Cashing in a SIPP.

traceyaj

My husband has a SIPP with Hargreaves Lansdown valued at £15973. This consists entirely of cash.  He wishes to withdraw all of this and probably invest it in a Fixed  Rate ISA.  From the guidance from HL we gather that 25% would be tax free and the remainder taxed at 20% basic rate tax. HL also advise that this remaining 75% of the SIPP would in practice by taxed using an emergency code and therefore we may initially pay more than 20% tax on it. 
Would he automatically get the overpaid tax back during the following tax year (2023/24)? Any advice welcome, btw this would be taken as a "small lump sum" or a UFPLS.   

dunstonh

This consists entirely of cash.  He wishes to withdraw all of this and probably invest it in a Fixed  Rate ISA.  

That is typically a bad thing to do as you end up paying tax unnecessarily.  What is the justification for doing that?

Would he automatically get the overpaid tax back during the following tax year (2023/24)?

Eventually yes but filling the appropriate HMRC form is quicker.

Any advice welcome, btw this would be taken as a "small lump sum" or a UFPLS.   

It is too large to be taken under the small pots rule.  It would have to be UFPLS.

Alistair31

What you pay in tax would outweigh what interest a fixed rate ISA would pay, no?

xylophone

Your husband has cash of £15973 in the pension pot and wishes to withdraw the whole in one lump sum amount?

He is entitled to £3993.25 tax free.

With regard to the balance £11,979.25, it is taxed  initially as if that amount were to be paid every month.

!/12 will  be paid tax free and the balance taxed at 20%.

Whether or not this correct will depend on your husband's personal situation.

If his only income in this tax year will be the £11,979.25 then he will have been over taxed.

If he has other income, then he may have been undertaxed.

See

https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

traceyaj

dunstonh said:

This consists entirely of cash.  He wishes to withdraw all of this and probably invest it in a Fixed  Rate ISA.  

That is typically a bad thing to do as you end up paying tax unnecessarily.  What is the justification for doing that?

Thanks dunstonh,  basically he hasn't invested the money in anything and just wanted a better interest rate. Part of the total consists of tax relief on the original SIPP investment. So even after paying income tax on a withdrawal he wouldn't be really worse off. Not sure of an alternative to paying tax unnecessarily? Would be grateful if you could enlighten me? thanks.

Dazed_and_C0nfused

traceyaj said:

My husband has a SIPP with Hargreaves Lansdown valued at £15973. This consists entirely of cash.  He wishes to withdraw all of this and probably invest it in a Fixed  Rate ISA.  From the guidance from HL we gather that 25% would be tax free and the remainder taxed at 20% basic rate tax. HL also advise that this remaining 75% of the SIPP would in practice by taxed using an emergency code and therefore we may initially pay more than 20% tax on it. 
Would he automatically get the overpaid tax back during the following tax year (2023/24)? Any advice welcome, btw this would be taken as a "small lump sum" or a UFPLS.   

Paying 20% tax on some of the money to get the chance to earn 5% interest doesn't really seem to stack up financially.

What other taxable income will he have in the current tax year?

Also, this would mean he triggers MPAA, forever limiting future contributions to a DC scheme to £4k/year.

dunstonh

Thanks dunstonh,  basically he hasn't invested the money in anything and just wanted a better interest rate.

Maybe he should invest?      You dont need to go in gung ho but with every market down, its a far better time to buy than any over the last year or two.

So even after paying income tax on a withdrawal he wouldn't be really worse off. 

He will pay the equivalent of 15% tax if he has no personal allowance available.  If he gets 3% interest on it, it will take 5 years just to recover the tax.

Not sure of an alternative to paying tax unnecessarily? Would be grateful if you could enlighten me? thanks.

Leave it in the pension with a sensible level investment.

traceyaj

Alistair31 said:

What you pay in tax would outweigh what interest a fixed rate ISA would pay, no?

Thanks Alistair31, But surely no matter what he did in the interim, he would end up paying tax when it comes to withdrawing the proceeds of the fund? Basically he/we don't fancy being exposed to the stock market and are looking for a safe haven such as the fixed rate ISA. Investing in the SIPP has been a pointless exercise.

Dazed_and_C0nfused

traceyaj said:

Alistair31 said:

What you pay in tax would outweigh what interest a fixed rate ISA would pay, no?

Thanks Alistair31, But surely no matter what he did in the interim, he would end up paying tax when it comes to withdrawing the proceeds of the fund? Basically he/we don't fancy being exposed to the stock market and are looking for a safe haven such as the fixed rate ISA. Investing in the SIPP has been a pointless exercise.

But he hasn't invested in the SIPP, that's part of the problem.

He has made contributions, received the tax relief and left the money in cash.

He won't necessarily have to pay tax on it.  Plenty of people manage to get money out without paying tax by timing it to coincide it with tax years where they have spare Personal Allowances.

traceyaj

Dazed_and_C0nfused said:

traceyaj said:

Alistair31 said:

What you pay in tax would outweigh what interest a fixed rate ISA would pay, no?

Thanks Alistair31, But surely no matter what he did in the interim, he would end up paying tax when it comes to withdrawing the proceeds of the fund? Basically he/we don't fancy being exposed to the stock market and are looking for a safe haven such as the fixed rate ISA. Investing in the SIPP has been a pointless exercise.

But he hasn't invested in the SIPP, that's part of the problem.

He has made contributions, received the tax relief and left the money in cash.

He won't necessarily have to pay tax on it.  Plenty of people manage to get money out without paying tax by timing it to coincide it with tax years where they have spare Personal Allowances.

Thanks.
We do understand what you are saying about the spare Personal allowance, however he is very unlikely to ever be in this position.   

Dazed_and_C0nfused

traceyaj said:

Dazed_and_C0nfused said:

traceyaj said:

Alistair31 said:

What you pay in tax would outweigh what interest a fixed rate ISA would pay, no?

Thanks Alistair31, But surely no matter what he did in the interim, he would end up paying tax when it comes to withdrawing the proceeds of the fund? Basically he/we don't fancy being exposed to the stock market and are looking for a safe haven such as the fixed rate ISA. Investing in the SIPP has been a pointless exercise.

But he hasn't invested in the SIPP, that's part of the problem.

He has made contributions, received the tax relief and left the money in cash.

He won't necessarily have to pay tax on it.  Plenty of people manage to get money out without paying tax by timing it to coincide it with tax years where they have spare Personal Allowances.

Thanks.
We do understand what you are saying about the spare Personal allowance, however he is very unlikely to ever be in this position.   

I think he's missing a crucial aspect of pensions.

Let's say he puts £2,500 in a savings account paying 4.5% and he doesn't need to pay any tax on the interest i.e. its an ISA or taxed at one of the 0% tax rates for interest.

After a year he has £2,612.50.

Let's say he puts that £2,500 into a relief at source pension.  The pension company will add £625 in basic rate tax relief giving him a pension fund of £3,125.

He then takes the 25% TFLS (£781.25) and has to pay basic rate tax of 20% on the remaining £2,343.75.

So he gets £2656.25 back.  A 6.25% return.  And if he picks the right provider he can potentially do that fairly quickly so he can then put the £2656.25 into a savings account and get a few months interest as well.  You do need to check the providers fees in this scenario, particularly if you intend putting money and taking it all out very quickly.