Withdrawing from a SIPP after retirement as a non-taxpayer

TeessideMag

My wife plans to retire in 2026 after she turns 58. She will receive a Civil Service pension of £8K pa. She has a Vanguard SIPP and planned to make withdrawals from it each year in the first 9 years of retirement so as to use all of her personal allowance, as when her state pension kicks in at 67 she will almost certainly go back to being a taxpayer. 

The Vanguard guidance suggests the first 25% of each withdrawal from a SIPP will be treated as a tax-free lump sum. For the period during which my wife will be a non-taxpayer this seems to me to create a good news/bad news situation – ‘the good news is the first 25% of every withdrawal will be tax-free, the bad news is you wouldn’t have paid tax on it anyway because your total income is still under your personal allowance’. Am I missing something? Is it possible for her stipulate that the withdrawals she is making are NOT coming from the tax-free lump sum element, allowing her to benefit from taking the tax-free lump sum at a more opportune time i.e. when she becomes a taxpayer again?

If that is not available I wondered if it would make sense to withdraw the entire tax-free lump at the start and immediately put that in the same Vanguard fund but in a stocks & shares ISA, so as to keep the same potential from growth over the coming years? Then spend the next 9 years making withdrawals from the remaining ‘taxable’ funds at amounts calculated to ensure she maximises the benefit of being temporarily a non-taxpayer. 

Any advice much appreciated. 

Sarahspangles

Is there any reason she wouldn’t simply withdraw enough from her SIPP to use up the balance of the personal allowance, plus the 25% tax free?

You can’t ‘leave behind’ the 25% tax free in the SIPP but you can pay up to £2,880 pa into a SIPP and receive £720 tax relief, even if you have no relevant UK earnings. So she could “put it back”, as an alternative option to paying it into an ISA.

It doesn’t make sense (in your scenario) to take the full 25% TFLS up front because that crystallises the 75% ‘left behind’ in the SIPP so that you pay tax on all of it when drawn, including any investment growth.

Also, if the TFLS is more than you can shelter in an ISA in one go, she may pay tax on savings interesr or investment gain. However, if her combined pension taken is equivalent to the personal allowance she should have ample starter savings rate to use. If you pay tax on your savings, putting some into joint names shelters some of it because half the interest can be set against her allowance.

SVaz

If the new IHT rules come in then it doesn’t really matter whether she takes the tfls up front and sticks it in an ISA,  the fly in the ointment would be if the IHT plans are scrapped for pensions.
I’d be inclined to take UFPLS payments for a couple of years and see what happens, she can still use her full PA with the tax free bit on top, so say £4k taxable and £1k tax free, she can always stick the £1k in an ISA. 

dunstonh

The Vanguard guidance suggests the first 25% of each withdrawal from a SIPP will be treated as a tax-free lump sum. For the period during which my wife will be a non-taxpayer this seems to me to create a good news/bad news situation – ‘the good news is the first 25% of every withdrawal will be tax-free, the bad news is you wouldn’t have paid tax on it anyway because your total income is still under your personal allowance’. Am I missing something?

You are missing the fact that 75% is taxable.  So, you make sure the 75% element equals the unused allowance and the 25% is on top.

Any money not needed can go back into the pension to gain tax relief with any excess into an S&S ISA.

Is it possible for her stipulate that the withdrawals she is making are NOT coming from the tax-free lump sum element, allowing her to benefit from taking the tax-free lump sum at a more opportune time i.e. when she becomes a taxpayer again?

Theoretically possible within the rules, but you won't find many providers that will allow it because it would be highly unlikely to be suitable for anyone.

Secret2ndAccount

Your wife's income is 8k, so you planned to withdraw 4.5k from Vanguard SIPP?  Instead, draw £6k. The first 25% (£1.5k) is tax free. The other 4.5k is taxable. Your wife receives £14k, but pays no tax

Albermarle

Before you make any withdrawals from a DC pension, the pot is known as being 'uncrystallised'

To withdraw money you have to crystallise the relevant amount and as part of this , 25% is generated tax free and 75% becomes crystallised funds, which are potentially taxable on withdrawal.
For example if you have a pot of £200K which is uncrystallised and you want to withdraw £20K.
You end up with ;
£5K tax free cash 
£15K crystallised and taxable if withdrawn
£180K uncrystallised 

So if you wanted £15K taxable income, you will automatically get £5K tax free cash.

TeessideMag

Thank you all, that's really helpful. Taking £6K and putting up to £2880 back into a SIPP seems to make sense. Administratively I'm assuming the easiest way to do this is to open a new SIPP with a different provider? 

Albermarle

TeessideMag said:

Thank you all, that's really helpful. Taking £6K and putting up to £2880 back into a SIPP seems to make sense. Administratively I'm assuming the easiest way to do this is to open a new SIPP with a different provider? 

I think there are some pension providers where they do not allow new contributions once you have accessed the pot, but most would be fine with it, including Vanguard.
The £2880 + £720 would just add to the still uncrystallised part of the pot.

ian16527

TeessideMag said:

Thank you all, that's really helpful. Taking £6K and putting up to £2880 back into a SIPP seems to make sense. Administratively I'm assuming the easiest way to do this is to open a new SIPP with a different provider? 

Just add it back to the Vanguard Pre pension account. When you want to crystalise some of the pot, Vanguard will move that into a drawdown pension account so you have 2 accounts.
I only move what I need each year into the drawdown account and currently keep that as cash. The rest stays invested

dunstonh

Administratively I'm assuming the easiest way to do this is to open a new SIPP with a different provider? 

No. Using the same provider is nearly always the most convenient.

BigGirlPants

I was reading this thread with interest and I hope you don't mind me asking a question regarding it.

Secret2ndAccount said:

Your wife's income is 8k, so you planned to withdraw 4.5k from Vanguard SIPP?  Instead, draw £6k. The first 25% (£1.5k) is tax free. The other 4.5k is taxable. Your wife receives £14k, but pays no tax

I was reading this thread with interest that I hope you don't mind me asking a question regarding the quote above.

My question is-

Because the four and a half thousand in the quote above is taxable, but his wife is below her personal allowance for tax, she would pay no tax on the taxable proportion of the withdrawal in this instance? Do I understand it correctly?

Therefore somebody with no income, who is below state pension age, could withdraw their personal allowance plus 25%, from their pension and still pay no tax?

Thank you