Drawdown Options

segovia

Hi

I was discussing the subject of drawdowns with my wife last night and realised that I know very little about our drawdown options from our SIPPS. I looked at the AJ Bell guidance today and I am a little more informed but not 100% clear.  Some questions.....

When I want to move to drawdown can I move part of the pot into drawdown, for example, £200,000.00 pot move 25% 50k into drawdown and leave £150,000.00 in my SIPP?

If I take 25% of the 50k tax-free, I assume I'll have 75% remaining to drawdown as and when required which will be taxable Does taxable mean that it is classified as "taxable income" and tax will be due if my annual allowance is exceeded. 

If 75% of the drawdown fund is invested and makes a profit is that liable for capital gains tax?

Thanks 

J

dunstonh

When I want to move to drawdown can I move part of the pot into drawdown, for example, £200,000.00 pot move 25% 50k into drawdown and leave £150,000.00 in my SIPP?

You don't move it into drawdown unless you are actually taking the 25% out that goes with it.

So, no you would not crystallise £50k and leave £150k uncrystallised.   Unless you draw £12,500 as the 25% tax free cash and then move the £37,500 crystallised part of your pension. (which you next paragraph went into).

Does taxable mean that it is classified as "taxable income" and tax will be due if my annual allowance is exceeded. 

Yes.

If 75% of the drawdown fund is invested and makes a profit is that liable for capital gains tax?

Pensions are not subject to CGT.

segovia

Hi 

I appreciate the response but I am even more confused now   

Regards

John

newatc

This is how I processed my wife's move to drawdown but I'll use your figures:

1. I sold 30% enough of the SIPP investment to provide enough cash for the tax free amount (50K) and 10k to cover estimated further withdrawals for the next two years.
2. We requested our provider to move the SIPP into drawdown and requesting 25% as tax-free cash.
3. We requested a monthly withdrawal of £415 (though you don't need to do this, you could take ad-hoc* amounts). This amount will be taxed as income by you SIPP provider (using tax code provided by HMRC).
4. Once a year, we sell enough investments to bring the cash up to two years of estimated cash withdrawals.

* I believe there is an issue if you choose ad-hoc as HMRC is likely to overtax you as they think this may be a monthly amount. This would need to be claimed back.

segovia

Taking lumps out of the equation for the moment, let's say I wanted to draw £800.00 a month out of my pension. I assume £200.00 of that will be tax-free and £600.00 a month will be taxable which is £7,200.00 per annum + state pension of £9,100.00 I would be taxed on everything over and above my annual allowance, correct?  Annual income £16,300.00 less £12,500.00 I would pay tax on £3,800.00. How do I move the £800.00 per month from my SIPP to an area of the SIPP where I can access and can it be done monthly as described above? 

I think where I am going with this is, I don't need to move the whole of my pension pot into drawdown mode, I can do it incrementally?  

Thanks in advance

Thrugelmir

segovia said:

 How do I move the £800.00 per month from my SIPP to an area of the SIPP where I can access and can it be done monthly as described above? 

You don't. You'll need to ensure that's adequate cash sitting in your SIPP.  The SIPP provider will then process the payment to you. Much in the same way that your employers payroll team pay your salary.  To do this you'll need to complete some paperwork that will be supplied to you. . 

dunstonh

Taking lumps out of the equation for the moment, let's say I wanted to draw £800.00 a month out of my pension. I assume £200.00 of that will be tax-free and £600.00 a month will be taxable which is £7,200.00 per annum + state pension of £9,100.00 I would be taxed on everything over and above my annual allowance, correct? 

yes.

How do I move the £800.00 per month from my SIPP to an area of the SIPP where I can access and can it be done monthly as described above? 

you don't.     At this point, you have an uncrystallised fund of £x (your value) and a crystallised fund of £0 (as you haven't drawn any tax free cash).    If you start drawing £800pm using phased flexi-access drawdown the platform will draw £800 from your uncrystallised pot and pay 25% of that to tax free.   It will transfer £600 to your crystallised pot but then immediately draw it back and pay it to you through a payroll system (PAYE just like when you are employed).   So, your crystallised pot remains at nil but your uncrystallised pot is £800 lower (ignoring investment return movements).

Using phased drawdown, you never have a value in your crystallised fund unless you later decide to access just the 25% element.  Often at age 75, people will draw the 25% tax free cash due to changes in the taxation of the death benefits. (sometimes a good idea, sometimes not)

The work, you have to do will depend on your platform.  Some will require you to have sufficient cash before they can carry out the drawdown.  Others will sell units for you.     

cfw1994

segovia said:

Hi 

I appreciate the response but I am even more confused now   

Regards

John

Have you had a chat with Pensionwise? See here for details

They may be able to clarify things with you more easily: we both went for a chat face2face (pre Covid - might be available now, although I am sure the past year will have been telephone only).
Have to say I didn’t really learn anything spectacular, BUT it did clarify my understandings in a completely pressure-free environment (they aren’t selling you anything!!).
Well worth an hour of your time!

segovia

cfw1994 said:

segovia said:

Hi 

I appreciate the response but I am even more confused now   

Regards

John

Have you had a chat with Pensionwise? See here for details

They may be able to clarify things with you more easily: we both went for a chat face2face (pre Covid - might be available now, although I am sure the past year will have been telephone only).
Have to say I didn’t really learn anything spectacular, BUT it did clarify my understandings in a completely pressure-free environment (they aren’t selling you anything!!).
Well worth an hour of your time!

I may have called them some time back but at the time drawdown was something in the distant future. It's now approaching that time. However, I am still working and I have a decent rental income so taking anything from my SIPP less the 25% would be immediately taxed.  My strategy at the moment is I don't want a large lump sum and when I finish work I can live off my rental income and just take small amounts from the SIPP as and when I need it.    

segovia

newatc said:

This is how I processed my wife's move to drawdown but I'll use your figures:

1. I sold 30% enough of the SIPP investment to provide enough cash for the tax free amount (50K) and 10k to cover estimated further withdrawals for the next two years.
2. We requested our provider to move the SIPP into drawdown and requesting 25% as tax-free cash.
3. We requested a monthly withdrawal of £415 (though you don't need to do this, you could take ad-hoc* amounts). This amount will be taxed as income by you SIPP provider (using tax code provided by HMRC).
4. Once a year, we sell enough investments to bring the cash up to two years of estimated cash withdrawals.

* I believe there is an issue if you choose ad-hoc as HMRC is likely to overtax you as they think this may be a monthly amount. This would need to be claimed back.

Lightbulb moment

1, You sold 30% of your investments and turned it into £60k cash, the remainder of the pot stays invested £140k
2, You asked the SIPP provider to send you 25% of 60K tax-free = £15K
3, Yiu asked for £415PM, does the SIPP provider deduct the tax, like a payroll?
4, Essentially, repeat the process annually or as required
 

segovia

I think I am getting it now, one more question. 

If I cashed in 30K of my investments and moved it to drawdown, I take 25% Tax-Free but didn't want to take the taxable balance immediately, where does the remaining 75% sit. I wouldn't want it in cash.