How to draw down SIPP gains

WiltsGuy

I am retired, aged 72, and have a SIPP worth about £120k. I have other state and company pensions which meet my normal needs so have not been drawing anything from the SIPP as yet. The SIPP is increasing in value (though growth and dividends, etc) by around 5% p.a. Ideally I would like to withdraw each year the amount by which it has grown (i.e. typically £6k) to use for holidays. Also ideally I would like those withdrawals to be tax free (at least until I use up the 25% tax free value).

Am I able to draw down £6k p.a. as tax free withdrawals until I have drawn down a total of 25% of the fund – which would take about 5 years, by when I probably won’t be going on expensive holidays anymore?

If so, what type of draw down is this – I’m a bit confused between lump sum withdrawals, flexible drawdown, Uncrystallised Fund Pension Lump Sum (UFPLS) drawdowns, etc.
Basically, my aim is to try and treat the annual growth in the SIPP as tax-free income, while preserving the capital value in case I need it later. I obviously accept that some years the SIPP value may go down if the underlying investments do not perform.

kidmugsy

Suppose you draw down £6k of Tax-Free Lump Sum. Then you will have "crystallised" £24k. Your provider will then refer to the £18k by some such name as "Crystallised SIPP Account" to distinguish it from the as-yet-uncrystallised assets. And so forth until you've crystallised the whole pot.

TcpnT

I'm assuming that your income tax personal allowance is already being fully utilised by your other pensions.

In this case UFPLS will not help you as only 25% of each withdrawal is tax free. You would have to pay income tax at your marginal rate on the other 75%.

Assuming that your SIPP is presently uncrystallised the only option I see to take this amount without paying any extra income tax is to crystallise £24k per year for the next 5 years. Take 25% / £6K as tax free lump sum each time and keep the £18K invested in your, now crystallised fund. After 5 years your SIPP will be fully crystallised and you will be able to get no more out tax free. The crystallised fund can remain invested and untouched until you need it (with withdrawals taxable) or can be passed onto your named beneficiaries when you die.

You do not mention who your SIPP is held with. It may be that you need to transfer it to another provider who will provide these facilities.

squirrelpie

Ideally I would like to withdraw each year the amount by which it has grown (i.e. typically £6k) to use for holidays. Also ideally I would like those withdrawals to be tax free (at least until I use up the 25% tax free value). ... Basically, my aim is to try and treat the annual growth in the SIPP as tax-free income, while preserving the capital value in case I need it later.

What you're overlooking is that if you follow this plan, then the capital still in the SIPP will be reduced by taxation if/when you do need it. So you will have less capital available.


If you took out your holiday money by UFPLS, then you would pay some tax now but would have more capital left in your fund for later.


What I don't know is the tax treatment of the possibilities if you die?

WiltsGuy

Thanks for responses.

atush

Take the entire TFLS to use over the next few years?