25% tax free lump sum

HuskerDu

HI everybody,

I'm 53. I'm lucky enough to have a SIPP worth 1 million (give or take)

What i can't find out is when I get to 55, is my 25% tax free allowance based on the 1 million, or the value at the time.

If I take say, 10 % and the remaining 900k doubles in value before I take anymore hypothetically, can I take 15% of that , or is it still 15% of the original 1 million?

p00hsticks

HuskerDu wrote: »

HI everybody,

I'm 53. I'm lucky enough to have a SIPP worth 1 million (give or take)

What i can't find out is when I get to 55, is my 25% tax free allowance based on the 1 million, or the value at the time.

If I take say, 10 % and the remaining 900k doubles in value before I take anymore hypothetically, can I take 15% of that , or is it still 15% of the original 1 million?

It's based on the value at the time.

Basically, whenever you take some tax free cash you 'crystallise' that portion of your pension. So if you have a pot worth £1 million, and you wish to take £100,000 tax free, you can do it by crystalising £400,000 of the pension. You can then take out the £100,000 as 25% of the crystallised pot, and the remaining £300,000 can stay crystalised in situ to be taken out as and when you wish, but it will all have tax deducted when you do, regardless of what the actual value is at the time you come to take it.

The remaining £600,000 remains uncrystalised and will grow or shrink in size depending on how well your investments do - you can then repeat the process to get further tax free cash.

HuskerDu

Cheers p00. Gives me plenty of food for thought

EdSwippet

HuskerDu wrote: »

If I take say, 10 % and the remaining 900k doubles in value before I take anymore hypothetically, can I take 15% of that , or is it still 15% of the original 1 million?

As mentioned by p00hsticks above, it's based on the value at the time you crystallise a chunk of your pension.

However, at £1m "give or take" you need to pay very careful attention to the pension lifetime allowance. This is currently £1.055m, and rises annually but only with inflation. Once your pensions grow above this allowance, there is no more 25% tax free lump sum, but instead you have to pay a 25% lifetime allowance penalty tax for crystallising funds beyond the allowance.

The can more than negate any tax efficiencies from pensions, and so might argue for stopping pension contributions now, if still contributing (though it depends on whether you would lose a sizeable employer match, whether you plan to use your pensions as inheritance bypasses rather than pensions, and so on), crystallising the full pension as soon as possible, and several other moves that seem to run counter to the way most advisers suggest using a pension tax efficiently.

Anyway, a forum search should bring up a bunch of previous threads discussing options around pension lifetime allowance issues. It's complicated.

HuskerDu

Cheers Ed.

It's actually £1.09 million ( I transferred a DB pension). I'm also now paying into a work base DC scheme at c.£6K/year.

I'm not well so the reason I transferred is to leave a legacy to the fambo.

This whole thing is so confusing! I'm an engineer not a bloody accountant!