Sipp drawdown taxation

logical1

I have just converted a SIPP pension pot into flexible drawdown & have taken the 25% tax free amount.
The remaining amount is £180k approx.
I do not currently need any income this would provide.
Due to our ages it is likely that my wife will live for a good few years after my death.
If my wife inherited the remaining pension pot it is inevitable that she would pay 40% tax, if she used it for pension income, and of course an even higher rate if she took it as a lump sum.
My other income means that if I take more than @5K per annum income from the pension I will pay tax on the excess at 40%.
For the record we do not have any close family.

My aim therefore is to take the remaining benefit from the Sipp whilst I live, (statistically perhaps 10-14 years) whilst paying the least amount of tax. I have in the past used VCTs' to reduce my tax liability, with admittedly mixed investment results, but recent investments in limited life VCTs' have not been too bad.

My idea therefore is to take reasonably substantial income sums over the next few years, (say £35k pa) and invest them in mainly limited life VCTs' together with a small top-up amount each year to eliminate the tax liability entirely. The rational being that the VCT income and repayments may provide a tax free income at a time in our later years when we may find it beneficial

Any comments on this would be very much appreciated.

Regards

gadgetmind

It's a difficult one, and one where it perhaps makes sense to speak to an IFA.

I'm no great fan of VCTs, and despite looking at them several times, I have never pushed the button. However, if your other income is reasonably secure, then I can see the attraction.

Had you considered moving to Cyprus? Due to the tax treaty, you only pay their tax on pension income, which is 5%. You can (I'm told!) then take your entire SIPP in one chunk, pay the 5%, and that's it unless you move back to the UK within 5 years. You can of course, visit the UK (max 180 days per year?), and you can then Cyrpus after your (from memory!) 180 days their to qualify as resident for tax purposes. There are lots of other countries in the world that you could visit during the 4.5 years, particularly given your healthy income.

Of course, your own health needs might mean the UK is more attractive despite the high levels of taxation.

Freecall

gadgetmind wrote: »

Had you considered moving to Cyprus?

Wow! Let no one ever accuse this board of not giving imaginative advice.

Can't wait to see what the OP says to this.

gadgetmind

France also has some interesting taxation regards pension lump sums.

http://www.sykesanderson.com/Service_France/articles/french-tax-uk-pension-draw-down.asp

jamesd

If you still have earned income you might consider taking the income and recycling it into more pension contributions, then taking a tax free lump sum from that new pension pot later.

Why limited life VCTs instead of non-limited if your objective is ongoing tax free income? The limited life types sacrifice growth and/or income to get their limited life.

A life expectancy of 10-14 years implies that you're at least 78 years old. If you're not, you need to look at cohort life expectancies unless you have some medical condition that significantly reduces your life expectancy beyond the 88 or so that around half of males and females aged 65 can be expected to reach.

If there's nobody you really want to leave your estate to then taking the maximum income you can enjoy is likely to be best, limited by the GAD limit on drawdown income. Unless you have £20,000 in guaranteed income and can use Flexible Drawdown instead of Capped Drawdown.