How to avoid paying too much tax on first drawdown?

_pete_

I will need to make my first drawdown from my SIPP in the new year (probably February 2023).  It will be about £20,000 and should be my only drawdown that year.

I understand that HMRC treat this drawdown as if it were the first of several (monthly?) payments in the New Year and tax it accordingly.  I believe that you have to apply for a refund from them.

Can anyone explain how this works?  I am a self-employed sole trader.  I fill out a self assessment form each year.  My tax year runs from April to April.  Does my SIPP provider deduct the tax, or will it be done via my annual tax bill from HMRC once they've received my self assessment form?

Thank you.

xylophone

I will need to make my first drawdown from my SIPP in the new year (probably February 2023). 

Have you already taken the 25% tax free PCLS?

Which company holds your SIPP?

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

_pete_

xylophone said:

I will need to make my first drawdown from my SIPP in the new year (probably February 2023). 

Have you already taken the 25% tax free PCLS?

Which company holds your SIPP?

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

Thanks for the link.  My SIPP is split between IWeb and A J Bell.  

My understanding is that I'm not operating under PAYE (because self employed sole-trader).

Do IWeb and A J Bell deduct the tax at source or is it dealt with by HMRC under my annual return?  

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year.  Does it make sense to crystalise the whole pot at the outset then draw down a portion of the tax free amount each year?

Dazed_and_C0nfused

_pete_ said:

I will need to make my first drawdown from my SIPP in the new year (probably February 2023).  It will be about £20,000 and should be my only drawdown that year.

I understand that HMRC treat this drawdown as if it were the first of several (monthly?) payments in the New Year and tax it accordingly.  I believe that you have to apply for a refund from them.

Can anyone explain how this works?  I am a self-employed sole trader.  I fill out a self assessment form each year.  My tax year runs from April to April.  Does my SIPP provider deduct the tax, or will it be done via my annual tax bill from HMRC once they've received my self assessment form?

Thank you.

You won't apply for a refund, it will all be settled via your Self Assessment return.

You simply include the taxable pension income (and tax deducted) as you would any other taxable income.

The income and tax deducted is reflected in your Self Assessment calculation.

eastcorkram

_pete_ said:

xylophone said:

I will need to make my first drawdown from my SIPP in the new year (probably February 2023). 

Have you already taken the 25% tax free PCLS?

Which company holds your SIPP?

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

Thanks for the link.  My SIPP is split between IWeb and A J Bell.  

My understanding is that I'm not operating under PAYE (because self employed sole-trader).

Do IWeb and A J Bell deduct the tax at source or is it dealt with by HMRC under my annual return?  

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year.  Does it make sense to crystalise the whole pot at the outset then draw down a portion of the tax free amount each year?

If your plan is to take 20k per year, can you not just set it up to take monthly? Then the tax would be about right. No idea if that's doable, or whether it incurrs extra charges.

molerat

The pension provider will effectively be a PAYE employer and will deduct tax accordingly.  The first drawdown will be taxed at 1257LM1 in accordance with tax regulations.  To avoid any tax being deducted a first amount lower than £1048 taxable needs to be taken.  HMRC will then issue a tax code and any further payments will be taxed under PAYE in accordance that.  Taking a large sum early in the year will see a big tax deduction as you will only have X 1/12ths of the annual tax free amount according to the code allocated.  If that code is BR or D0 etc it will not matter when you take the large sum.  Your SA will then sort out your total tax for the year.

Albermarle

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year.  Does it make sense to crystalise the whole pot at the outset then draw down a portion of the tax free amount each year?

If you crystallise the whole pot, all the tax free cash will be paid out to your bank, and then all further withdrawals will be taxable.

You can take the 25% tax free in stages, and then all future withdrawals will be taxable.

You can take some tax free, and some taxable with each withdrawal.

You are best to discuss with your pension provider, what your wishes are and if that fits with their system. When you first start drawdown you will most likely have to speak with them anyway. You can not just press a button online.

You will also need to decide whether to merge the two pots first, or empty one, then the other. You can drawdown from two at once but it can complicate things a bit with tax.

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year. 

Where does this £20K figure come from? Ideally it should increase with inflation each year.

The rule of thumb is not to take more than 4%pa + inflation, to make sure you do not run out if you live a long time.

Marcon

_pete_ said:

I will need to make my first drawdown from my SIPP in the new year (probably February 2023).  It will be about £20,000 and should be my only drawdown that year.

I understand that HMRC treat this drawdown as if it were the first of several (monthly?) payments in the New Year and tax it accordingly.  I believe that you have to apply for a refund from them.

Can anyone explain how this works?  I am a self-employed sole trader.  I fill out a self assessment form each year.  My tax year runs from April to April.  Does my SIPP provider deduct the tax, or will it be done via my annual tax bill from HMRC once they've received my self assessment form?

Thank you.

As usual, the LITRG comes up trumps with an excellent guide: https://www.litrg.org.uk/tax-guides/pensioners/what-tax-position-when-i-take-money-my-pension-flexibly

This article from Which is also very helpful: https://www.which.co.uk/news/article/can-this-tactic-help-you-avoid-a-huge-pension-tax-bill-aQXDW6c2U5wB

Marcon

Albermarle said:

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year.  Does it make sense to crystalise the whole pot at the outset then draw down a portion of the tax free amount each year?

If you crystallise the whole pot, all the tax free cash will be paid out to your bank, and then all further withdrawals will be taxable.

You can take the 25% tax free in stages, and then all future withdrawals will be taxable.

You can take some tax free, and some taxable with each withdrawal.

You are best to discuss with your pension provider, what your wishes are and if that fits with their system. When you first start drawdown you will most likely have to speak with them anyway. You can not just press a button online.

You will also need to decide whether to merge the two pots first, or empty one, then the other. You can drawdown from two at once but it can complicate things a bit with tax.

My intention is to gradually drawdown my SIPP until I die, taking approximately £20K each year. 

Where does this £20K figure come from? Ideally it should increase with inflation each year.

The rule of thumb is not to take more than 4%pa + inflation, to make sure you do not run out if you live a long time.

...but remember a rule of thumb is no sort of guarantee, especially in times of high inflation. The oft-mentioned 'safe withdrawal rate' is no such thing!

SouthCoastBoy

I'm not planning a monthly drawdown I'm planning a yearly one in March towards the end of tax year of 24k a year with taxable amount of 18k, that way I can get any overpaid tax quickly refunded via self assessment in May June of the same year. I do something similar at the moment but with contributions so will just do the inverse when in retirement.

Every year they change my tax code and I go online and get it changed back, its a little game we play, been doing it for years now

eastcorkram

SouthCoastBoy said:

I'm not planning a monthly drawdown I'm planning a yearly one in March towards the end of tax year of 24k a year with taxable amount of 18k, that way I can get any overpaid tax quickly refunded via self assessment in May June of the same year. I do something similar at the moment but with contributions so will just do the inverse when in retirement.

Every year they change my tax code and I go online and get it changed back, its a little game we play, been doing it for years now

Is there a reason why you and the OP are doing this yearly? Is it possible to have it set up to withdraw monthly, then you wouldn't have to faff about reclaiming over paid tax .

I've not quite got to the drawdown stage myself, but imagined I'd just do it once a month.