Drawing Down Tax Free from SIPP

jim8888

My other half is retiring from her job in April and we plan to access a Fidelity SIPP at that point to replace her income. This has a current value of £55k. However, we want to ensure this is accessed tax free, and the plan is to withdraw 12k a year from it. How do I ensure this isn't taxed? When you withdraw from a SIPP, is tax automatically deducted that you then have to claim back from HMRC via Self Assessment? I know I can take a 25% lump sum tax free but, when you do this, is that sum initially also taxed at source and you then have to claim the tax back? I vaguely remember reading somewhere that you should take a minimal amount (even just as low as £1?) as your first withdrawal from a SIPP and let that be taxed, then fill out relevant forms for HMRC to ensure that your subsequent withdrawals can be tax free (providing you annually take less than your personal allowance). Or something like that? Would appreciate any advice on how best to approach this.

Dazed_and_C0nfused

All you need to do is make sure that the first taxable payment is less than £1,042.

The pension company will use the emergency tax code but no tax is deducted on the first £1,042.

There is no need to complete a Self Assessment return just from having pension income (unless it exceeds £100k/year).

In fact there are no forms to fill in full stop if you don't want to fill any in.

Once Fidelity notify HMRC of the first payment HMRC will send a tax code to them to use from then on.

Unless she has other income it is likely that the tax code will be 1250L (the emergency tax code) and she would only pay tax if she took taxable income exceeding £12,509.

Note this is calculated each time a payment is taken so if she took £6,000 in say month 3 of the tax year she would pay tax as that is the equivalent of £24k/year.

But if she spreads the income equally throughout the year that wouldn't be an issue.

A TFLS is exactly what it says on the tin, tax free.  No tax would be deducted from that.  Anything else is taxable income but tax may not be payable because of her Personal Allowance, not be used it is "tax free".

Finally don't forget that if she retires in April taking pension income of £12,000 is likely to mean she has to pay tax on some of it as her pay in April will have to be taken into account.  Obviously a very low wage would keep her under £12,500.

Albermarle

Some people take £16,666 pa from their pensions . £12,500 taxable ( but no tax to pay if no other taxable income ) + £4166 tax free.
Not sure if you can do this with an exact monthly split though, including both taxable and tax free money each month , you would have to ask Fidelity if this was possible. I think most people just take it in one go annually , pay some tax and claim it back .

Scrudgy

If you want to take the money in large chunks, it is quite simple and painless, yes you need to pay tax, but you get it back very quickly once you fill out a P55 online which takes about 3 minutes.

Step 1, take out your 25% tax free lump sum - no tax will be deducted
Step 2, take out your £12,500 personal allowance, you will be paid approx £8,500 and the tax people will take approx, £4,000.
Step 3, as soon as you get your personal allowance lump sum, calculate from the £12,500 how much the tax was taken from you and you can immediately fill out an online P55 and submit it. 

Step 4, after about three weeks the taxed £4K will appear in you bank account. (In my case it only took 9 days from submitting the P55 until the tax people returned the money to my bank account)

(Steps 1 & 2, can probably be applied for at the same time, I don’t use Fidelity, but my provider was A J Bell who only required a single application for both the 25% tax free lump sum and the personal allowance withdrawal).

The whole thing is very easy.