Commencement lump sum questions

Legacy_user

I have a SIPP invested in our own company premises. There is very little cash in the SIPP, so pending a possible sale at some future date there is little scope for taking a 25% lump sum.
However I have another smaller SIPP invested conventionally.

1) Can I combine the two SIPPs and then take 25% of the total, eg the entire cash value of the smaller SIPP?

2) If this is permissible, could I crystalise only part of the property SIPP, ie enough to release the cash forming 25% of it?

3) Would future rental income to the SIPP be apportioned between the two halves, ie the crystalised and the uncrystalised, or could I direct it entirely into the uncrystalised portion?

4) Is it still the case that the 25% lump sum is paid with tax deducted at an emergency rate, which has to be reclaimed from HMRC? Is the 25% entirely tax-free (after reclaim) even if the amount pushes it into a higher tax bracket?

kidmugsy

1) Nice idea. I don't see why not.

2, 3) These seem to be incompatible with what you said in (1).

4) I got mine entirely tax free instantly. I've never heard of what you suggest.

jamesd

Yes, you can combine SIPPs.

Crystalising means taking benefits from a whole pot, of which up to 25% can be taken as a lump sum and the remaining 75% stays in the pension. You can choose how much to crystalise and how much to take as a lump sum but you can't avoid the requirement to keep at least 100% minus the lump sum percentage crystalised. So to take 25% you'd need to add at least enough to the property owning SIPP for the property to be only 75% of the remaining value.

I don't know whether it's legal or accepted by your SIPP provider to split property ownership between two SIPPs. Ask them.

If you don't need the whole amount of the other SIPP to get the full 25% you can leave the rest in a different SIPP if you like, not crystalising any of that yet if you don't want to.

It seems unlikely that you could pay the rent to only one part of the pension, but check with the experts at your SIPP provider to be sure.

I've never heard of the lump sum being treated in the way you described. It's a tax free lump sum. Your tax bracket makes no difference.

The two SIPPs can probably be held with the same provider. Yours may not allow it but some do.

System

Many thanks.

My tax query was because I read that the pension provider has to deduct tax and provide a P45, and the recipient then claims it back. I was asking whether that was still true, or whether the procedure had been simplified.


So basically this is possible, but will depend on the provider's rules.

I appreciate the point about the 75%. To give an example:
SIPP 1 = £175,000 property
SIPP 2 = £25,000 cash

Move SIPP 2 into SIPP1 = £200,000. Crystalise half of enhanced SIPP, and take 25% of one half, = £25,000.
Result : SIPP 1 still has £175,000 (of which £75,000 is crystalised) and the entire SIPP 2 has been taken tax free.

jamesd

You can't have the same SIPP partly crystalised and partly not crystalised. You can have two SIPPs with the same pension provider if they allow that, law does.

The cash doesn't quite work that way. SIPP1 would have to be £100,000 uncrystalised and SIPP2 £75,000 and the £25,000 already taken from SIPP2, all crystalised. £100,000 total in SIPP2 because that is the amount required for the 25% lump sum to be £25,000.

I'm assuming you don't want to crystalise it all yet just because you want ultimately to have 25% of it all as a lump sum.

If you don't have a mortgage in the SIPP yet you have an alternative way of achieving that. Merge SIPP1 and SIPP2 to get a combined value of £200,000. You now want £50,000 lump sum but have only £25,000 cash. You can take half of a SIPP value as a mortgage. Your target end value is £150,000 after taking out £50,000 so the maximum mortgage is £75,000. You only need £25,000 to get £50,000 cash so you can do that. This gets you to £175,000 property, £50,000 cash, £25,000 mortgage less some money for costs. You can then crystalise it all and take out the £50,000 cash. The ongoing income pays off the mortgage.

If you don't want the whole £50,000 now the splitting the property somehow is needed. Thinking back I do seem to recall some cases where that has been done, so your SIPP provider may say yes to it.

When taking income from a pension, that's treated as PAYE income subject to income tax but not NI. You'll get all of the usual PAYE things. But this doesn't apply to the tax free lump sum.

kidmugsy

jamesd wrote: »

You can't have the same SIPP partly crystalised and partly not crystalised.

Oh, I thought that that was what I had at HL. Presumably it's formally two SIPPS, then?

jamesd

How many entries in the list of your accounts, one or two? Have you taken any tax free cash - formally, pension commencement lump sum - from it or one of them?

If you've taken the tax free cash then the SIPP you've taken it from is crystalised. I'm not aware of any way to have a single SIPP account that is partly crystalised and partly not, but multiple accounts at one provider are permitted.

kidmugsy

I opened my SPP by transfer in, and the crystallised it, taking the lump sum and starting income withdrawal. Later I transferred in two more. I suppose you're telling me that this latter cash constitutes a second SIPP. So be it. I'll check whether I can crystallise it without any need to get a new GAD calculation on the old money.

jamesd

It'd technically be a second "arrangement" within the same pension scheme. Have a look at RPSM09103520.

I remain uncertain what the detailed requirements are for a property, since it's one pension but two different arrangements and somehow the value has to be apportioned. Best to consult a real drawdown expert for guidance on that.

System

It's obviously more complicated than I realised, not unsurprisingly perhaps.

But I thought a pension pot was divided into 1000 segments. One of the selling points that SIPP providers make much of is the ability to treat these segments separately, eg by only taking a lump sum from some, or only drawing down income from some, leaving the others uncrystalised, perhaps progressively crystalising them as circumstances develop.

Are you saying those 1000 segments are technically 1000 separate SIPPs?

jamesd

That splitting is common with a pension intended to staged drawdown, as a way of within one pension having different pieces crystalised at different times to take a lump sum then ongoing income from a variable number of pieces. Technically I think different "arrangements" within the same pension.

What I'm not certain of, and what you do need to be certain of, is how your pension provider can handle a property in that situation.

I think that I didn't help to clarify by describing the property as having to be split between different SIPPs, when it might be possible to apportion the value and income between lots of different arrangements to do exactly what you first asked about.

Not really that much more to say here because what you can do will be determined by what your pension provider allows and how they handle things.