Using Sipp over a 3 or 4year period to cover the gap

frugal90

I have £70000 in a Sipp. As of today it is all in cash. My plan is to use this to help cover the gap from age 56 or 57 until I can draw my teachers pension without an actuarial reduction. Assuming that I use it from age 56, then I will draw £70000/4 each year - or £17500 each year. The first 25% will be tax free then I will have my personal allowance, so roughly 15k will be free of tax. Tax then will be paid at 20% on the remainder, in other words about 20% of £2500 = £500. Total net to me of 17k. Now where I need advice from the forum. I suspect that the payment will be made 25% tax free then I'll pay 20% initially on the rest when I drawdown. Will I need to contact HMRC to reclaim the tax as I will have no additional income, or is there a way of sorting this prior to the drawdown?. Also do I need to wait until the end of the tax year to claim the tax back or can I do it straight away as I have no intention of working during that year. Thanks for any help, I know someone will know the answer.

Frugal

Linton

The way it works is that after the 25% tax free is taken, the first taxable tranche of drawdown is taxed at the default 20%. By the time the second tranche is taken HMRC should have issued a tax code which will operate just like the tax code during employment. With luck by the end of the year you will have paid the correct amount of tax.

However if you just take 1 taxed tranche in the first year, by default the correct tax will need to be sorted out at tax year end when you would get a refund. However HMRC have now provided a form whereby you can claim your refund before the end of the tax year. See here.

xylophone

Your idea would be to retire from teaching at the end of the summer term 2018?

You intend to keep your SIPP in cash until it has all been drawn?

You would send your P45 to your SIPP provider?

You would take the 25% PCLS immediately? (This would seem to be a good idea as you would be able to earn at least some interest on it -you will be in a better position to know at the time) - cash in a SIPP earns virtually nothing?

As the SIPP provider would have your P45, it should be the case that your tax position and code should be correct for the tax year in question- presumably you would ask the provider to pay you a regular monthly amount to keep you as near as possible to a monthly salary position?

You have checked your starting amount for new state pension?

frugal90

My 70k will be split into four drawdowns, each having 25%tax free. I will use this plus saved cash to see me through to teachers pension at age 60.

dunstonh

You may find the admin easier to do phased flexi-access drawdown rather than ad-hoc UFPLS. The latter requires you to send in the appropriate P5x form after each event. Whereas the former will see the pension provider sort it with HMRC as its treated as a regular payment. Phased flexi-access drawdown may be cheaper too depending on your provider.