Taking money out of SIPP without triggering MPAA?

DBdoobydoo

I have £20,000 in cash in a Hargreaves Lansdowne SIPP. I am 67 but still working & want to continue to be able to contribute to the SIPP for the tax advantages as I am a higher rate tax payer but I have a bit of a cash flow problem.
I have used serial 0% balance credit card transfers for a number of years to kick some debt off into the long grass. Unfortunately about £10,000 of credit card debt will fall out of 0% in a few weeks & will be racking up interest at over 21%. I cannot find any new 0% card that I can transfer to or at least none that will offer me a card.
What is the best way of using money in my SIPP to pay off the £10,000 credit card debt? If I move the money in the SIPP into drawdown I know that I can take £5,000 as a TFLS but I am concerned that if I draw any more than this that I will trigger the money purchase annual allowance (MPAA) which will restrict my pension contributions to £4,000 per year. I had planned on contributing £30,000 to the SIPP later this year.
If I did trigger the MPAA is the amount I can contribute to a pension limited to £4,000 a year forever or just this tax year? Have I misunderstood the MPAA rules or is there some way that I can take £10,000 net out of my SIPP (allowing for 40% income tax) & still be able to contribute £30,000 to the SIPP later this year?

NedS

You can cash in a small pot pension of upto £10,000 without triggering the MPAA. You can do this 3 times in your lifetime. You could phone HL and ask them to split your £20,000 into 2 small pots of maximum value £10,000 and take one (or both?) of them without triggering MPAA. The first 25% is tax free and you will be taxed on the remaining 75%

https://www.moneyadviceservice.org.uk/en/articles/money-purchase-annual-allowance

green_man

https://citywire.co.uk/new-model-adviser/news/small-pension-pot-withdrawals-avoid-triggering-mpaa-tax-charge/a1259862

You can withdraw all a trivial pot of under £10k without triggering MPAA.  What I don’t know is if you can somehow split your existing pot by transferring say £9900 to a different provider , then withdrawing the whole amount (you would likely be hit by admin charges at the minimum).  Maybe someone else can comment on if this split likely to be possible?

Dazed_and_C0nfused

The problem is to get £10k means you would need to use £14,285 of the £20k, which is well above the small pot limit.

If you stick to £10k (gross) you will only end up with £7k after tax.

Malthusian

green_man said:

https://citywire.co.uk/new-model-adviser/news/small-pension-pot-withdrawals-avoid-triggering-mpaa-tax-charge/a1259862

You can withdraw all a trivial pot of under £10k without triggering MPAA.  What I don’t know is if you can somehow split your existing pot by transferring say £9900 to a different provider , then withdrawing the whole amount (you would likely be hit by admin charges at the minimum).  Maybe someone else can comment on if this split likely to be possible?

Pension companies can split the pot up themselves so that they can be taken under the small pot rules, although not all of them will offer this functionality. The only cost of transferring to one of them would be time out of the market.

OP: Have you looked at refinancing the debt against your house (possibly a retirement mortgage) given the low interest rates? The interest might cost less than unnecessary 40% tax.

Alexland

I'm unclear from your post if the £20k cash is the entirety of the SIPP or just some of it? Do you have any other pensions that could offer a tax free lump sum? Either way you can withdraw the 25% tax free (at least £5k) without triggering the MPAA. If you did trigger the MPAA that's forever not just this tax year. For the rest of it then you may not want to pay higher rate tax on drawing it as income so maybe a personal loan (or even paying the extortionate CC interest rate for a few months) might be a better answer. Preferably one with no fixed fees and early repayment without penalty. Sometimes it is possible to get a personal loan via TopCashBack where the cost of the loan (if repaid early) is less than the fixed cashback they pay (so you make a small profit on the loan) but I haven't done that for a while so the market may have changed and you may encounter the same problems getting credit for a loan as you are seeing on credit cards. In future always ensure any stoozing is covered by accessible cash savings.

DBdoobydoo

Thanks for all the answers even if some seem to be conflicting
The HL SIPP only contains £20,000 in cash. It's never been invested in anything as I only opened the SIPP a few months ago & I have no interest in investing I just want to take advantage of the tax breaks. I opened the SIPP with HL as they charge nothing for payments in or withdrawals if it's all held in cash.
I have no other pension pots but am well covered financially with a house nearly paid for plus state & DB pensions plus I am still in employment but pay HRT so would prefer to continue using a SIPP to wash away tax. My stoozing should have been covered but exceptional expenses have arisen for me in what is an exceptional year for everybody.
It looks like my first step is a conversation with HL to see whether they will split the £20,000 into two separate £10,000 SIPPs for me. Then I could liquidate one totally for about £7K & take the rest from the other. Failing that a transfer of £10,000 to another pension (I already have about £400 in a NEST pension) then taking advantage of the small pot rules.

MK62

Have you sat down and worked all this out on paper.........on the face of it it looks like you'll end up paying more in income tax than the CC interest charges if you end up following your current plan.

Alexland

DBdoobydoo said:

It looks like my first step is a conversation with HL to see whether they will split the £20,000 into two separate £10,000 SIPPs for me. Then I could liquidate one totally for about £7K & take the rest from the other. Failing that a transfer of £10,000 to another pension (I already have about £400 in a NEST pension) then taking advantage of the small pot rules.

So you really want to pay some 40% tax now (rather than maybe 20% in retirement) in order to save a few months of interest on a reducing balance at less than 2% per month? If you have a good income it shouldn't take long to clear the £5k left on the CC after taking the 25% TFLS. Again I repeat the suggestion of trying to get a flexible personal loan with cashback to cover the cost.

MK62

Under your current plan, if you split and take one small pot of £10000, your tax on that would be £3000, leaving you £7000, as you say.
For the remaining £3000 of the CC debt, you'd also need to crystallise the other pot, giving you £2500 (making sure to take only the 25% tax free PCLS to avoid the MPAA)
You'd need to find the other £500 elsewhere.....

If you crystallise the £20000 pot as is, but take ONLY the PCLS of £5000 you won't trigger the MPAA.
You should also avoid triggering the pension recycling rules later when your big SIPP deposit becomes available (but you may need to wait a while before taking another lump sum)

Use £3000 of that to reduce the CC debt down to £7000. Use the remaining £2000 of that to fund the monthly minimum payments until that £30000 is available.

Pay the outstanding balance and put the remainder into the SIPP.

Your credit card interest over an example 8 months, paying off £250pm (ie £2000/8), should come to around £900, making the outstanding balance around £5900.
This is assuming that you can't also balance transfer to a card charging less than 21%pa (even if no cards are available at 0%).

To me it seems crazy to pay £3000 in income tax in order to avoid c£900 in CC interest charges (maybe around £1200 or so if it's a full year rather than 8 months)

DBdoobydoo

Thank you very much for all the discussion & suggestions. I really hadn't thought this through or  worked all this out on paper so this has been a very useful exercise. I really don't want to trigger the MPAA as I plan on continuing to funnel income through the SIPP to wash away income tax. I can live with high interest charges for a few months but will take the £5,000 PCLS to mitigate the repayments.