Taking tax free cash from pension at 55

older_and_no_wiser

I have a conundrum that I’m pondering and hopefully the amazing people here can provide some guidance. Here’s my financial situation:

I will be 55 in around 6 months time so will have access to my DC pension pots. This is what my current situation is:

£410,000 in DC SIPP (85% global equity, 15% bonds)

£80,000 in Stock ISAs (100% equity)

£30,000 in easy access cash savings (earning 3% interest)

£10,000 in Loanpad P2P loans (earning 5% interest)

£30,000 outstanding mortgage (1.3% fixed till 04/24)

No debts or loans other than mortgage

Full state pension at 67

I am working full time and each month I am contributing:

£1,400 into my work SIPP (via salary sacrifice)

£1,000 into stock ISAs, GIA and/or cash savings depending on my ISA allowance limits at the time

I plan on working till 58-59 at which point I will probably pay off my mortgage. I live alone, have no dependants, no legacy/inheritance requirement and my current annual living and discretionary expenses (including hobbies, holidays etc) is around £15,000.

I have run my numbers through retirement planning software such as Voyant Go and all the simulations suggest that I won’t be able to spend my money and may die with a lot more than I started retirement with!

Now my conundrum. My big passion is sport and the club where I play tennis are in urgent need of new court surfaces. I would like to donate/gift £10,000 to assist with this. I was thinking of using part of the 25% tax free money from my SIPP when I have access at 55. I wouldn’t trigger the MPAA rule as it’s the tax free element, so I can still continue to contribute fully through my workplace pension until retirement. 

If I did the above, am I potentially losing out on any future tax gains or pension withdrawal benefits? I still need to get my head around the various pension withdrawal pros and cons - UFPLS, flexi access drawdown etc. Is my logic for using the SIPP pot okay or would you do this differently? 

older_and_no_wiser

Sorry forgot to mention one other question on this:

If I take some tax free money from my SIPP at 55, is the tax free amount locked in at that point? e.g. if my pension is valued at £400,000 at age 55 then I am entitled to £100,000 tax free. If I keep contributing for another 3 years, then the pension value could grow to, say, £500,000 and the tax free amount at that point would be £125,000. Do I lose the extra tax free amount if I've previously withdrawn from it?

Linton

I assume you will only take the £10K from your SIPP and leave the rest invested rather than taking the maximum 25% of £410K.  In that case ISTM £10K out of £410K is pretty irrelevent and wont materially affect any future plans.

older_and_no_wiser

Linton said:

I assume you will only take the £10K from your pension and leave the rest invested rather than taking the maximum 25% of £410K.  In that case ISTM £10K out of £410K is pretty irrelevent and wont materially affect any future plans.

Yes that's right @Linton - just the £10K will be withdrawn and I will leave the rest in there and continue to contribute through my workplace DC pension.

older_and_no_wiser

Would I have an issues with crystallisation of the pension even if withdrawing such a small percentage amount of the pension?

Linton

older_and_no_wiser said:

Sorry forgot to mention one other question on this:

If I take some tax free money from my SIPP at 55, is the tax free amount locked in at that point? e.g. if my pension is valued at £400,000 at age 55 then I am entitled to £100,000 tax free. If I keep contributing for another 3 years, then the pension value could grow to, say, £500,000 and the tax free amount at that point would be £125,000. Do I lose the extra tax free amount if I've previously withdrawn from it?

If you take £10K tax free from your £410K Sipp then the SIPP is effectively divided into two separate parts - £30K Crystalised with TFLS paid  and £370K uncrystalised with 25% TFLS still available.  Exactly how the division is managed depends on your SIPP provider.  Some set up 2 separate sub-accounts, others simply retain a % crystalised figure.  

New contributions add to the uncrystalised part but each part retains its own investment gains.

waveneygnome

Great on you - I'm a firm beleiver in supporting local causes/philanthropy;  so long as its not leaving you or family in finacial stress, which it doesn't appear so.

One other thing to check:  is the sports club a registered charity? 

If Yes - make sure you gift it in such a way that they might be able to claim Gift Aid on your donation

If No - maybe point the club towards an online platform called 'localgiving' dot org.  According to their site, even non-charities are able to reclaim gift aid via the platform (they charge a small fee;  but still of benefit to the club/society).  I've not used them myself, but plan to in the future.

Albermarle

older_and_no_wiser said:

Sorry forgot to mention one other question on this:

If I take some tax free money from my SIPP at 55, is the tax free amount locked in at that point? e.g. if my pension is valued at £400,000 at age 55 then I am entitled to £100,000 tax free. If I keep contributing for another 3 years, then the pension value could grow to, say, £500,000 and the tax free amount at that point would be £125,000. Do I lose the extra tax free amount if I've previously withdrawn from it?

As per Linton's post, you have to think in terms of crystallised and uncrystallised pension, and then usually it all becomes a bit clearer.
So for example if you have a pot of £400K and take £10K tax free, you will have £30K crystallised and £360K uncrystallised, as already explained. If you then add another £100K in contributions over the next few years, then ( ignoring investment growth/loss) you will still have £30K crystallised and now £460K  uncrystallised. Whatever you have uncrystallised you are entitled to take 25% tax free cash from.

Couple of other comments.
Check with your provider that you can take just part of the tax free cash available and you do not have to take all of it at once. This maybe the case if the pension is an older one. 
It might be easier just to pay the £10K from your savings? and then top them up for the next few months if you feel that is necessary.
When you retire you will have about £600K + a house . With your low expenditure and the state pension at a later date, you will, as you have worked out, probably die with a lot of it left. In which case you could consider.
1) Increasing expenditure, £15K pa is not a lot.
2) Retiring earlier
3) Have a plan for distributing some funds to good causes ( charities, sports clubs etc) 
4) Being nice to HMRC and  paying a lot of inheritance tax .

older_and_no_wiser

If Yes - make sure you gift it in such a way that they might be able to claim Gift Aid on your donation

Thanks for the response. I've checked with the club and they will be able to get an additional 25% gift aid on donations. 

older_and_no_wiser

Albermarle said:

When you retire you will have about £600K + a house . With your low expenditure and the state pension at a later date, you will, as you have worked out, probably die with a lot of it left. In which case you could consider.

1) Increasing expenditure, £15K pa is not a lot.
2) Retiring earlier
3) Have a plan for distributing some funds to good causes ( charities, sports clubs etc) 
4) Being nice to HMRC and  paying a lot of inheritance tax .

Thanks so much for the comment. I do live quite frugally. I have grown up learning that money is hard to come by and I appreciate what I get. I am planning on buying a motorhome in retirement and doing some travelling with my other half (although she will likely still be working when I retire). Currently I am quite restricted with holidays due to caring for my elderly father, but I do plan on travelling a lot and a few car purchases in retirement. I really don't want to leave too much when I pop my clogs. 

older_and_no_wiser

Linton said:

The SIPP is effectively divided into two separate parts - £30K Crystalised with TFLS paid  and £370K uncrystalised with 25% TFLS still available.  Exactly how the division is managed depends on your SIPP provider.  Some set up 2 separate sub-accounts, others simply retain a % crystalised figure.  

Maybe an added complication - or simplifier:

I have 2 SIPPs:
Hargreaves Lansdown is my workplace SIPP and currently valued at approx. £85,000. This gets all my workplace contributions each month.
Interactive Investor is my personal SIPP and currently valued at approx. £325,000.

They are both fairly new arrangements - under 3 years since both were opened. Because II has much lower platform fees for me (they are fixed price rather than percentage based), I do an in specie transfer every so often from HL to II of certain funds. 

Regarding the crystallisation, I can check but believe both should be flexible with arrangements.

Would both providers need to be contacted if I withdraw any tax free amount?
Do I need to crystallise one or both if I withdraw?
Is it easier if I were to withdraw half from each provider?

So many questions. Maybe I should just use my savings as suggested! haha