Withdraw 25% cash from from a cash SIPP each year?

JohnB47

This question was prompted by another thread.

My wife has a SIPP holding cash only. Does she have only one chance to withdraw 25% of it tax free or can she withdraw 25% tax free each financial year? She is age 62 and does not currently pay tax but may (depending on income) become a basic rate tax payer if she still works self employed at the time her State Pension kicks in (age 66).

Dazed_and_confused

It all depends on what method she uses.

Some people take 25% TFLS upfront whilst others opt for 25% of each payment being tax free.

Possible some providers may not have all options available for some of their plans.

AnotherJoe

Depends what you are thinking of with 25% tax free.
She can take payments each one of which will have a 25% tax free portion.
Or she can take 25% in year one and any future payments will be fully taxable.
She cannot take 25% tax free in year one, 25% tax free in year two, and so on,

I take it you know she can put in up to her earnings each year and get a 25% uplift ?

Reluctantpensioner

No, here is how it works:
Your wife's pension is currently "uncrystallised" funds.
Assuming your provider supports it, at any time she can take up to 25% as a tax free lump sum.
The 75% remaining becomes "crystallised" funds. (known as a drawdown fund)
She can withdraw (draw-down) from crystallised funds but are added to any other income and may be taxed. (of course if the draw-downs are small you may be able to keep within your annual allowance).
If crystallised funds grow - there is no second bite of the cherry - no tax free withdrawals from any growth in crystallised funds.
For this reason, it can pay to only take a proportion of your TFLS, 25% of future growth in uncrystallised funds can be withdrawn tax free.

JohnB47

Reluctantpensioner wrote: »

For this reason, it can pay to only take a proportion of your TFLS, 25% of future growth in uncrystallised funds can be withdrawn tax free.

Thanks everyone. The replies confirm what I thought. Just one further clarification please- Reluctantpensioner, can you explain the above?

I'm not sure what you mean by "25% of future growth in uncrystallised funds can be withdrawn tax free".

It might not be relevant to my wife's cash SIPP. There won't be any growth, unless that includes a tiny amount of interest or additional payments into the SIPP.

JohnB47

AnotherJoe wrote: »

I take it you know she can put in up to her earnings each year and get a 25% uplift ?

Yes, thanks. She has done this for the past two years and plans to continue doing it until she stops her self employed work.

The current plan is to wait until her State Pension starts and take stock then. If she wants to continue working, she'll keep paying the max into the SIPP. Then, eventually when she stops working, she'll take a 25% lump and start drawing down sufficiently small amounts that will allow her to avoid paying tax.

jamg21

An important question is why is all her money just in cash??

soulsaver

jamg21 wrote: »

An important question is why is all her money just in cash??

It doesn't say all her money is in cash.

Spreadsheetman

soulsaver wrote: »

It doesn't say all her money is in cash.

Yes it does - from the OP's original post:

My wife has a SIPP holding cash only.

harz99

jamg21 wrote: »

An important question is why is all her money just in cash??

Why, that has nothing to do with the question and advice the OP asked for, and is none of our business unless/until the OP asks for advice relating to other forms of investing the cash.

DairyQueen

jamg21 wrote: »

An important question is why is all her money just in cash??

That's a very valid question, and I assume you mean 'inside a SIPP'.

Cash held in SIPPs pays zero-to-token interest. Inflation will therefore ravage it.

OP's wife is a 62-year-old non-taxpayer. OP may be unaware that if his wife crystallises now, takes the 25% TFC, and draws down additional amounts up to her personal allowance each year (less any other taxable income), she will:

a) Benefit from much better interest rates available outside of the SIPP wrapper.
b) Be able to access the drawn down cash free of income tax whenever she chooses. This will be of benefit once income from earnings/SP kicks-in in future tax years.