree. Don't start drawdown until you need the income. Then take 25% out - which is tax free - and as james says move this into ISAs. Assuming you are a taxpayer, income from the SIPP is taxed at 20% (40% for higher rate taxpayers) whereas income drawn from ISAs is not taxed at all (even if you are a 40% tax payer).

Once your SIPP is in drawdown you can vary the amount of income you draw each year. You might want to do this, for example, to keep you just below the 40% threshold. (Or even, for people with a low pension income, to keep your total income below even the 20% threshold.) Income from ISAs does not count towards your total income. So you can earn a million pounds a year from ISAs and still be a non-taxpayer if your other incomes total less than c£8,000.

jamesd

One problem with waiting at the age here is the GAD limit, which will restrict income to below the sustainable level from the investments. That's part of why starting drawdown ASAP can be useful, since the money can be saved and spent at whatever rate is required to top up whatever the GAD limit allows. Or there's the second chunk of tax relief option if the GAD limit isn't an issue.

middlepuss

jamesd wrote: »

Or there's the second chunk of tax relief option if the GAD limit isn't an issue.

Please could you explain this?

jamesd

Take the income. Pay it into a personal pension to get income tax relief, possibly also NI if using salary sacrifice. Later, get another 25% tax free lump sum out of the new contributions. That eliminates the income tax on the 25%.

It conflicts to some extent with a desire to accumulate investments outside the pension to work around the GAD limit.

ognum

jamesd wrote: »

One problem with waiting at the age here is the GAD limit, which will restrict income to below the sustainable level from the investments. That's part of why starting drawdown ASAP can be useful, since the money can be saved and spent at whatever rate is required to top up whatever the GAD limit allows. Or there's the second chunk of tax relief option if the GAD limit isn't an issue.

Please can you tell me what a GAD limit is?

atush

It is the amt you are allowed to take out of your drawdown each year. Based on fund size, and the rates of gilts and annuities (and your age). I think it stands for Govt Actuarial something or other -feel free to quote me lol!

They have to set a rate, to prevent the fund from becoming zero too soon, as people might be tempted to take too much and then have to go on govt benefits.

If you have pension income of 20K from other sources, then you can have flexible drawdown where you decide how much to take out- the govt doesn't care then as they can see you have too much to go on benefits ;-)