Help understanding 25% tax free lump sum in pension

the_k_dog

I’m struggling a bit with understanding the 25% tax free element of my pension.

I’m planning on retiring in April 2024. I have some defined benefit pension (£16k pa) which I will start claiming then. I also have roughly £200k in a SIPP. 

I also have savings in an ISA. 

At some point before the state pension kicks in (10 years away), I am likely to need to start drawing on my SIPP. 

So, I understand I can take 25% (£50k) all at once, tax free. I guess I could use up my annual ISA allowance and put £20k in there and £30k elsewhere. 

Or, I can just take it as and when I want, converting some of the stocks in the SIPP into cash as needed, and the first 25% of each sale would be tax free. That could go on for 30+ years (as longs as I live). 

I would rather do it all at once, to keep my tax affairs simple and to aid with budgeting. But since I can only put £20k in an ISA, I’d be getting taxed on any interest I may earn on the other £30k outside it, wouldn’t I, until I can drop it into my ISA over the next couple of years? Is my understanding right and if so, Is there a better way of doing it, while keeping things simple, and preferably avoiding paying a financial advisor!

molerat

Depending the provider, not all have full flexibility on withdrawals, you can do pretty much whatever you want.  Take the whole 25% at once leaving the rest invested with all future withdrawals, including any growth, taxable.  Or take whatever you need whenever you want it with 25% tax free and 75% taxable.  Whatever is left invested will grow with 25% of that new amount tax free.  Remembering of course that with no relevant income you can put £2880 into a pension every year and receive a 25% uplift from the taxman.

MallyGirl

do you have a partner with spare ISA quota? If not then the amount of interest you generate on £30k by next April and which then incurs tax is not going to be massive. At 5% it will be £625 interest.
Come next April you can then put £20k in the ISA meaning you are only worrying about the tax on the interest on £10k

Brie

If you took the TFLS in March 2024 you could put £20k into your ISA in this tax year and another £20k into it in April.  Interest accrued would be minimal as you'd only have £10k hanging about for a full year.  If you've already used your limit this year then maybe wait until 2025.  

Have you talked to PensionWise about what you are considering - they are very helpful on explaining the alternatives for dealing with PPs and DC schemes.  And it's a free service.

Should you decide to look at financial advice check to see what is available via any scheme through your employer or your industry or union.  If you are looking for freelance advice check the local IFAs that might be recommended by friends or family.  Many will do a preliminary info session free of charge in a bid to get your business.  You're under no obligation until you actually sign up to get them to manage your money for you.

sheslookinhot

If your plan is to draw from the SIPP and stick it a bank or building society would it not be better to simply leave it in the SIPP ?

the_k_dog

molerat said:

Depending the provider, not all have full flexibility on withdrawals, you can do pretty much whatever you want.  Take the whole 25% at once leaving the rest invested with all future withdrawals, including any growth, taxable.  Or take whatever you need whenever you want it with 25% tax free and 75% taxable.  Whatever is left invested will grow with 25% of that new amount tax free.  Remembering of course that with no relevant income you can put £2880 into a pension every year and receive a 25% uplift from the taxman.

Thanks. All my workplace pensions are being transferred to a SIPP so it's nice and easy to manage (and, much lower fees - I got a shock when I investigated recently).

the_k_dog

MallyGirl said:

do you have a partner with spare ISA quota? If not then the amount of interest you generate on £30k by next April and which then incurs tax is not going to be massive. At 5% it will be £625 interest.
Come next April you can then put £20k in the ISA meaning you are only worrying about the tax on the interest on £10k

My wife will be in exactly the same boat as me. You make a good point though. I could take it at the end of March, and stick 20k in my ISA (I've added nothing in 23), then another £20k a few days later and the tax on the remaining £10k is really neither here nor there in the grand scheme of things. In fact, I could use my (grown up) kids' ISAs...we're trying to put something away for them anyway.

the_k_dog

sheslookinhot said:

If your plan is to draw from the SIPP and stick it a bank or building society would it not be better to simply leave it in the SIPP ?

I don't really intend to stick it in a bank, my plan is to put it in an ISA. As far as I'm aware, there is no advantage to it being in a SIPP rather than an ISA, is there?

MallyGirl

the_k_dog said:

sheslookinhot said:

If your plan is to draw from the SIPP and stick it a bank or building society would it not be better to simply leave it in the SIPP ?

I don't really intend to stick it in a bank, my plan is to put it in an ISA. As far as I'm aware, there is no advantage to it being in a SIPP rather than an ISA, is there?

Pensions are outside of your estate for inheritance tax, ISAs are in your estate.

Albermarle

molerat said:

Depending the provider, not all have full flexibility on withdrawals, you can do pretty much whatever you want.  Take the whole 25% at once leaving the rest invested with all future withdrawals, including any growth, taxable.  Or take whatever you need whenever you want it with 25% tax free and 75% taxable.  Whatever is left invested will grow with 25% of that new amount tax free.  Remembering of course that with no relevant income you can put £2880 into a pension every year and receive a 25% uplift from the taxman.

It also possible with some providers to 
1) take the 25% tax free in stages, before taking any taxable income.
2) Take some tax free in stages and take some taxable income ( but not necessarily as a fixed 25/75  UFPLS payment) 

I don't really intend to stick it in a bank, my plan is to put it in an ISA. As far as I'm aware, there is no advantage to it being in a SIPP rather than an ISA, is there?

There is no advantage in taking it out of the SIPP and putting it in an ISA, especially if the SIPP provider is flexible in how you withdraw the tax free cash ( see above) so why bother ?

the_k_dog

MallyGirl said:

the_k_dog said:

sheslookinhot said:

If your plan is to draw from the SIPP and stick it a bank or building society would it not be better to simply leave it in the SIPP ?

I don't really intend to stick it in a bank, my plan is to put it in an ISA. As far as I'm aware, there is no advantage to it being in a SIPP rather than an ISA, is there?

Pensions are outside of your estate for inheritance tax, ISAs are in your estate.

Good point. Need to get it spent then