SIPP - Tax free lump sum once or spread over several years?

ognum

If you do not have a current need for the tax free lump sum from a SIPP on retirement would it be most profitable to

Leave the whole amount in the SIPP until needed

Take the lump sum anyway and self invest

Take out a yearly tax free sum until the allowance is used

Or none of these

Any help would be appreciated

jamesd

It depends in part on the amounts but if you do it at one time you will only have to pay a single GAD calculation fee and perhaps a single fee for starting to take an income.

Say you can invest all of the money into a S&S ISA in three to five years. You probably won't accumulate a substantial capital gains tax liability for holding the money outside for that time and if you did potentially do that you can just sell part and buy back later to use your annual CGT allowance each year and keep within the limit.

If you don't need the income it's still quite likely to be good to take the maximum permitted income level using income drawdown then invest that, either into S&S ISA investments or back into another pension. The pension route gets you another tax free lump sum that will benefit from the tax relief. This way there's no income tax penalty for taking the money early if you're a higher rate tax payer now and won't be later. All tax rate people can benefit from the second tax free lump sum part. The other pension could be at the same place as this one is unless their own rules don't allow that.

If you don't need the lump sum it's also possible to recycle some or all lump sum money into new pension contributions. There are restrictions on how much of a lump sum can be reinvested into pension contributions so say if this interests you and I or someone else will point you to the HMRC rules.

If you take any of it you also need to consider the inheritance situation. Before you take any money, 100% of it is inheritable without tax charge. For a portion that you take 25% from, that then is still payable without tax charge into a pension for a spouse but anyone else or a spouse outside a pension will have a 55% tax charge deducted first. If this matters you can buy life assurance to cover it.

So: taking and reinvesting is probably most efficient, particularly using the pension contribution route for the income to get some extra tax efficiency.

If you're approaching state pension age it's worth deferring the state pension by one to three years for a man or two to five for a woman if you're in good health and expecting to be part of the half or so who live to 87 or older, more for women than men. The extra 10.4% a year pro-rated for partial years is a good deal.

dunstonh

Leave the whole amount in the SIPP until needed

in most cases yes but with a few exceptions.

Take the lump sum anyway and self invest

What difference would that make other than reducing the death benefits and creating potential tax issues?

Take out a yearly tax free sum until the allowance is used

Does phased drawdown fit with your needs?

Any help would be appreciated

You have listed some but not all of the options and asked us which is best but you havent given any indication of what you are trying to achieve or why. Unless we know the objectives, requirements, tax position and your overall financial position, risk profile and capacity for loss then we cant really comment on what is best.

evanowen

If someone gave up guaranteed annuity rates or guaranteed bonuses when they switched an existing plan into a SIPP they may be entitled to compensation in five or six figures. Check with your previous pension provider.

kidmugsy

ognum wrote: »

If you do not have a current need for the tax free lump sum from a SIPP on retirement would it be most profitable to

Leave the whole amount in the SIPP until needed

One advantage of leaving the SIPP "uncrystallised" (that's "unvested" in the old parlance) is that if you should pop your clogs the money can be passed gross (i.e. untaxed) to whomever you nominated to your pension provider. If that nominee were, say, a child of yours, she might be pretty glad that the money was not exposed to Inheritance Tax.

It may be that I should have said "pop your clogs before age 75": I hope one of the experts hereabouts might comment on that.

evanowen

Same applies to a personal pension? Stakeholder? NEST?

A SIPP is an upmarket personal pension tax wrapper that may be unsuitable for most people with small pension pots, they are more expensive to run and require a time commitment ordinary people just don't have unless the size of their 'pot' justifies having the fund 'managed' by a stockbroker for example, this also incurs further costs and can't be guaranteed to beat any trackers or individual stock.

Unfortunately many advisers in the UK see them as an opportunity to fill their boots. I have seen some stupid things being done by highly qualified "RDR ready" advisers and of course 'consumers' who do their own thing with execution only services.

One day soon there may be a regulatory review, the regulators has already paid attention to to what some 'specialists' have been doing and they didn't like what they saw.

If you aren't sure what a SIPP is or whether you will benefit from having one then think carefully or get a second opinion from someone who doesn't have a vested interest.

SeniorSam

kidmugsy wrote: »

One advantage of leaving the SIPP "uncrystallised" (that's "unvested" in the old parlance) is that if you should pop your clogs the money can be passed gross (i.e. untaxed) to whomever you nominated to your pension provider. If that nominee were, say, a child of yours, she might be pretty glad that the money was not exposed to Inheritance Tax.

It may be that I should have said "pop your clogs before age 75": I hope one of the experts hereabouts might comment on that.

I am in a similar position and my pension pot is growing reasonably well using life funds I have selected and now almost £300k.

I would appreciate clarification on the following points:-


(1) Can someone please clarify this 'age 75' rule. I was under the impression that the rule had been set aside? When I started my SIPP, the rule was not limited to any age.

(2) I would also appreciate clarification on the 'equalisation' rule that will be coming into effect soon. Will this also affect the amount I can draw from my SIPP drawdown ?

(3) If my SIPP TFC is not all needed, presumably I can take a few TFC amounts up to the limit of 25%, but I don't need to start the actual drawdown of the pension at all do I ?

Would appreciate advice on this . Thanks

Sam.

jamesd

At age 75 the pension pot is treated as crystalised (benefits taken) even if that hasn't happened. So if you want any lump sum you'd need to take it before 75 or lose the chance.

The current announced changes will increase the amount that can be taken by females without reducing the amount that males can take. This may change in the future. HMRC has said that females will initially use the male GAD calculation rules and those produce higher allowed incomes.

You don't need to start taking an income but you do need to put the portion from which you take 25% into technical income drawdown, even if not taking any income. You could take less than 25% but it's usually going to be best to take 25% from a portion of the pot than less than 25% from more of it.

evanowen wrote: »

A SIPP is an upmarket personal pension tax wrapper that may be unsuitable for most people with small pension pots, they are more expensive to run and require a time commitment ordinary people just don't have unless the size of their 'pot' justifies having the fund 'managed' by a stockbroker for example, this also incurs further costs and can't be guaranteed to beat any trackers or individual stock.

They can be more expensive to run. They can also be cheaper to run. It depends on the particular SIPP chosen and the investments used within it. There is no requirement to spend more time if that is not desired. Again, whether spending more time is desired is up to the individual and the choices they make. There's no requirement at all for a stock broker to be used for advice, nor any need to use any direct share purchases. No investment can be guaranteed to beat "any trackers" but it's not that hard to beat many or even most trackers within a SIPP. Just takes picking the right ones.

Beating something like a FTSE All Share Index tracker charging 1.5% or 1% would be easy within many SIPPs. 1% being the long term Stakeholder pension charge cap, completely trivial to beat within a SIPP. Hargreaves Lansdown has a moderately costly SIPP but even there you can get a FTSE tracker for no more than 0.84% TER even for small amounts invested. For larger amounts they have an option that can approach 0.1% - 0.1% fund charge plus £2 a month. On £100,000 invested that would be 0.124%, on £20,000, 0.22%.

Other forms of personal pension can be more or less suitable and more or less costly than a SIPP. Depends on the specifics of the various pensions and investments involved. What SIPPs are, is in part a highly competitive market, where the price competition has the potential to bring significant savings for consumers, and where the RDR changes may increase that competition and the potential benefits.