Income from SIPP in Drawdown - tax treatment

peterg1965

Quick question, how is income from a SIPP in Drawdown treated for taxation purposes? Is it liable for income tax at your prevailing rate, or is it regarded as a dividend and taxed accordingly. Does the type of investment within the SIPP, determine how the income is taxed?Many thanks.

jem16

peterg1965 wrote: »

Quick question, how is income from a SIPP in Drawdown treated for taxation purposes? Is it liable for income tax at your prevailing rate, or is it regarded as a dividend and taxed accordingly.

It's taxed as normal income. Depending on how you are taking it, it may see a larger than necessary tax amount being taken off - if it's done on a regular monthly basis it's fine as it would be allocated a tax code. It's lump sums that can sometimes cause the overtax but you can claim it back.

Does the type of investment within the SIPP, determine how the income is taxed?Many thanks.

No it doesn't.

dunstonh

how is income from a SIPP in Drawdown treated for taxation purposes?

chargeable to income tax at the highest appropriate rate. Although phased drawdown allows 25% to be tax free.

Does the type of investment within the SIPP, determine how the income is taxed?

no.

peterg1965

Thank you both.

pops66

From next year you can have £5,000 a year dividends tax free, even if you are a higher rate taxpayer.

For a higher rate taxpayer I think it makes sense to take money tax-free out of your SIPP such that you have up to around £100K invested in dividend-paying assets outside SIPPs and outside ISAs. (Of course, if you don't use you annual ISA allowance, that should be the first destination for capital taken out of a SIPP.)

Experts - does the above make sense? It's what I'm thinking of doing at some time in the future.

kidmugsy

pops66 wrote: »

Experts - does the above make sense? It's what I'm thinking of doing at some time in the future.

I'm not an expert, but then who is an expert on the future? The only good reasons that spring to mind for moving tax-free capital out of a SIPP, and thereby exposing it to CGT, are (i) MAJOR: that you fear that the 25% TFLS will be abolished or reduced, and (ii) MINOR: that you save in charges i.e. because many platforms charge you less to hold shares outside a tax shelter.

A disadvantage for some people, in addition to the costs involved, is that they'd thereby lose the shelter from IHT that a SIPP provides. On related grounds; if I were approaching the age of 75, I might take my 25% on the grounds that it would be tax-free in my hands whereas it wouldn't be in the hands of a beneficiary if I died after 75. IHT would outweigh that consideration though, for anyone wealthy enough.

pops66

kidmugsy wrote: »

The only good reasons that spring to mind for moving tax-free capital out of a SIPP, and thereby exposing it to CGT, are (i) MAJOR: that you fear that the 25% TFLS will be abolished or reduced, and (ii) MINOR: that you save in charges i.e. because many platforms charge you less to hold shares outside a tax shelter.

A third possible reason is fear of falling foul of the LTA rules. Take the 25% out of your SIPPs and you can subsequently never fall foul of the LTA rules. (I hope that is correct!!??)

Particularly relevant for people who have an occupational pension and a SIPP. I believe there are some protections which you can register to get, but if you don't, and your pension and SIPP value rise you could get a nasty shock.

The fact that people do get caught out suggests not everyone is on the ball with respect to adding the deemed capital value of an occupational pension + SIPP value to arrive at your closeness to the LTA. All three numbers being ever-changing variables.

Daniel54

pops66 wrote: »

A third possible reason is fear of falling foul of the LTA rules. Take the 25% out of your SIPPs and you can subsequently never fall foul of the LTA rules. (I hope that is correct!!??)

In order to take the full 25% PCLS then it is necessary to crystallise the entire pension,which will then erode the relevant percentage of your lifetime allowance.You can certainly fall foul of the LTA as the PCLS always counts towards the LTA calculation ( DB or DC)

If you have a large DB pension then there are arguments for crystallising a SIPP sooner rather than later so that it takes up less of the LTA .There is also a second LTA test at age 75 to be aware of.

pops66

Daniel54 wrote: »

In order to take the full 25% PCLS then it is necessary to crystallise the entire pension,which will then erode the relevant percentage of your lifetime allowance.You can certainly fall foul of the LTA as the PCLS always counts towards the LTA calculation ( DB or DC)

If you have a large DB pension then there are arguments for crystallising a SIPP sooner rather than later so that it takes up less of the LTA .There is also a second LTA test at age 75 to be aware of.

Thank you.

What is the test at age 75 please? More particularly, if I have a DB pension and fully crystallised SIPP(s), would I be subject to it?

zagfles

pops66 wrote: »

Thank you.

What is the test at age 75 please? More particularly, if I have a DB pension and fully crystallised SIPP(s), would I be subject to it?

Yes but AIUI it would only be on any increase in the value of the drawdown pot, so as long as you've drawn down enough to make its value lower at age 75 than it was at crystallisation you should be OK. That's my understanding anyway.

See http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM11104645.htm

pops66

zagfles wrote: »

Yes but AIUI it would only be on any increase in the value of the drawdown pot, so as long as you've drawn down enough to make its value lower at age 75 than it was at crystallisation you should be OK. That's my understanding anyway.

See http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM11104645.htm

Thank you, I've visited that link but I'm afraid I can't make head nor tail of it!

It is quite possible that the assets in my fully crystallised SIPP will be higher at 75 than they where at the point of crystallisation. So now I need to understand exactly what the calculation is at 75 but so far I can't find those details anywhere.