SIPP Withdrawal To Reduce Tax

Julezy101

I was originally going down the UFPLS route but am now having second thoughts and think taking the full 25% tax free up front instead.
I've been doing some 'back of a fag packet' calculations with the aim to reduce the amount of tax you pay when you start getting the SP. It seems the best way would be to take the full 25% tax free from my SIPP when I start accessing it and then each year withdrawing up to my PA.
This will reduce the SIPP pot the most (without paying tax) before the SP starts and ultimately mean paying less tax on what's left to take out.
Does that sound like a logical approach?

MallyGirl

whether you take the 25% upfront and then only withdraw taxable up to the PA or take approx £16670 each year which is 25% tax free and taxable at the PA makes no difference in the tax you end up paying really. You might get a bit more out as  tax free if the uncrystallised pot continues to grow.
What you would be doing is bringing that 25% lump sum into your estate (liable for inheritance tax).

Julezy101

Thanks. I'd not considered IHT, although its unlikely to be an issue.

From my rough calculations I make it I'd have about 40k less in my SIPP at 67 if I take the full 25% up front rather than  UFPLS which would mean quite a chunk with no tax to pay on it.

MallyGirl

but the 25% tax free will always be the same - roughly as it will hopefully grow a bit - whether you take it in instalments or upfront.

Julezy101

Yes but its the amount I'll have left in my SIPP at SP age which will be taxed as the SP and my DB pension will use up all of my PA and more. So the less I have in my SIPP then will mean the less I'll be taxed on when its eventually withdrawn

Marcon

Julezy101 said:

Yes but its the amount I'll have left in my SIPP at SP age which will be taxed as the SP and my DB pension will use up all of my PA and more. So the less I have in my SIPP then will mean the less I'll be taxed on when its eventually withdrawn

...although if you take the 25% tax free at the outset, every withdrawal you make from your SIPP will be fully taxable, as opposed to 25% tax free/75% taxable.

The personal allowance could change as could tax rates...and surely you are letting the tax tail wag the income dog? Most people aspire to have as much as they can in their SIPP, not try to reduce it!

enthusiasticsaver

Julezy101 said:

I was originally going down the UFPLS route but am now having second thoughts and think taking the full 25% tax free up front instead.
I've been doing some 'back of a fag packet' calculations with the aim to reduce the amount of tax you pay when you start getting the SP. It seems the best way would be to take the full 25% tax free from my SIPP when I start accessing it and then each year withdrawing up to my PA.
This will reduce the SIPP pot the most (without paying tax) before the SP starts and ultimately mean paying less tax on what's left to take out.
Does that sound like a logical approach?

That makes sense to me.  My husband is just now taking everything out on the final balance of his crystallized SIPP (only £20k)  over this tax year and next to avoid paying higher rate tax on the whole balance when his state pension starts paying out in October. This I think is the downside of SIPPS in that the tax side of them is messy.  We are going to have to go down the route of paying a lot of tax on it when it pays out in a few weeks time then reclaim it.  I had to do the same with mine a few years back and why I have said if we invest any more it will be in ISAs not SIPPS as our DB pensions take up all our  allowances. 

Julezy101

Marcon said:

Julezy101 said:

Yes but its the amount I'll have left in my SIPP at SP age which will be taxed as the SP and my DB pension will use up all of my PA and more. So the less I have in my SIPP then will mean the less I'll be taxed on when its eventually withdrawn

...although if you take the 25% tax free at the outset, every withdrawal you make from your SIPP will be fully taxable, as opposed to 25% tax free/75% taxable.

The personal allowance could change as could tax rates...and surely you are letting the tax tail wag the income dog? Most people aspire to have as much as they can in their SIPP, not try to reduce it!

Yes but I'll still be able to get 12.5k out each year tax free (with no other income). Like most people I don't want to pay anymore tax than I have to. I'm done with most of the accumulating in my SIPP - it'll soon be time to start spending it.

BoxerfanUK

I don't know what size your pension pot is, but in theory, drawing down via FAD or UFPLS could mean you end up getting more out of your SIPP tax free than if you took all the 25% out up front!

Julezy101

BoxerfanUK said:

I don't know what size your pension pot is, but in theory, drawing down via FAD or UFPLS could mean you end up getting more out of your SIPP tax free than if you took all the 25% out up front!

I assume this would only happen if the SIPP pot grew very well in terms of good investment choices? 
I'm happy to take a lower risk (lower return) approach on how it grows but I will have another look at my figures based on your reply.

Qyburn

Julezy101 said:

BoxerfanUK said:

I don't know what size your pension pot is, but in theory, drawing down via FAD or UFPLS could mean you end up getting more out of your SIPP tax free than if you took all the 25% out up front!

I assume this would only happen if the SIPP pot grew very well in terms of good investment choices? 

Easiest to explain with an example say £200k pot and lets say three years to SP.

Option 1 take tax free only £16,666.66 per year. £50,000 with no tax paid. At SP age all your tax free is used leaving you with £150k all of which will be taxed as its drawn.

Option 2 take UFPLS of £16,760 each of three years. £58,280 total with no tax paid. At SP age you still have £37,430 tax free remaining, and £112,290 that will be taxed as it's drawn.