Withdrawals from SIPP drawdown tax implications

Ella_fella

Please can you help confirm the following- my IFA advised me to make a one off payment from my personal savings of about 31k which would then equate to roughly 38k with the tax breaks on it, bringing me under the allowance apparently for paying into a SIPP.

I asked if I could access this cash via drawdown in a couple of years time when I was 55 and said my understanding was I could access 25% of my fund tax free which I was told was correct. 

I now have done some casual reading and seen that this actually isn't true - the money I potentially would withdraw would be classified as earnings so would be added to my earnings at this time which would be around 45k pa meaning if I took out the whole 25% then this would push me into the 40% tax bracket.

Realistically any significant withdrawal per annum would push me over the limit totally negating the sell of getting 20% of the money made up as tax free? I've also read that to convert the SIPP into a drawdown this would incur charges coming off my bottom line as well.

So really what is the point of overpaying to get tax breaks then I can't touch this money until I retire? I made the point of saying to my IFA I would like to access this pot at 55 but seems pointless if any tax breaks are then totally eroded, I might as well put it somewhere elsewhere?

Am I missing the point somewhere before I go back to my IFA?

QrizB

Ella_fella said:

Am I missing the point somewhere before I go back to my IFA?

I'm not quite sure what point you're missing, but I think you've missed one somewhere along the line.

I asked if I could access this cash via drawdown in a couple of years time when I was 55 and said my understanding was I could access 25% of my fund tax free which I was told was correct.

This is correct. Once you get to the minimum age (probably 55 for you, but for some people reading this it will be 57 or higher) you can access your SIPP funds. 25% of those can be taken tax-free.

I now have done some casual reading and seen that this actually isn't true - the money I potentially would withdraw would be classified as earnings so would be added to my earnings at this time which would be around 45k pa meaning if I took out the whole 25% then this would push me into the 40% tax bracket.

No, this bit isn't correct. The 25% is tax-free. It's the remaining 75% that is taxable income (not earnings, so no NI to pay).

Realistically any significant withdrawal per annum would push me over the limit totally negating the sell of getting 20% of the money made up as tax free?

Only once you start taking the 75%.

Ella_fella

QrizB said:

Ella_fella said:

Am I missing the point somewhere before I go back to my IFA?

I'm not quite sure what point you're missing, but I think you've missed one somewhere along the line.

I asked if I could access this cash via drawdown in a couple of years time when I was 55 and said my understanding was I could access 25% of my fund tax free which I was told was correct.

This is correct. Once you get to the minimum age (probably 55 for you, but for some people reading this it will be 57 or higher) you can access your SIPP funds. 25% of those can be taken tax-free.

I now have done some casual reading and seen that this actually isn't true - the money I potentially would withdraw would be classified as earnings so would be added to my earnings at this time which would be around 45k pa meaning if I took out the whole 25% then this would push me into the 40% tax bracket.

No, this bit isn't correct. The 25% is tax-free. It's the remaining 75% that is taxable income (not earnings, so no NI to pay).

Realistically any significant withdrawal per annum would push me over the limit totally negating the sell of getting 20% of the money made up as tax free?

Only once you start taking the 75%.

The bit I'm getting wrapped round my head is that I thought if I withdraw 25% of the tax free element in one go when I turned 55 this would be added as income to my current earnings at this time pushing me into a higher tax bracket.

Like for example I was still earning 45k at 55 with my current job and withdrew say 40k from my SIPP as all of the tax free element so in that tax year I would effectively earn 85k income? And get taxed on this accordingly?

Albermarle

Ella_fella said:

QrizB said:

Ella_fella said:

Am I missing the point somewhere before I go back to my IFA?

I'm not quite sure what point you're missing, but I think you've missed one somewhere along the line.

I asked if I could access this cash via drawdown in a couple of years time when I was 55 and said my understanding was I could access 25% of my fund tax free which I was told was correct.

This is correct. Once you get to the minimum age (probably 55 for you, but for some people reading this it will be 57 or higher) you can access your SIPP funds. 25% of those can be taken tax-free.

I now have done some casual reading and seen that this actually isn't true - the money I potentially would withdraw would be classified as earnings so would be added to my earnings at this time which would be around 45k pa meaning if I took out the whole 25% then this would push me into the 40% tax bracket.

No, this bit isn't correct. The 25% is tax-free. It's the remaining 75% that is taxable income (not earnings, so no NI to pay).

Realistically any significant withdrawal per annum would push me over the limit totally negating the sell of getting 20% of the money made up as tax free?

Only once you start taking the 75%.

The bit I'm getting wrapped round my head is that I thought if I withdraw 25% of the tax free element in one go when I turned 55 this would be added as income to my current earnings at this time pushing me into a higher tax bracket.

Like for example I was still earning 45k at 55 with my current job and withdrew say 40k from my SIPP as all of the tax free element so in that tax year I would effectively earn 85k income? And get taxed on this accordingly?

Your 'casual reading' as somehow led you to a totally wrong conclusion.
The 25% tax free is not classed as taxable income, and therefore is not added to any other taxable income you have, and totally ignore by the taxman.
It is what it says on the tin - tax free !

molerat

No.  The 25% is not so much "tax free" but more "non taxable".

dunstonh

I now have done some casual reading and seen that this actually isn't true - the money I potentially would withdraw would be classified as earnings so would be added to my earnings at this time which would be around 45k pa meaning if I took out the whole 25% then this would push me into the 40% tax bracket.

The 25% tax free cash is, funnily enough, tax free.   The 75% element is taxable but you are not asking to draw that.

So really what is the point of overpaying to get tax breaks then I can't touch this money until I retire?

The whole concept of a pension is for use when you are retired.  Hence the tax breaks you get.

Am I missing the point somewhere before I go back to my IFA?

It sounds like you think that the 25% tax free cash isn't tax free cash.

The bit I'm getting wrapped round my head is that I thought if I withdraw 25% of the tax free element in one go when I turned 55 this would be added as income to my current earnings at this time pushing me into a higher tax bracket.

No.   Your IFA is correct, as you would expect.