Accessing a SIPP pension..?

C_Mababejive

OK i have read some sutff on this but dont fuly understand it.

My info is that you can access your SIPP from aged 55.

You can take 25% tax free

The rest is taxed at whatever your tax rate is, basic rate for the vast majority i would think ?

So the bit i dont understand is the 25% bit.

Is it the case that at the point you choose to access it, the 25% is the valuation at that point?

If so, maybe its best to leave accessing as late as possible to ensure max returns and therefore max tax free benefit??

Essentially is the 25% a one time take?

What other options are there??

Thank you

drumtochty

Yes do not automatically say, "I can take the moneys therefore spend" it if you have other income as that money has to last a long time.


Let's say you have £40,000 in your pot you can do two things.


1 Take the £10,000 tax free when you decide and the taxable money when you need it.


OR


2 Take an amount out every year and 25% of that annual amount is tax free and the other 75% is taxable.


Therefore in that case, say £4,000 a year, £1,000 tax free and the other £3,000 taxable.


In the case of option 2, it does not have to be a specific amount every year but what you need in any particular year.


In both cases, the 25% value is the value on the day you decide to tell the pension company you want to put the fund into drawdown (crystalise) but if you have a large pot let's say £100,000, then you can say let,s crystalise £40,000 today so you have £10,000 tax free £30,000 taxable and the remaining £60,000 can grow and you can crystalise or put ut into drawdown say 5 years later when it may have grown.


Even say a year later the fund grows by say £10,000, that growth is taxable. The tax free amout stays at say £10,000 or whatever is left of the tax free money if you have already tacken some tax free money. If you have crystalised the full pension pot.

penwise

I am a bit confused as to how much you get tax free from the pot - could some take please help clarify this for me . I have given an example below to illustrate what is causing the confusion

Thanks

Example

Pot: 400k

I start taking from that pot and take 100k (I get 25k tax free and 75k taxed ) and I leave the rest (ie 300k) in the pot.

Some years later this 300k pot has grown via investments and contributions to 500k.

Most of this growth being investment growth but during this time i had made a further personal contribution to the pot of 50k.

So lets say this time i want to take the whole pot.

How much would I get tax free?

Would it be 125k (25% of the whole 500k) or what ?

NoMore

EDIT: Misread post, Atush's post below is correct

atush

Yes, it would be 125K tax free. However, you wouldnt want to take the other 375 taxed, as it would be stomped on by tax at a very high rate.

Not much point in accumulating all that pension then losing half of it to tax.

atush

NoMore wrote: »

All of it would be subject to tax, as you crystalised the whole pot at the start and took the 25% tax free then, Any further withdrawals from the crystalised portion will always be subject to tax.

You can crytalise smaller amounts and always take the 25% tax free from that crytalised amount but you can't crytalise the whole lot and expect to get further 25% tax free amounts.

No it wouldnt, they only crystalised 100K, so only took 25K tax free and 75K taxed. Not the worlds greatest idea as that 75K would be taxed at 40%. At least

NoMore

Sorry @atush is correct, I misread it what you planned to do.

penwise

Thanks for the quick reply - that helped a lot.

Just one last quick question.

If instead I had had a 400k pot and at the time of accessing it for the first time I had taken the whole 25% tax free and the rest 300k went into the drawdown product
Over the years this 300k grows to for example 400k
Lets say in the intervening years I have also make more personal contributions (e.g. 200k) to a pension and these contributions have grown to 500k.
Am I right in thinking if I take money from the 400k drawdown anything I take is all taxed and if I take money from the 500k in the pension I get 25% of this tax free.

Thanks

NoMore

Yes the second pension would have the 25% tax free available to you, although you would have to be careful with the first pension to not trigger the MPAA of £4000 per year contributions (basically don't take anything more from the first pot other than the 25% tax free) to allow you to get that 200K built up in your second pot.

Hopefully I've read it correctly this time Although I'm sure atush or somebody will correct me promptly if not!

Judwin

penwise wrote: »

Thanks for the quick reply - that helped a lot.

Just one last quick question.

If instead I had had a 400k pot and at the time of accessing it for the first time I had taken the whole 25% tax free and the rest 300k went into the drawdown product
Over the years this 300k grows to for example 400k

Once you crystallise the £400K, and take the £100K tax free, the remaining £300K goes into a separate crystallised 'pot'. That pot can stay invested, and may grow to £400K/£500K/£600K/whatever, but you can't ever take any more tax free cash from it. Everything you take from it will be taxed as 'income' at whatever rate you pay.

penwise wrote: »

Lets say in the intervening years I have also make more personal contributions (e.g. 200k) to a pension and these contributions have grown to 500k.

Careful. You can take the £100K tax free ok, But once you take ANYTHING from the crystallised pot (the remaining £300K) then you can't continue to contribute any more than £4000 per year. So you won't be able to add another £200K, so it won't grow to £500K!

penwise wrote: »

Am I right in thinking if I take money from the 400k drawdown anything I take is all taxed and if I take money from the 500k in the pension I get 25% of this tax free.

Anything you take from the crystallised pot (£300K + growth) is taxed.


The 'new' £500K pot is uncrystallised, so you can crystalise it, take 25% tax free, and then the remaining £375 is crystallised and gets treated in the same way as the original £300K + growth.

AlanP_2

NoMore wrote: »

Yes the second pension would have the 25% tax free available to you, although you would have to be careful with the first pension to not trigger the MPAA of £4000 per year contributions (basically don't take anything more from the first pot other than the 25% tax free) to allow you to get that 200K built up in your second pot.

Hopefully I've read it correctly this time Although I'm sure atush or somebody will correct me promptly if not!

Looks correct to me :beer:

The key thing in your post is that if you take 1p of taxable income from a DC pot you trigger MPAA.

Your annual contributions are then limited to higher of £10k (£4k limit has been announced but not passed into law yet AFAIK) or amount of earned income (not pension income) rather than the £40k Annual Allowance.

In short DON'T take taxable income if you still want to carry on contributing at >£10k (£4k) per year.