Income Draw down

charlotte_rose

My mother is 70 and has just retired.

She has £35k in a SIPP and is planning to take 25% tax free and move the rest into either income drawdown or an annuity.

If mum moves in Income drawdown and after a few years the funds are below £10k can she withdraw the reminder in one lump sum?

jamesd

What she can do depends on the total value of all of her pensions other than the state pensions. It includes any work final salary or similar defined benefit pensions as well as the SIPP. To get the value of work final salary pensions multiply the annual income by 20.

If the total value is no higher than £18,000 she can use trivial commutation to take the money as a lump sum, taxed as normal PAYE income.

If she uses trivial commutation for any pension she has 12 months to do it for any others she wants to do it for, then her once in a lifetime opportunity to do it is over.

It appears that initially she'd have £26,250 in the pension pot after taking the 25%. It's possible to use two other personal pension pots of up to £2,000 each by moving some money into them and then taking those as trivial lump sums but in her case this still wouldn't be enough to get her to the £18,000 limit for the main trivial commutation.

At the moment as a 70 year old the GAD limit on drawdown income each year would be 6.70% of the capital value of £26,250, which is £1,758.75 a year. This is calculated with a 2.75% gilt yield and 100% of GAD income limit. The gilt yield changes so later calculations may give a different value. From late March this year the income limit increases to 120% so if she started drawdown then she'd be able to take £2,110.50 a year. The limit has to be recalculated for her once every three years until she's over 75, then once a year. The age-related percentage part of the calculation will go up each year if the gilt yield (interest rate) stayed the same.

kidmugsy

If your mother happened to have enough pension income to qualify (State Pension plus other pensions/annuities = £20k per annum) she could enter Flexible Drawdown, which would let her empty the SIPP at a rate that suits her.

charlotte_rose

current fund around £35k. after 25% tax free should be around 28.5k.

on income draw down (not activated yet) about £1700 each year can be drawn down.

other income would not total in excess of 20k pa.

xylophone

Has she looked into an annuity so that she can compare this with drawdown?

charlotte_rose

annuity is similar level. an enhanced annuity would be around 2200 pa.

deterred from annuity because nothing left on death, where something from draw down albeit after tax. pro annuity, stable income for life (though inflation will erode).

kidmugsy

charlotte_rose wrote: »

an enhanced annuity would be around 2200 pa.

£2200 p.a. > £1700 p.a.

If she were my mother I'd try to persuade her of this truth. On the other hand, inflation could prove it an untrustworthy guide.