Multi-Drawdown on SIPP Pension Fund?

meggeth

Hi SonOf. The £12500 was just a figure to make things simplified. The SIPP fund is around 400K, so the 25% is more like 100K. I didn't want to start using the taxable part of the fund as I am still working part time, so this allows me to still make payments into the fund when I want to, and not be limited by the £2,800 per annum (I think that's the figure).

The idea of having a part payment was to allow me to open 2 ISAs (one for me, one for the wife) using the £20K yearly allowance. This way I can chose the same funds as my SIPP (which has done very well), and these can be used tax free in the future. Then next year, have the remainder and open 2 more ISAs using the next years allowance.  In the meantime, I have other ISAs which will keep me going for a good year or so. Does that make sense?

meggeth

Oh. I have just read another post where Dox said that self-employment earnings does not count  as "earnings" that you can use to calculate how much you can put into your SIPP. Is that correct? I have started my own small business (as a sole trader), so does this mean that I am limited to the £2880 (£3600), even though I will earn more that that?

Albermarle

The idea of having a part payment was to allow me to open 2 ISAs (one for me, one for the wife) using the £20K yearly allowance

By doing this you have not achieved anything . You could leave the tax free cash in the pension and also take it out when you want/need it . As Son Of says it is best to leave it in the pension unless you actually need it to spend on something.

meggeth

OK Albermarle (used to be a street called that where I used to live!). So it might be best to use my existing ISAs, then use flexi drawdown when I've used it up? I have to fill in self assessment tax return each year, so presumably, if I have say £40K from a flexi drawdown, I effectively have earned £30K from a tax point of view? I assume that once I start flexi drawdown the SIPP fund stays invested as it is at present, if I want it to?

Albermarle

meggeth said:

OK Albermarle (used to be a street called that where I used to live!). So it might be best to use my existing ISAs, then use flexi drawdown when I've used it up? I have to fill in self assessment tax return each year, so presumably, if I have say £40K from a flexi drawdown, I effectively have earned £30K from a tax point of view? I assume that once I start flexi drawdown the SIPP fund stays invested as it is at present, if I want it to?

Or you can use a mixture of existing ISA's and flexi drawdown , whatever best suits the tax position at that time .
If you take £40K from drawdown, the tax situation depends on how you draw it . You can just take tax free cash ( if you have some left ) Take a mixture of TFC and taxable income , or at a later stage just taxable income , if all the TFC has been used up.

Normally the SIPP will stay invested in the same funds . With some providers it is possible to have uncrystallised and crystallised pots in different funds ( if you wanted to for some reason) but with others this is not possible.

jamesd

Albermarle said: By doing this you have not achieved anything . You could leave the tax free cash in the pension and also take it out when you want/need it . As Son Of says it is best to leave it in the pension unless you actually need it to spend on something.

Not so. It has reduced potential lifetime allowance charge and mad the money more readily accessible. For any cash component interest rates are likely to be higher, particularly if ISA flexibility features are used.

It isn't always best to leave money in a pension until it will be spent. Lower costs, locking into day's income tax rate and using non-pension investments are some other reasons.

For those reasons I expect to be taking taxable income up to the limit of my basic rate band from my own pensions for many years. What's needed is some actual reason, not "just because I can". If that's all there is, better to leave it.

jamesd

meggeth said: it might be best to use my existing ISAs, then use flexi drawdown when I've used it up? I have to fill in self assessment tax return each year, so presumably, if I have say £40K from a flexi drawdown, I effectively have earned £30K from a tax point of view?

Your income tax personal allowance is £12,500 a year and is a use it or lose it allowance. At a minimum you should look to use it all every tax year.

ISAs are usually cheaper as well as faster and easier to access than pensions so I wouldn't be inclined to run them down first.

If you withdraw £40k from a flexi-access drawdown account all £40k is taxable income. A flexi-access drawdown account is one containing money from which the tax free lump sum has already been taken, a crystallised pot.

If you were to flexibly access £40k from an uncrystallised pot then it'd be £30,000 taxable and you could usu ether of these ways:
a. UFPLS £40k
b.tax free lump sum of £10k (25%) and £30k laced into a flexi-access drawdown account from which you withdraw it.

A variation on b is how you could fund the ISAs as well: take a £50k tax free lump sum (25%) and place the £150k (75%) into a flexi-access drawdown account from which you withdraw the £30k but leave the £120k for later.The untouched remainder stays uncrystallised with 25% tax free still available from it..

jamesd

meggeth said: I am planning to continue to work on a part time basis, so I will be aiming to earn around £12-15K per year. Is it ok to use this money to add to my SIPP, as long as I don’t start to draw on the taxable part of the fund? I assume there will not be a problem with “recycling” as I’m still working during this period?

There are several easy approaches to staying within the recycling limits:

1. put the tax free lump sum money into ISAs and leave it there until the third tax year after the one in which you take it. Then you can point to the ISA money to prove no recycling.

2. take tax free lump sums of no more than £7,500 per rolling 12 months (not tax or calendar year).

3. not increase your pension contributions by more than 30% above what would have been expected based on your past record. Harder.

4. keep the increase over a five year period including the two previous tax years, tax year of taking and following two tax years  to no more than 30% of the lump sum value. Harder to calculate.

Perhaps the simplest in some ways is the ISA approach 1 combined with drawing taxable money from the pension for living.In that context it's worth knowing that there are no restrictions on recycling pension income into new contributions. So you could say take 25% tax free from the lot and provably use combined work and pension taxable income (within basic rate band) for living and contributions while funding the ISAs to prove no recycling rule breach. This also seems to fulfil the objectives given in your initial post.

£7,500 can also work since that makes £22,500 taxable available, though that might not meet your needs.

meggeth

OK guys. Thanks for all your comments and suggestions. I'll have a good read and digest before I come to my decision. It can get a little confusing with all the options, so I'll take my time. Cheers! 🙂