Ad hoc draw-down from SIPP?

k6chris

Dumb question time! We are in the fortunate poistion that our core retirement funding is coming from 3 DB pensions, which will need to be supplemented by our SIPPs for things like holidays / car costs / one-off payments etc. At all stages we will remain basic rate tax payers. So far we have been using savings to do this top up but at somepoint we will want to use the SIPP. If I want to take out (say) £5,000 from the (iWeb) SIPP, I want 25% to be tax free and the other 75% to be taxed as a basic rate tax payer. Here are the dumb questions:


1) I presume I have to request a larger gross amount than £5,000 to be withdrawn, so that the net I receieve is £5,000?


2) As a basic rate tax payer, would the SIPP provider communicate the withdrawal to HMRC or am I now into the world of tax returns each year?


3) Are ad hoc SIPP withdrawals actually a thing, or is regular drawdown more frequently used?


4) Is it likely that the first time I do this, there will be additional 'paperwork' that I need to factor into my timing of a withdrawal?


Be gentle

xylophone

https://www.iweb-sharedealing.co.uk/PDFs/SIPP-Benefits-Guide.pdf


https://www.moneymarketing.co.uk/ufpls-vs-drawdown/

Dazed_and_confused

1). Sounds an unusual strategy. Do you mean £5,000 in total, the tax free element and the net of tax taxable element? If so you probably need to run some figures through the manual payroll calculator on gov.uk to work out what to take. I would imagine it would a long process as each time you change the taxable amount the tax free element would change as well!
It should be simpler after the first payment as you will have a basic rate tax code. Although if you are Scottish resident for tax purposes it will be more complicated I would think.

2). The SIPP provider will notify HMRC. Unfortunately for you they will have to use the emergency tax code on the first payment so you could end up owing HMRC some additional tax. The more you withdraw (the taxable element) the more likely it is that the emergency tax code will mean HMRC owe you a refund (because some higher rate tax will be deducted from the first payment).

3). Nothing unusual with either. No idea what proportion are ad-hoc or regular.

4). Probably but will depend on your particular provider. Just ask them.

NoMore

1) This was a surprisingly difficult calculation and I had to run a what if analysis in excel to come to the answer. You would need to request to withdraw £5882.40 to get £5000.04 net. You can't get exactly £5000 net without going into several decimal places of the pennies. I think most people would request a rounder figure close to what they want like £5800 would give you £4930.


2) They should inform HRMC I believe they may end up using a emergency tax code on first withdrawal, but I'm not fully sure on the mechanisms of that


3) Yes its known as Flexi Access Drawdown


4) Maybe if they use the emergency tax code as described earlier

Linton

k6chris wrote: »

1) I presume I have to request a larger gross amount than £5,000 to be withdrawn, so that the net I receieve is £5,000?

Drawdown above the 25% tax free is taxed under PAYE in the same way as employment earnings. So after the forst drawdown which will be charged under an emergency code HMRC will issue your provider with a tax code. This tax code together with the tax codes for any other income streams should add up to your overall tax allowance. You can adjust the split however you wish.


So the £5K may be covered by your tax code. If on the other hand it is 25% tax free and the rest at basic rate you would need to drawdown £5882. You can check my arithmetic:
5882 X 25% tax free=1471
5882-1471=4411, 4411 X 0.8=3529
3529+1471=5000.

2) As a basic rate tax payer, would the SIPP provider communicate the withdrawal to HMRC or am I now into the world of tax returns each year?

It is all handled by the PAYE process so you do not need to do anything.

3) Are ad hoc SIPP withdrawals actually a thing, or is regular drawdown more frequently used?

You can drawdown as much as you like whenever your like. I personally just drawdown annually.

4) Is it likely that the first time I do this, there will be additional 'paperwork' that I need to factor into my timing of a withdrawal?

No unless you want to get an early recovery of possible excess tax paid on the first ever draw down -- the default tax code may be wrong for your circumstances. It will be sorted out anyway in subsequent drawdowns in the current tax year or after the end of the tax year.

Dazed_and_confused

1) This was a surprisingly difficult calculation and I had to run a what if analysis in excel to come to the answer. You would need to request to withdraw £5882.40 to get £5000.04 net

£5882.40 will give £5088 net for the first payment. I think your figures only apply from the second payment onwards once a basic rate tax code is in place.

Linton

Dazed_and_confused wrote: »

£5882.40 will give £5088 net for the first payment. I think your figures only apply from the second payment onwards once a basic rate tax code is in place.

Why? See my detailed calculation. I thought the normal default tax code was 1185 X1 (month 1 basis) which matches the 5882 figure.

Shedman

If you want to be taking out this tax year then you need to contact iWeb as soon as possible as they will probably require you to complete some paperwork or send you an illustration first and possibly complete a risk questionnaire (a quick look at their site suggests these are available to download). It depends how they operate as each SIPP provider is different. If they are anything like say HL they will need the instruction to withdraw by something like the 17th of month and pay out at the end of the month.

Also are you holding the required funds in cash in the SIPP otherwise you need to factor in time to sell sufficient of the assets in the SIPP (although normally this would only be a couple of days).

You are aware that by drawing on your SIPP you will then start to incur the £180 pa drawdown fee from iWeb as well as the quarterly admin fee? And that you will also be subject to the £4,000 pa MPAA restriction?

Dazed_and_confused

4411 X 0.8=3529

That ain't how emergency tax code works.

£988 will have no tax deducted then 20% and 40% tax can be deducted from the balance.

Linton

Dazed_and_confused wrote: »

That ain't how emergency tax code works.

£988 will have no tax deducted then 20% and 40% tax can be deducted from the balance.

Of course! Wasnt thinking clearly.

Dazed_and_confused

You are spot on though for the withdrawals once the basic rate tax code is in place.