Rules around age 75 in respect of drawdown

Sea_Shell

What are the rules (options) surrounding any remaining balance in a SIPP at age 75, which has been in drawdown?   

Do you HAVE to take it and therefore pay tax on it?  Or can it just sit there, waiting to be inherited by a nominated beneficiary?     Can you suspend drawdown after, say, 12 years, starting age 55?

We're not concerned about being able to contribute to a pension, just drawing it out.

ETA - Also we wouldn't be clattering into any LTA, as the initial pot (net) would be in the region of 142,500, with a balance after 12 years of approx £60,000 (if average of 7% growth achieved).   

We're trying to work out the most tax efficient way (over 20 years) of getting the maximum out, whilst paying as little tax as possible, but with DC and SP that will use up whole personal allowance by year 13.

Taking just the PA for 12 years, means no tax payable, but would leave a significant balance by year 13 (assuming some growth).      This would then be taxable.

Many thanks

Dazed_and_C0nfused

Just take a bit more each year and pay some tax.

It's not a crime and you shouldn't feel ashamed, your country will thank you for helping out in these troubled (expensive) times.

zagfles

If the pot is crystallised then you can just carry on drawing it down, stop the drawdown, reduce it, increase it, whatever you want. If you're claiming any means tested benefits you'll be expected to use it (ie they'll take it into account). There is the LTA test at 75 on growth but sounds like you're aware of that and it won't affect you as the pot will be smaller than at crystallisation. If pot/some of pot is uncrystallised then might be an idea to crystallise at 75 as you'll then get the tax free cash out, whereas the pension will be fully taxable if inherited. But there'll be other factors to consider eg IHT.

Albermarle

Dazed_and_C0nfused said:

Just take a bit more each year and pay some tax.

It's not a crime and you shouldn't feel ashamed, your country will thank you for helping out in these troubled (expensive) times.

Yes , many people are very focused on just taking the £16666 tax free each year but if instead they took £20K , they would only pay £666 tax each year ( £55 per month ) anyway , so not the end of the world.

cfw1994

Albermarle said:

Dazed_and_C0nfused said:

Just take a bit more each year and pay some tax.

It's not a crime and you shouldn't feel ashamed, your country will thank you for helping out in these troubled (expensive) times.

Yes , many people are very focused on just taking the £16666 tax free each year but if instead they took £20K , they would only pay £666 tax each year ( £55 per month ) anyway , so not the end of the world.

Must admit I've always thought the goal really is to avoid the high rate tax.....paying 20% isn't a heinous crime!!

Anonymous101

I believe you can increase, decrease, pause or stop drawdown anytime you like. So it’s possible just to leave a balance there waiting to be inherited.

I actually gave this some thought after you mentioned it the other day. Another possibility if you didn’t have a huge balance in the SIPP would be to defer SP for a couple of years whilst you finished the withdrawals.

Or as other posts suggest accept that by spreading the balance over a longer time frame you'll Pay some tax but it will be minimal.

However, if you don’t need it, the pension is currently the most efficient place for it in terms of inheritance tax. Although all may change on that front shortly.

Sea_Shell

We've been playing round with the numbers, and yes, paying some tax to be able to empty the SIPP before DB and SP come into play, seems like the best move.

It makes things simpler too, long term, as it'll be one less provider to deal with.

It seems counter intuitive, but you could actually pay less tax over 20 years, if you take more out earlier, rather than taking just PA for longer, and maybe never emptying the pot.  (more so if they raise the tax rate in the future!).     This also puts the money in your hand earlier, if you find you need it for something.

At the end of the day, this is just "spitballing" as we don't know what the next 10-20 years will look like, and there is no "right" decision, but we just wanted to get a feel for the starting point and general plan.     What DH decides to do in year 1, is not set in stone, and can change and adapt as time goes on.      

IHT isn't a problem on first death, but could be on second.   But then as it'll be going to N&N's, it'll be their problem.   

zagfles

Sea_Shell said:

We've been playing round with the numbers, and yes, paying some tax to be able to empty the SIPP before DB and SP come into play, seems like the best move.

It makes things simpler too, long term, as it'll be one less provider to deal with.

It seems counter intuitive, but you could actually pay less tax over 20 years, if you take more out earlier, rather than taking just PA for longer, and maybe never emptying the pot.  (more so if they raise the tax rate in the future!).     This also puts the money in your hand earlier, if you find you need it for something.

At the end of the day, this is just "spitballing" as we don't know what the next 10-20 years will look like, and there is no "right" decision, but we just wanted to get a feel for the starting point and general plan.     What DH decides to do in year 1, is not set in stone, and can change and adapt as time goes on.      

IHT isn't a problem on first death, but could be on second.   But then as it'll be going to N&N's, it'll be their problem.   

I'm not sure if looking at this the right way or you're thinking of something else, but the fact that you might pay more tax the longer you leave it in the pension doesn't necessarily mean you'll be worse off. You could pay less tax and be worse off!

Assuming that:

1) you're taking enough to use the PA

2) you won't ever enter higher rate tax,

3) tax rates don't change,

4) you can invest outside the pension without paying tax on growth, eg using ISA, within CGT/dividend allowances etc

5) you invest in the same stuff inside and outside the pension

and leaving aside issues like inheritance treatment, it is completely neutral to you whether you draw out more now or later. Assuming growth, you'll pay more tax in total if you draw out later, but it will make no difference to the end result. Because the only reason you're paying more tax is because a larger (pre-tax) amount has grown. Multiplication is commutative. Investment x growth factor x tax hit = investment x tax hit x growth factor.

If you take out early and end up paying tax on growth (eg outside an ISA), you could end up paying less tax in total but end up worse off overall!

LHW99

Presumably you could also add to the mix the idea of using extra SIPP money to allow deferring of state pension. Not as good as it used to be, but a guaranteed rate of increase, and a payment for your lifetime (but no longer inheritable).

soulsaver

Albermarle said:

Dazed_and_C0nfused said:

Just take a bit more each year and pay some tax.

It's not a crime and you shouldn't feel ashamed, your country will thank you for helping out in these troubled (expensive) times.

Yes , many people are very focused on just taking the £16666 tax free each year but if instead they took £20K , they would only pay £666 tax each year ( £55 per month ) anyway , so not the end of the world.

OK I'll bite: How do you get to £16666 tax free? Clearly c.£12.5 is personal allowance - am I missing something obvious?

Dazed_and_C0nfused

Take £16,666 as UFPLS.
£4,166 as TFLS

£12,500 as taxable pension income.

Assuming you haven't applied for Marriage Allowance in which case it would be £15,000 not £16,666.