Tax on SIPP lump sum withdrawal

enthusiasticsaver

DH had around £21k left in his drawdown SIPP and he is 65 and receives his state pension this year.  He also has a substantial DB pension of just over £30k a year. We decided to empty the SIPP pot and use the money for holidays this year and next and to gift our daughters some money to avoid the risk of him paying 40% tax on sipp withdrawals.

So our IFA suggested the bulk came out  23/24 before his state pension pays out and we received a much larger amount than we expected as we thought it would be taxed on a month 1 basis.  Looking at the coding though it appears they have moved his personal allowance to his private SIPP from his DB pension so the tax was lower than we thought. This presumably means his DB pension will be less going forward? We checked his HM gateway account and sure enough the personal allowance £13750 (he has marriage allowance from me) seems to have all been moved to the private Sipp.

The other SIPP is much smaller and has not yet been crystallized so 25% will be tax free so we are not quite so worried about that. 

Is this the usual way of taxing lump sums on SIPPS? My SIPP is on monthly drawdown to supplement my DB pensions and my state pension does not pay out for a few years yet so my PA less the marriage allowance is split across all three pensions. 

I think this means that his personal allowance for this year will apply to his final SIPP drawdown (after the 25% tax free lump sum) but this year only £4k will come out as the SIPP will then be emptied. So £9k of his personal allowance on that pension will not be used and needs to go back to his DB pension.  

My feeling is that we go on to his HMRC account and update expected amounts for this year so they reallocate his PA to his DB pension. 

Any ideas? 

Dazed_and_C0nfused

Firstly he cannot have a Personal Allowance greater than £12,570.

He can have tax code allowances greater than £12,570 but that is something completely different (and a tax code is only ever provisional).

With a DB pension that large it would make sense for that to be classed as his main source of income for tax code purposes.

I don't think changing anything on line will achieve that though, a call at 8am sharp is the best bet.

Fortunately with it being literally the start of the new tax year it should be possible to change that without things getting complicated.

Unless you are Scottish resident for tax purposes BR would be the correct code for the SIPP that has already had taxable money taken out.

The other SIPP is utterly irrelevant tax wise until such time as he takes some taxable income from it.  Don't confuse HMRC by mentioning it.

enthusiasticsaver

No we are not Scottish.  The code for the SIPP which has now been drawn down to 0 by taking out a lump sum of £18812 the tax code on the payslip was 1257L .  On his main pension the tax code is 1383M.  Goodness only knows what the code will be on the remaining SIPP which is due to pay out in the next few weeks now we are in the tax year 24/25. As you say maybe a phone call to them or just leave them to sort it out? 

Albermarle

Remember that tax codes are only an attempt to get you to pay the right amount of tax, and any actual over or underpayment will get corrected at some point.
It seems that when you add a new source of income, change jobs etc, some problems can often occur and it needs a call to HMRC to sort it out. You might end up underpaying tax from the DB pension if not, and then getting a big bill at some point.
If you do call them do not mention the remaining SIPP. NOthing can be done about this until the first payment is made. You can not pre empt the system by 'warning' them of an impending withdrawal, it will just probably confuse things further.

enthusiasticsaver

Albermarle said:

Remember that tax codes are only an attempt to get you to pay the right amount of tax, and any actual over or underpayment will get corrected at some point.
It seems that when you add a new source of income, change jobs etc, some problems can often occur and it needs a call to HMRC to sort it out. You might end up underpaying tax from the DB pension if not, and then getting a big bill at some point.
If you do call them do not mention the remaining SIPP. NOthing can be done about this until the first payment is made. You can not pre empt the system by 'warning' them of an impending withdrawal, it will just probably confuse things further.

We thought we would actually wait until the next SIPP comes out which will be in a few weeks time and leave it a few months and  just wait and see.  I think we have underpaid tax on the first SIPP withdrawal and since then DHs normal DB pension has paid out and they don't yet seem to be clawing back tax.  Would it be best to wait until June when they should have sorted it out? 

We have money set aside to repay any tax bill if we have as I think underpaid it?  What is the benefit of ringing them up given they are dreadful to get in contact with?  Once this last SIPP pays out there will be no other pension income for DH except his current DB pension which is his main income and his state pension which pays out later on this year. 

Albermarle

For sure you can sit it out, and see if it sorts itself out.

However if it takes a while, then he has the SP coming along, and that means another change in tax code for his existing pensions. If they are still not correct by then, that could cause further complications.

If you call at 08.00, you should get through reasonably quickly. Once you get through they are usually quite helpful, and can often sort out these kind of issues quickly. ( but not always of course) 

enthusiasticsaver

Ok I think we will leave it for now and then I will get him to ring up early to see if he can speak to someone. Given it is the start of the new tax year though I think they will be busy for then next few weeks at least. Drawing on our ISAs is so much easier than the SIPPs from a tax point of view.