Withdrawals - SIPP or ISA?

okydoky

My wife and I will benefit from SP in a couple of years time, and additionally a small but important LGPS, so that from 2024 onwards we will have guaranteed, index linked income of £26K pa

The period until 2024 will be covered by savings and limited SIPP tax-free withdrawals giving us the £36K pa we would like.

So from 2024 we require to generate an additional £10K pa. We estimate that we will have approx £350K in SIPP's  between us and £250K in ISA's

So my question is this - do we take the income from our SIPP's and incur basic rate tax, or drawdown first from our ISA's? Or some kind of combination of the two?

I understand there are IHT issues going forward and that the treatment of inheritance differs from age 75 onwards, but it is really the next 5/10 years or so I am looking at meantime and just curious as to what withdrawal strategy might be right for us?
(We have considered SP deferral but have decided against it - don't like the thought of having to live 20 years just to break even!)

Any thoughts on this?

pip895

I am grappling with a similar problem - up to now (for the last 10 years) we have been living of unwrapped investments but these are pretty much exhausted now apart from our main cash reserves (PB etc. a bit under two years living expenses).  Now I am faced with drawing down from (rather than adding to our SIPPs and ISAs)  
My thoughts are
1. Take from SIPP enough to use all our allowances (no brainer -but amounts to very little as we both have other income (State pension (OH) and a rental property for me)
2. Take from SIPP ensuring we keep comfortably within basic tax - put any excess income into ISAs  ( big one off expenses (e.g.helping kids onto housing ladder) could be taken from the ISAs)
This makes sense for us as my SIPP is heading towards the LA - well off at the present, but if returns were to continue as they have for the last ten years I would hit it within 6 years even if they keep raising the level by inflation!  Our estate will be over the IHT threshold so if SIPPs were to retain their current IHT status we might swap to using ISAs at some time in the future though..
 

AlanP_2

Overall assets would be a consideration if you were getting near IHT threshold after allowing for property etc.

Assuming not for now then I would withdraw from the SIPPs up to the point that personal allowances are used up and then from the ISAs.

Just before Age 75 I would crystallise the SIPPs and move the 25% tax free into ISAs (may take a few years) as otherwise inheritors would be taxed on it. 

DT2001

How close are you to IHT threshold or are you over it?
What level of income is needed after 1st death?
Is the LGPS in same name as SIPP or do you both have a pot?

Depending on answers to the above I would consider taking natural income from both pots and any excess passing on as gifts (see  https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ ihtm14250 ).
As no one knows what changes they’ll be to taxation I’d probably draw equally from both ISA and SIPP.

AlanP_2 - does your last paragraph depend on if OP is under/over IHT threshold and marginal tax rates of beneficiaries. I think you are right in certain circumstances but wasn’t sure if applied without exception?

Linton

okydoky said:

.....

(We have considered SP deferral but have decided against it - don't like the thought of having to live 20 years just to break even!)

Any thoughts on this?

It is not 20 years to break even on deferring SP.  The crude value is actually 17.4 years.  You also get the 2.5% triple lock increases on the extra pension whilst deferring and CPI increases after deferring.  So it's a much better deal than you imply.

Even if it were 20 years there could still be a case for deferring in that it adds to your inflation linked income later in life.  A significiant part of my income is  fixed rather than inflation linked.  So by deferring my SP I protect myself from inflation in the long term.  Tax planning could be another reason to defer.  

okydoky

Thank you very much for the responses.
A bit more detail -
My SP is forecast at £11200, payable next year. My SIPP is currently £250K and mainly already crystalized - I do have another personal pension worth £80K that I will be transferring in shortly and taking the remaining TFC to aid cash flow over the next couple of years.
Wife's SP is payable in 2024 and is £9200 pa and she will have LGPS of £4K on top. Her SIPP is £120K but again she will be taking TFC and income up to PA until pensions kick in.
Jointly we have ISA's of £250K and cash(mainly PB's) of £100K
Family home is about £250K, debt free and looking to downsize soon. No IHT planning yet but this will be looked at when we move house.
Comments re SP deferral noted, I was previously persuaded by the maths kindly outlined by Linton, but as SP age has neared, I find myself less convinced but still actually  have an open mind on the subject.

pip895

In your situation (No IHT or LA issues) I would focus on a regular income from the SIPPs holding the ISAs in reserve for any one off or emergency requirements.  Like you I am not entirely sure whether to delay SP..  I have a few more years to think about it though.

Notepad_Phil

Regarding SP deferal, is there a case in your situation to defer the SP for one of you. In our case we're both of similar age and I'm currently thinking that it is likely to be advantageous to defer SP for Mrs Notepad to increase the inflation linked income available to her when I'm no longer around.

AlanP_2

pip895 said:

In your situation (No IHT or LA issues) I would focus on a regular income from the SIPPs holding the ISAs in reserve for any one off or emergency requirements.  

Can you explain why please as that is the complete opposite of the approach I would take and outlined above?

AlanP_2

DT2001 said:

AlanP_2 - does your last paragraph depend on if OP is under/over IHT threshold and marginal tax rates of beneficiaries. I think you are right in certain circumstances but wasn’t sure if applied without exception?

I think it applies in all circumstances where IHT is not an issue, with one exception possibly.

Death before 75 - beneficiaries get 100% pot tax free

Death after 75 - beneficiaries get 100% pot taxable

So my thinking is take the 25% TFLS at ~74 leaving a 75% pot exposed to tax when inherited.


The exception would be the marginal tax rate aspect as you mentioned but only for a beneficiary who is a non-taxpayer and will remain so. Even then you are limiting the amount that they can withdraw tax free to their tax allowance less any income so I can't se the benefit.


NOTE: I am no expert in this area and am still a way off having to make these sort of choices so my current thoughts are only based on comments read on here over the years - DYOR .