Taking first taxable lump sum from SIPP

eastcorkram

molerat said:

Havent_got_a_clue said:

Will we have to go through this the following year? 

Unfortunately to some extent yes.  The only way to avoid reclaiming the tax with a large sum withdrawal is to take it in March.  But in future years the tax code will already be in place.

Do you get the same issue with small, even , withdrawals? 
I have a sipp with HL for example where I'd like to take out say £400 per month, every month. Would I overpay tax on that and have to reclaim it every year? I have a dB which I can take at 65, so presume something similar happens with that? 

I can also see that my DB will probably be about enough to pay my tax. Do you get a payslip type thing monthly with a DB? I can envisage that having a gross pay figure and a nett pay of zero, once WTW get issued with a tax code. 

I should have state pension payments, not taxed at source of around £17,000, and my tax code currently is 670L. Once I stop work, that should revert to the full allowance, until they take off the £17k !

As one of those weirdos who isn't looking forward to retirement (but carrying on working has no appeal either!), all this paying too much tax, and trying to claim it back, or not paying enough and getting a tax demand is making me dread it. Also seems to make budgeting difficult. At least for the first few years. 

molerat

Once you are issued with a tax code pensions operate the same way as any job so regular, or irregular, monthly payments would have the correct tax deducted.  A payment in March will make sure the tax for the year is squared (provided the code for the pension is correct / appropriate with reference to other income sources)

Very few pensions issue monthly payslips, my 2 only give one at the start of the year as more of a "this is what you will be getting each month" or if there is a payment / tax code change mid year.  I get P60s after the end of the tax year. The SIPP only gives a P60 but that is only a once a year draw.

dealyboy

People here are highlighting what many consider a deficiency in the tax system where pension 'income' is considered as pay and falls under the PAYE system.

The personal pension provider starts off with no tax code for the pension holder and is obliged to apply tax on a non-cumulative basis as Month 1, i.e. only one month's worth of the personal tax allowance, to a drawdown payment, whatever the amount. The rate is determined by the amount of drawdown which is considered to be 1/12 of the annual income, so there may be a marginal higher rate.

The following tax year the pension provider should be issued with a tax code based on the previous year's drawdown, dependent on whether there are other sources (other than SP) of taxable income, and this will be cumulative. In the simple case when a single payment occurs in the next tax year, the month it is made determines how many months of the allowance is applied. If the single payment is made on or after March 6th in that tax year all the allowance will be applied. Of course many providers can arrange regular monthly flexi-access drawdown payments which can be within the allowance.

Whether the tax code is non-cumulative or cumulative, unfortunately there is no Year 1 code to apply the whole allowance at once.

Getting a return of the tax paid is relatively straightforward and relatively quick (4-8 weeks), this can be done online via gov.uk and is a P55 if the pension is left open. There are one or two confusing questions regarding flexible access and the details are required of all taxable income received and due to receive within the tax year, including savings interest and state pension. If a tax refund is not requested, HMRC will refund overpaid tax in the following tax year, usually within 3-4 months.