Advice re SIPP tax-free lump sum

tiddles

Hi, I’d welcome some advice please.

My husband, who has just turned 60, holds 80k in a SIPP, and is also currently contributing to his workplace’s final salary pension scheme. He is thinking of retiring in just over a year’s time, but would be interested in withdrawing 25% of his SIPP as a tax-free lump sum before the end of the current tax year.

My question is would withdrawing this sum from the SIPP in any way affect his workplace pension contributions or the annual pension amount he will receive from the company pension scheme once he retires?

My feeling is that the two types of pension operate completely independently of one another, but am I correct in thinking this?

Thanks in advance.

dunstonh

but would be interested in withdrawing 25% of his SIPP as a tax-free lump sum before the end of the current tax year.

What for? is it to spend or put in a bank account? (there is a reason for asking but will wait for your reply before trying to describe scenarios and creating an unnecessarily long post)

My question is would withdrawing this sum from the SIPP in any way affect his workplace pension contributions or the annual pension amount he will receive from the company pension scheme once he retires?

Directly no. Indirectly yes.

By taking the 25% at the outside on that pension, it eliminates phased flexi-access drawdown as a method of income in retirement. That is frequently one of the best methods (you pay less tax and you get more tax money out over the long term).

Most people amalgamate the pensions at retirement. So, the workplace scheme would end up in the SIPP but not able to use phased flexi-access (unless the fund on the workplace scheme is high enough itself to make it worthwhile).

tiddles

Thank you dunstonh.

The SIPP is held as cash-only, because my husband has only had it for a couple of years, so it did not seem worthwhile investing it over such a short length of time. The idea is that he could invest the lump sum in a savings account or bond to receive at least a little interest on it before it is required to cover living expenses after retirement.

He is thinking of deferring the workplace pension until 65, as I understand that it could then be worth more than if he takes it at 61 or 62. We intend to live off our SIPPS until then.

dunstonh

The idea is that he could invest the lump sum in a savings account or bond to receive at least a little interest on it before it is required to cover living expenses after retirement.

In which case, it is likely to be a bad idea. he should keep it in the pension and invest it within the pension.

As the pension grows, the available 25% gets bigger.

Plus, when he combines the two pensions in retirement, he will have more choice of methods (such as the phased option which would be lost if the 25% was taken up front).

He is thinking of deferring the workplace pension until 65, as I understand that it could then be worth more than if he takes it at 61 or 62. We intend to live off our SIPPS until then.

Maybe stop thinking about them being separate and see how they can work together? Its difficult to comment beyond that based on so little info. However, based on what you have written so far, the SIPP is poorly invested and taking the 25% is probably the wrong thing to do. That SIPP could be invested for years. It's not just the time to retirement but the 20-25 years beyond retirement that matter.

Albermarle

Dunston - I think you maybe missed this part of the original post ?

and is also currently contributing to his workplace’s final salary pension scheme.

Normally on this forum the usual advice is to keep a final salary scheme seperate from an DC pots/SIPPS
So anyway taking 25% tax free from the SIPP , would not have any effect on the workplace final salary scheme. If you took any more than 25% i.e some taxable income this would restrict his ability to continue contributing to the final salary scheme( I think )

xylophone

The OP is proposing taking a PCLS only - even were he then proposing continuing to contribute to a DC pension, the MPAA would not be triggered, although it would be if he took more than the PCLS.

As he is contributing to a DB scheme, even were he to take more than the PCLS, the MPAA would not be triggered.

See https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/Money-purchase-annual-allowance/

When does it apply?
The MPAA applies to all Defined Contribution (DC) savings made by that individual after the date it's triggered.

What about DB?
Accrual under defined benefits (DB) arrangements is not tested against the MPAA, but will be included in the test of total contributions against the AA/TAA:

dunstonh

Dunston - I think you maybe missed this part of the original post ?

I did. Thanks for spotting it. That changes things.