Is this feasible/legal

reheat

I'm virtually into the 40% tax band, and I currently have £84K in one of my deferred pensions, which I want to get at my 25% lump sum. (I'm nearly 60). So I am considering transferring it into a Sipp. (I've checked regarding transfer, and though it's currently in an S32 buyout plan, but there is no GMP nor GAR associated with it).

Suppose I then put the £84K into a Sipp, and go into draw down, initially at 0%, so I can collect my tax free £21K lump sum.

Now suppose I draw down the remaining £63K, which will render me liable to pay £25K income tax, leaving me £38K as cash in the bank. Is there anything in law which would prevent me then paying that £38K into a currently active pension fund, which due to tax relief should then get boosted back up to £63K?

My objective is to access the lump sum, but leave the rest in a normal pension fund.

atush

It will depend on how much income you have, and how much you have put into pensions this year. Up til April you can put 50K into a pension (if you have 50K income).

You may be able to use previous years unused amts. But there are rules on recycling pension lump sums.

jamesd

It's completely lawful to recycle pension income into new pension contributions. No restrictions or limits other than the usual earned income and £50,000 a year ones. It's particularly beneficial where the contributions are being made by salary sacrifice, so NI as well as income tax is being saved. You gain by getting a second 25% tax free lump sum on the newly contributed money.

This recycling of income is one of the more efficient things to do if you can accept the reduced capital availability compared to investing the income outside the pension.

So first, you should consider recycling drawdown income, because you can do that easily.

How do you propose to withdraw the remaining 63k? You cannot do this as a single lump, the GAD limit of Capped Drawdown prevents it. And you can't use Flexible Drawdown to do it because you can't make more pension contributions from the moment you enter Flexible Drawdown.

For recycling the 21k, that needs to be checked against the lump sum recycling rules.

First rule, if the lump sum taken (and others within the previous twelve months) is not more than 1% of the lifetime allowance, recycling it into pension contributions is fine. The lifetime allowance is currently £1.5 million so today and through the end of this tax year it's OK to recycle a lump sum of £15,000. From next tax year the lifetime allowance reduces to 1.25 million and the lump sum to £12,500. The GAD limit calculation goes up part way through March so the ideal time to do it might be between the increase to 120% in GAD calculation and the start of the new tax year.

So your initial solution is to recycle the lump sum in two steps, with a gap of just over twelve months between them. But there's another rule that can trip you up if you do this: the amount of the additional contributions will exceed 30% of the lump sum, under a cumulative rule that spans five years.

So you must do it more slowly.

But since you want access to the lump sum, no issue because you won't be recycling it, just the income from the rest.

Note that once you take the lump sum or any income, the death benefits are subject to a 55% tax charge unless they are paid into the pension pot of a spouse or a few very limited other types of financial dependent. Use life assurance to protect the interests of anyone else who might lose out. Prior to taking benefits all 100% is available with no tax outside the pension pot.

reheat

Lots to think about there. Probably not what I hoped I could do with it. Trying to find a way to get my 25% lump sum, to go towards a property purchase, but still leave the rest in a pension fund till I'm 65.

I think my other option might be to get an interest-only mortgage until I'm 65, then draw my pension and 25% lump sum, so I can pay off the mortgage.

ffacoffipawb

reheat wrote: »

Lots to think about there. Probably not what I hoped I could do with it. Trying to find a way to get my 25% lump sum, to go towards a property purchase, but still leave the rest in a pension fund till I'm 65.

I think my other option might be to get an interest-only mortgage until I'm 65, then draw my pension and 25% lump sum, so I can pay off the mortgage.

Why not take the tax free cash but take a zero drawdown on the rest, thus leaving it all in the pension? That seems to be what you are trying to achieve, isn't it?

jamesd

You can take the lump sum and leave the rest in a pension pot, taking no income if you want to. Some pension product don't allow that but there are plenty which do.

But if you do use drawdown to get the 25%, you might as well think about the tax efficiency of taking the income and recycling that into more pension contributions. Won't leave as much cash in a future lump sum as taking the income and investing it outside the pension but it is very tax efficient.

Is the property BTL? Might be to your advantage to use an interest only mortgage anyway in that case. You can use a mortgage on your own property, it doesn't have to be on the BTL property.

reheat

ffacoffipawb wrote: »

Why not take the tax free cash but take a zero drawdown on the rest, thus leaving it all in the pension? That seems to be what you are trying to achieve, isn't it?

Because I'm not at all confident about self-investing, and I want my fund to be as safe as it would have been in an ordinary pension fund for someone close to 60. If I just leave it in the Sipp cash fund it will effectively depreciate in value because of the truly naff interest rates.

atush

What is your pension invested in now? It could be invested in t he same in the SIPP (or in a personal pension).

Why open a sipp if you don 't want to self invest?

reheat

jamesd wrote: »

You can take the lump sum and leave the rest in a pension pot, taking no income if you want to. Some pension product don't allow that but there are plenty which do.

But if you do use drawdown to get the 25%, you might as well think about the tax efficiency of taking the income and recycling that into more pension contributions. Won't leave as much cash in a future lump sum as taking the income and investing it outside the pension but it is very tax efficient.

Is the property BTL? Might be to your advantage to use an interest only mortgage anyway in that case. You can use a mortgage on your own property, it doesn't have to be on the BTL property.

No, not BTL, just our one and only future residence.

I don't know how to get at the 25% without having to either buy an annuity or go into drawdown. From what I can see, you cannot legally get at the lump sum without doing one or other of those things.

And from this thread it looks like it would take a good few years to achieve the recycling.

kidmugsy

reheat wrote: »

I want my fund to be as safe as it would have been in an ordinary pension fund for someone close to 60.

You need to tell us what you mean by "an ordinary pension fund ".

grey_gym_sock

reheat wrote: »

I don't know how to get at the 25% without having to either buy an annuity or go into drawdown. From what I can see, you cannot legally get at the lump sum without doing one or other of those things.

you can go into drawdown, but not not actually draw anything other than the 25% for now.

then, some years later, you can start actually drawing an income from the remaining funds. or you can later use the remaining funds to buy an annuity.