SIPP Withdrawal To Reduce Tax

Stargunner

Qyburn said:

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.

If you were taking the £50k tax free lump sum, you would be mad not to also take out £12.5k per year for the 3 years before SP to take advantage of being able to take it out tax free.
Both options would therefore give you the same outcome.

handful

I am in the same position as the OP. I am taking the view that it's best to take the £16760 each year until SPA and then I will most likely at that point put the rest into FAD and take the remainder of the TFC. I will time this so that I can utilise the ISA allowance so that the TFC can be invested again tax free because I don't want to pay tax on savings interest either. For me it's about getting as much TFC out of the SIPP before SPA and not how much (or little) is left in the SIPP at that point.

Linton

I cannot see it will make any difference.  When you take the 25% has no bearing on how the crystallised 75% is taxed.   Just take taxable drawdown up to your next tax band and put any excess over spending and cash savings if any, into an S&S ISA, perhaps invested in the same way as you invest your pension.

You may think that investing outside the pension is better as taking the pension before investment gains minimises pension income tax paid however the net money you get is the same.  pension X investment return, after tax=pension after tax X investment return if your marginal tax rates are the same.  

Julezy101

Linton said:

I cannot see it will make any difference.  When you take the 25% has no bearing on how the crystallised 75% is taxed.   Just take taxable drawdown up to your next tax band and put any excess over spending and cash savings if any, into an S&S ISA, perhaps invested in the same way as you invest your pension.

You may think that investing outside the pension is better as taking the pension before investment gains minimises pension income tax paid however the net money you get is the same.  pension X investment return, after tax=pension after tax X investment return if your marginal tax rates are the same.  

Rough figures I've worked out, if I take the full 25% out and then withdraw up to my PA it will leave me with around 70k left at SPA (ignore growth). If I do the UFPLS route it will leave me around 110k. So at SPA I'll be paying 20% tax - on the 70k it'll be 14k - on the 110k it'll be 22k. This would mean an extra 8k tax in total on the UFPLS route once the SIPP is emptied. 

ader42

Clearly the key thing is to make sure that you use your Personal Allowance.
My own personal second rule will be to never pay 40% tax.
My third rule for myself will be to avoid paying income tax for as long as I can - so that the 20% can stay invested for as long as possible.

I think these type of questions get complicated by some users as not all pension providers offer all options.

Personally I’ll be taking some TFLS one-off payments as and when I like during the year before I retire as I will have other income using my personal allowance. After that I may start to use UFPLS for the £16,760, but then again I might actually take £12,570 from the crystallised pot and another additional £12k (for example) from the uncrystallised pot as another TFLS.

I may take some TFC and put it into a junior SIPP for my son (£2880 per annum) to get the 25% tax relief for him, and my taking monies from my pot to pay the bills will enable the other half to put the bulk of her earnt income into her SIPP too. 

I’ll also be mindful when it comes to taking taxable monies out, that if I want to buy something for £10k above my normal expenditure it will actually cost me £12k of my taxable pot. 

Audaxer

Julezy101 said:

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.

My wife is doing something similar, but by UFPLS, and reinvesting it into the same fund within her S&S ISA. You could also consider paying £2,880 net back into your SIPP each year to get the tax relief. That does however effectively reduce your net annual withdrawal from the SIPP, but still worth considering.

Hoenir

Audaxer said:

Julezy101 said:

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.

My wife is doing something similar, but by UFPLS, and reinvesting it into the same fund within her S&S ISA. You could also consider paying £2,880 net back into your SIPP each year to get the tax relief. That does however effectively reduce your net annual withdrawal from the SIPP, but still worth considering.

The small gain goes someway to compensatating for the fees charged on running the SIPP. Whereas it's possible to hold the same investments in an ISA without any charges. 

QrizB

Julezy101 said:

Rough figures I've worked out, if I take the full 25% out and then withdraw up to my PA it will leave me with around 70k left at SPA (ignore growth). If I do the UFPLS route it will leave me around 110k. So at SPA I'll be paying 20% tax - on the 70k it'll be 14k - on the 110k it'll be 22k. This would mean an extra 8k tax in total on the UFPLS route once the SIPP is emptied. 

That makes no sense.

With the UFPLS route, 25% of the funds remaining in your SIPP are still tax-free, even after SPA.

NoMore

QrizB said:

Julezy101 said:

Rough figures I've worked out, if I take the full 25% out and then withdraw up to my PA it will leave me with around 70k left at SPA (ignore growth). If I do the UFPLS route it will leave me around 110k. So at SPA I'll be paying 20% tax - on the 70k it'll be 14k - on the 110k it'll be 22k. This would mean an extra 8k tax in total on the UFPLS route once the SIPP is emptied. 

That makes no sense.

With the UFPLS route, 25% of the funds remaining in your SIPP are still tax-free, even after SPA.

Yes and the fact they are ignoring growth means the amount of tax free cash available over the period of withdrawals is exactly the same, whether you take it all at once or in stages with UFPLS. One advantage of staged UFPLS is you can get more tax relief over the lifetime of the pension as your uncrystallised funds grow so does the remaining available tax free cash.

pensionpawn

Audaxer said:

Julezy101 said:

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.

My wife is doing something similar, but by UFPLS, and reinvesting it into the same fund within her S&S ISA. You could also consider paying £2,880 net back into your SIPP each year to get the tax relief. That does however effectively reduce your net annual withdrawal from the SIPP, but still worth considering.

My wife is also going down the UFPLS route and we also partially replenish via the £2880 (£3600) contributions pa. Yes, you get the tax rebate however you've also give yourself another £900 pa of tax free future withdrawals. From 55-75 that's £18k.