Tax on a SIPP drawdown question

maximumgardener

maximumgardener wrote: »

I reckon you have it sorted!.
40% taxpayer now but ensure you pay 20% in retirement.
as you say , you could take the £150k TFLS and invest it in ISA's and then DD the ISA's to suit your situation in early retirement. That way your 400k can stay invested . Woo hoo:beer:
Happy days! best of luck.
MG

typo . £450k . Even better

AnotherJoe

Do you see an advantage taking the full TFLS ? If I take it as a lump sum that would mean selling a bunch of shares and then repurchasing in an ISA and then the remainder would need to be cash or I'd be dealing with shares not in a tax free wrapper and the complications that ensue from that. (My SIPP is 100% in equities)

On reflection keeping it simple and all in the SIPP is probably best. I don't need the lump sum for anything and it just adds complexities.

EdSwippet

AnotherJoe wrote: »

Do you see an advantage taking the full TFLS? If I take it as a lump sum that would mean selling a bunch of shares and then repurchasing in an ISA and then the remainder would need to be cash or I'd be dealing with shares not in a tax free wrapper and the complications that ensue from that. (My SIPP is 100% in equities)

Not quite. You can 'crystallize' the SIPP to take the full TFLS, then place the remainder immediately into 'deferred drawdown' but still within the SIPP. No tax liability until you start actually drawing down from the non-TFLS part, annuitize, or whatever later on.

Of course you have to have a home for the TFLS now taken. ISA would be good, but remember that it will take many years of allowances at present levels to achieve that.

AnotherJoe wrote: »

On reflection keeping it simple and all in the SIPP is probably best. I don't need the lump sum for anything and it just adds complexities.

Generally right. Retain whatever tax sheltering you have for as long as you can, but use drawdown if needed to ensure you use up your annual income tax allowance.

But... one case for crystallizing and taking the TFLS all at once is if you hit the lifetime allowance. At 7% annual growth your £600k SIPP could grow to just under £850k by 2021. Factor in 20 times your £7k DB gives you £980k. This is perilously close to the new £1m coming in from April.

Now, 7% growth may be optimistic, and the £1m is supposed to index for inflation from 2018 -- government promise, so take with a vat of salt -- so it looks to me like if you stick to your timetable you are likely to be safe from lifetime allowance issues. Even so it'd be a good idea to keep an eye on it though. A good year or two in the markets, government changing the rules (certain), or delaying your retirement could all push you into 55% tax on a chunk of your pension savings -- not desirable.

grey_gym_sock

if you take the £150k lump sum immediately when you retire, you could postpone drawing any taxable income from the SIPP until the tax year after you've stopped working, by using some of the lump sum for living expenses in the mean time, while feeding the rest into ISAs when you can. that's more tax-efficient than paying 40% tax on the pension in the initial year.

you could choose to stop working at a point when you've earned c. £43k in the current tax year, i.e. on the threshold of higher rate tax.

you could even choose to stop working when you've earned more than that, but immediately lob all earnings in excess of £43k into your SIPP, wiping out your higher-rate tax bill in the last year (unless you're running into the annual allowance, after using any available "carry forward"). that won't leave you short of cash, since you can then take the 25% lump sum out almost immediately. surely that's more tax-efficient than scaling back pension contributions in the last year?

if you'd end up with a few shares in a taxable account (before they can be bed-and-ISA'd), that does add some complexity, but probably wouldn't cost anything in tax. since there is a £11k CGT allowance, and from next year a £5k dividend allowance, per person.

zagfles

AnotherJoe wrote: »

So you are saying, for example, work until just before any SIPP drawdown I'd take plus the pay for that part year, took me into 40% ? I can see the logic there. Though the downside is, that would still mean I'd pay an additional £2,200 that year on the drawdown from my SIPP ? Either that or postpone the drawdown until the next tax year and live off other sources ? In that case, might be a plan to stop pension contributions for that final part year and save that as cash to spend when I retire.

I see a little spreadsheet work coming on

Remember that the PCLS will always be paid up-front, ie you get that when you put the SIPP into drawdown, or the part of the SIPP that you're putting into phased drawdown.

So you could always use the PCLS to tide you over for a few months, or even the rest of the tax year if you put the whole SIPP into drawdown, before you start drawing taxed income from it.

AnotherJoe

Thanks for this guys, at least I've got a couple of years to work through the implication nd the sums !

Ed said "But... one case for crystallizing and taking the TFLS all at once is if you hit the lifetime allowance. At 7% annual growth your £600k SIPP could grow to just under £850k by 2021. Factor in 20 times your £7k DB gives you £980k. This is perilously close to the new £1m coming in from April."

My fund growth has been 6% annualised since 2000, and 9.5% annualised since 2011.
So i guess 7% is not out of bounds though I am intending to start moving into a reasonable percentage of income based investments (eg buying shares with an eye on dividends which are generally around 3-4%) to make drawdown possibilities a bit more stable. And if I"m closer to say 4-5% and I'm taking out 6 or 7% then its not going to grow.



ggs you said "you could even choose to stop working when you've earned more than that, but immediately lob all earnings in excess of £43k into your SIPP, wiping out your higher-rate tax bill in the last year (unless you're running into the annual allowance, after using any available "carry forward"). that won't leave you short of cash, since you can then take the 25% lump sum out almost immediately. surely that's more tax-efficient than scaling back pension contributions in the last year?"

My thought was, if I dont hit 40% band then its a zero sum game to put it in with 20% releif and get it back with 20% relief. Are you pointing out I'd only be paying the 20% coming out, on 75% of what goes in?

I obviously haven't quite got my head round the full implications yet so I'll work on it until I do, need to do some reading. Any books or websites people would recommend for this transition period of the year you finish and the next year? After that it seems fairly steady state and easy to understand.

Looks like I need to get a decent financial model to work through the possibilities. Is this the sort of thing you can have an IFA do, perhaps a couple of hours for a fixed fee to work me through the possibilities and numbers? I dont mind paying for that, but I dont need (or want) to pay anyone to manage my investments themselves.

zagfles

AnotherJoe wrote: »

ggs you said "you could even choose to stop working when you've earned more than that, but immediately lob all earnings in excess of £43k into your SIPP, wiping out your higher-rate tax bill in the last year (unless you're running into the annual allowance, after using any available "carry forward"). that won't leave you short of cash, since you can then take the 25% lump sum out almost immediately. surely that's more tax-efficient than scaling back pension contributions in the last year?"

My thought was, if I dont hit 40% band then its a zero sum game to put it in with 20% releif and get it back with 20% relief. Are you pointing out I'd only be paying the 20% coming out, on 75% of what goes in?

No what I think he's suggesting that when you retire, if you've earned over £43k, bung whatever you've earned over £43k into your SIPP. If you've earned under £43k, don't put anything in. Then take the TFLS and live on that for the rest of the tax year, don't draw down any taxable income from the SIPP. Start drawing taxable income in the next tax year.

But as you say getting 20% relief is still a winner as you only pay 15% on the way out - as you only pay tax on 75% of what you take out. Assuming you don't exceed the LTA/AA.

I obviously haven't quite got my head round the full implications yet so I'll work on it until I do, need to do some reading. Any books or websites people would recommend for this transition period of the year you finish and the next year? After that it seems fairly steady state and easy to understand.

Looks like I need to get a decent financial model to work through the possibilities. Is this the sort of thing you can have an IFA do, perhaps a couple of hours for a fixed fee to work me through the possibilities and numbers? I dont mind paying for that, but I dont need (or want) to pay anyone to manage my investments themselves.

You can get free guidance from your SIPP provider or pensionswise https://www.pensionwise.gov.uk you seem to understand things pretty well, I'm sure they could fill in any gaps.

OldBeanz

Presumably an IFA would charge you £200 plus VAT for showing you the different options. It's your money.
Would now not be a good time to start moving your funds onto an income gearing as you can build up a cash buffer?

AnotherJoe

OldBeanz wrote: »

Presumably an IFA would charge you £200 plus VAT for showing you the different options. It's your money.
Would now not be a good time to start moving your funds onto an income gearing as you can build up a cash buffer?

Yep, started last week in a small way

zagfles wrote: »

No what I think he's suggesting that when you retire, if you've earned over £43k, bung whatever you've earned over £43k into your SIPP. If you've earned under £43k, don't put anything in. Then take the TFLS and live on that for the rest of the tax year, don't draw down any taxable income from the SIPP. Start drawing taxable income in the next tax year.

Ahah, got it, a light dawns !

zagfles wrote: »

But as you say getting 20% relief is still a winner as you only pay 15% on the way out - as you only pay tax on 75% of what you take out. Assuming you don't exceed the LTA/AA.

Cheers again to all, I will start the detailed planning this time next year for early 2018. You have all been a great help, helped me firm up my retirement plan.

I do think now that packing it in around end of the tax year works for me, so I dont miss a summer, (has anyone read "the tail end "? ) and don't have my first few retirement months say Jan/Feb with rubbish weather and short days, might as well be in a warm office then

AnotherJoe

I also just realised I omitted wifes SP of £7k in 2022.

Just put this lot into Firecalc, I die with lots of money under any previous economic scenario. :rotfl:
What could possibly go wrong? :eek:

I'll give it a go with "retireasy" also when I have time.