25% pension lump sum

northbob

I am some years away from starting to withdraw from my SIPP but thinking ahead.

I understand that it is possible to take up to 25% from a SIPP as a tax free lump sum. Then withdraw the remainder as you wish over time, paying tax on income above the personal tax free annual allowance taking into account any other taxable income. The alternative is not to take the 25% lump sum, but withdraw from the pot as you wish over time paying income tax on the taxable proportion on 75% of all withdrawals (i.e. 25% of all withdrawals are tax free).

So (simply) £400,000 SIPP pot and £20,000 p.a. in other taxable income.
£100,000 tax free lump sum. Then £300,000 withdrawn at 4% p.a. £12,000. Tax on SIPP pension withdrawal 20% £3,000.
OR
£400,000 withdrawn at 4% p.a. £16,000. £4,000 tax free and £12,000 taxed at 20% £3,000.

My question is what are the pros and cons of taking the 25% lump sum?

Would the same pros and cons apply if at the time of starting to withdraw from the SIPP you are no longer in the UK or will that be nothing to do with the UK tax system and totally down to the taxation system in the country of residence? This is assuming the SIPP remains as it is and not transferred to QROPS.

quotememiserable

I don't think there's a con to taking it. You can invest it in all the same things as you can inside the pension, plus you can isa it to shelter it from income tax. Or at least progressively do so as the maximum isa transfer allows. Unless you think you can't trust yourself not to spend it, I suppose.

westv

Best to spend it on wine, women and song.

Sterlingtimes

My intention is to draw from the 25% tax free portion of my SIPP for the first five to six years of my pension to feed my income and pay no tax on that amount for several years. When that is depleted, I will pay basic rate tax from thereon. I will contrive not to cross the 40% tax threshold during my pensionable life.

dunstonh

My question is what are the pros and cons of taking the 25% lump sum?

There are no negatives. Unless there are GARs.

I would say the phased flexi-access is most popular method I am seeing. Rather than 25% lump sum. But it really depends on the needs. A lot of people dont have an immediate 25% lump sum need on day one. So, no point taking it out of the pension until they do need it.

northbob

How does the 25% work if you decide not to take it at the very beginning of drawdown? Assuming all personal tax free allowances have been exceeded and any pension withdrawal puts you in the 20% taxation band.
If you start with a SIPP value of £400,000 and decide to withdraw 4% p.a. £16,000 once a year.
Is the SIPP value at first withdrawal recorded and 25% (£100,000) ring fenced as tax free income to be withdrawn at any time. Once £100,000 has been withdrawn tax free over however many years then the tax free potential is exhausted and all further withdrawals are taxed in full?
Or if the first withdrawal is £16,000. Is this taxed as 20% on the full £16,000 or as £4,000 tax free and 20% tax due on £12,000? Does this then happen every year thereafter (whatever is withdrawn 25% of the amount is tax free) with no limit on the total cumulative tax free element of withdrawals?

dunstonh

How does the 25% work if you decide not to take it at the very beginning of drawdown?

Lets say you have £100k (for roundness) and wish to draw £1000 as an ad hoc payment. They will pay you £250 tax free (25%) and £750 taxed (75%). The rest of the pension is still uncrystallised and fully able to pay 25% of whatever value it grows to in future.

Phased flexi-access drawdown is where you take a fixed frequency income (typically monthly but can be q, h, y). Lets say £1000 pm with 25% tax free and 75% taxable (subject to personal allowance).

If you start with a SIPP value of £400,000 and decide to withdraw 4% p.a. £16,000 once a year.

So, in this scenario you have £400k uncrystallised.
If you do phased flexi-access drawdown with £16k p.a. that is £1333.33 pm.
£333.33 would be tax free (25%) and £1000pm would be taxable.

It is multiple phased crystallisations meaning your renaming fund after each withdrawal still has the 25% available on whatever fund value it grows to in future.

If you fully crystallise the fund at the start you never get access to another 25% again, even if the fund grows to whatever amount. If all you are going to do is put that money in a savings account or ISA then you have wasted the ability to draw more out tax free over the long term.

northbob

dunstonh thank you for this explanation. So the first three examples you gave all allow for income to be withdrawn from the SIPP pot over time and tax is paid on 3/4 of income.

I think I can work it out from your last paragraph, but what exactly is crystallise meaning in the context of SIPP withdrawals? I see the term often but it is never clear exactly what it means and the implications when it happens. Is taking any amounts from the SIPP crystallising or does it refer only to taking amounts on which 25% is tax free? Does 'fully' crystallising a SIPP mean taking the full 25% tax free amount in one go? Can fully crystallising happen at any point during drawdown, i.e. either at the start of drawdown as the very first withdrawal, or later on by taking 25% of whatever the remaining SIPP value at that point in time?

dunstonh

I think I can work it out from your last paragraph, but to be sure what exactly is 'crytallise' meaning in the context of SIPP withdrawals?

Pensions are either crystallised or uncrystallised or a combination.

Uncrystallised pensions allow you to take 25% from them. Crystallised pensions do not. Currently your pension is uncrystallised. If you drew the 25% on the whole value then all of it would become crystallised. If you drew 25% on half the value then half of it would become crystallalised.

Does 'fully crystallising' a SIPP simply mean taking the full 25% tax free amount in one go?

fully means doing the whole lot at 25%. Part means doing it in phases.

Can 'fully crystallising' happen at any point during drawdown, i.e. either at the start of drawdown as the very first withdrawal, or later on by taking 25% of whatever the remaining SIPP value at that point in time?

Fully would only happen right at the start. It would be part crystallisation if you used any other drawdown method.

northbob

dunstonh wrote: »

Pensions are either crystallised or uncrystallised or a combination.

Uncrystallised pensions allow you to take 25% from them. Crystallised pensions do not. Currently your pension is uncrystallised. If you drew the 25% on the whole value then all of it would become crystallised. If you drew 25% on half the value then half of it would become crystallalised.



fully means doing the whole lot at 25%. Part means doing it in phases.



Fully would only happen right at the start. It would be part crystallisation if you used any other drawdown method.

So if the starting SIPP pot was £100,000 and £4,000 is withdrawn in the first year, tax is paid on 3/4 of the £4,000 and the SIPP is part crystallised. If a year later the SIPP value was £96,000 (for arguments sake no gains or losses on investments) and you take 25% £24,000 of this in one go as a tax free lump sum - is the SIPP not then fully crystallised? You said if it was done in phases it is part crystallised - why is the status of the SIPP still part crystallised even if the full tax free entitlement has been taken?

westv

So you can
take 25% of the pot in one go all tax free
take 25% of the pot split over several years all tax free
take lump sums ( of which 25% will be tax free) until the pot runs out
????