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Avoiding 40% tax in SIPP drawdown

I seem to have overcooked my SIPP plans a little. I'd planned to retire early, 59, use SIPP drawdown as a bridging pension until DB pensions and state pensions kicked in at 60, 65, and 67. The plan was, draw down on my SIPP up to 40% tax threshold kicks in.
Based on 2.5% increase in DB/state pension, and tax thresholds increasing by 2.5% from 2028 (who knows where these will be for sure, crystal ball gazing to a degree I know)  that worked out pretty well with a £40k residual forecast to remain at 67, no big deal.

I'm now in the fortunate/unfortunate position DB pension early due to redundancy. Because of redundancy the pension needs to be taken straight away. The knock on effect of that is using the same plan above, residual at 67 now forecast to be £200k. With the changes coming to pensions and IHT I don't see much benefit leaving £200k where it is. It could be just passed to my wife on my death, but that would just pass the buck to her - with her own SIPP and DB still growing and she has less focus on these tax matters. So I don't see sense in leaving it where it is, surely better to now use in life and gift to children. 

I would still like to use a tax efficiently as possible, whilst drawing down as much as possible. I've modelled on various scenarios, taking 25% lump sum from SIPP and / or DB pensions, buying an annuity, delaying state/DB pension. None of these seem to work out that well unless I live to a very ripe old age, large lump of SIPP still left in most cases. Taking 25% lump sums seems to eat into biggest chunk of SIPP, but cashing in a chunk of inflation linked DB pension for a lump sum doesn't seem like a long term option, and I don't really need lump sum for anything in particular. 

The most tax efficient scenario I've come up with to date is enhancing my wife/children's SIPP contributions. My wife is currently 40% tax payer and plans to work for a few more years, she has some unused annual allowance. My children currently paying 20% tax. At least the tax would in effect stay in the family. I'm aware 7 year rule may be an issue for gifting to my children. 

A couple of things I don't know for sure. Can I both buy an annuity and take a 25% tax free lump sum (or monthly draw down with 25% of this tax free)?

I have SIPP across two providers, how is this best managed. Can I draw down from one (the one I have been making payments into) whilst the other remains fully invested, does draw down impact how the other is classed, crystalised, uncrystallised?

Thanks in advance, all quite complicated and perhaps IFA input is needed. Happy to pay for this if there's a glimmer of wiggle room in all this. 
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Comments

  • GrumpyDil
    GrumpyDil Posts: 1,918 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper Combo Breaker
    Why so worried about paying 40% tax?

    Surely it'll lead to increased quality of life? Ie spending it. 
    That was my first thought too.  Enjoy the money and the fact that it sounds like you will have a decent level of retirement income. 
  • You can tie yourself in knots looking to optimize things. I tend to do this myself, but it's good to step back and just enjoy your financial security.

    You can certainly use some of your SIPP to buy an annuity and take the 25% TFLS. I'd ask your provider about detailed options. If you are worried about changes tp pensions and IHT you might want to look into gifting from income.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • Albermarle
    Albermarle Posts: 25,993 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    A couple of things I don't know for sure. Can I both buy an annuity and take a 25% tax free lump sum (or monthly draw down with 25% of this tax free)?
    The normal way with annuities is that you get 25% of your pot as tax free cash and the remaining 75% is used to buy the annuity. Remember that there are lots of different options with annuities ( inflation linked or not as one example) . The better the terms the lower the income from the annuity.
    Alternatively you can drawdown with each payment being 25% tax free and 75% taxable, but can cause admin problems with the SIPP provider, so often better to take on payment in a year and put it in a savings account until you use it.
    Or you can take all the 25% tax free ( or part of it) and withdraw the taxable income separately. Known as flexi access drawdown.
    All these methods are discussed regularly on the forum

    I have SIPP across two providers, how is this best managed. Can I draw down from one (the one I have been making payments into) whilst the other remains fully invested, does draw down impact how the other is classed, crystalised, uncrystallised?

    Each SIPP can be handled separately. Drawing down one has no impact on the other, except there is an overall limit of how much tax free cash you can take from any pensions ( £268K) . Plus of course if you take taxable income from both or either, it will affect your overall income tax position.



  • Did the redundancy come with a significant payout, or a pension paid without reduction? Otherwise, the DB has just been rearranged so you get more out soon, and less later. In which case you would, at some point, need greater withdrawals from the SIPP to make up for the lower DB payout. Don't you need to have the extra 160k in the SIPP in order to top up your income from age 65?
  • I guess from the comments so far I don’t think there’s anything I’m missing. The main focus of the question was around avoiding excessive payments of 40% tax if there were any thoughts on strategies to avoid that. Isn’t the basis of a lot of pension planning around being as tax efficient on the provision side? I’m just trying to apply the same on the accessing side. I may now be in a privileged position, but it hasn’t come easy. Too many years of full time work and saving to get to this point. It’s natural to try and think these lines now. If there’s no avoiding the 40% tax ceiling that’s fine. With the 25% tax free it isn’t really 40%. I will explore the topping up wife/children SIPP option if I have residual funds.


  • A couple of things I don't know for sure. Can I both buy an annuity and take a 25% tax free lump sum (or monthly draw down with 25% of this tax free)?
    The normal way with annuities is that you get 25% of your pot as tax free cash and the remaining 75% is used to buy the annuity. Remember that there are lots of different options with annuities ( inflation linked or not as one example) . The better the terms the lower the income from the annuity.
    Alternatively you can drawdown with each payment being 25% tax free and 75% taxable, but can cause admin problems with the SIPP provider, so often better to take on payment in a year and put it in a savings account until you use it.
    Or you can take all the 25% tax free ( or part of it) and withdraw the taxable income separately. Known as flexi access drawdown.
    All these methods are discussed regularly on the forum

    I have SIPP across two providers, how is this best managed. Can I draw down from one (the one I have been making payments into) whilst the other remains fully invested, does draw down impact how the other is classed, crystalised, uncrystallised?

    Each SIPP can be handled separately. Drawing down one has no impact on the other, except there is an overall limit of how much tax free cash you can take from any pensions ( £268K) . Plus of course if you take taxable income from both or either, it will affect your overall income tax position.


    Thanks Albermarle, I'll look at annuity options although to be honest, I'm not drawn to it. Prefer the flex access I currently have. Good to know both SIPPs don't cause me too many headaches
  • Did the redundancy come with a significant payout, or a pension paid without reduction? Otherwise, the DB has just been rearranged so you get more out soon, and less later. In which case you would, at some point, need greater withdrawals from the SIPP to make up for the lower DB payout. Don't you need to have the extra 160k in the SIPP in order to top up your income from age 65?
    There's a pay out that can be taken as cash or used to buy out a reduction in pension. I don't see the extra being needed preferentially after 65 from the modelling I've looked at. 
  • Getting to your point means that you are going to be financially secure so congratulations on that. Once you breach the 40% tax threshold on retirement income and reached the maximum lump sum allowance, there is no reason why you should put more funds into your pension. 

    You could consider taking out a lump sum and using those to contribute to your wife’s pension. If that is maxed out, you could consider putting the funds into both your Stocks and Shares ISA’s. You could also consider off shore bonds and even trusts although this may not work for some.

    You could consider the order you withdraw your funds each year as this would affect the tax efficiency. We all have allowances and some allowances allow us to withdraw more due to taxation rules. Speaking to a tax planner is probably a good option for you.

    Most of all, plan to enjoy your life as much as possible on retirement with your family and do the things you like to do. Setting some personal goals would help in this regards. Take care of your health and do some regular exercises. Life passes by so quickly that you don’t want to miss out anything if possible at this chapter of your life.
  • NoMore
    NoMore Posts: 1,445 Forumite
    Part of the Furniture 1,000 Posts Name Dropper

    I guess from the comments so far I don’t think there’s anything I’m missing. The main focus of the question was around avoiding excessive payments of 40% tax if there were any thoughts on strategies to avoid that. Isn’t the basis of a lot of pension planning around being as tax efficient on the provision side? I’m just trying to apply the same on the accessing side. I may now be in a privileged position, but it hasn’t come easy. Too many years of full time work and saving to get to this point. It’s natural to try and think these lines now. If there’s no avoiding the 40% tax ceiling that’s fine. With the 25% tax free it isn’t really 40%. I will explore the topping up wife/children SIPP option if I have residual funds.


    I think its more that if your withdrawal strategy to get the lifestyle you require involves you having to pay some 40% tax then pay the tax. I.e. once optimised, don't just avoid 40% tax for the sake of it. Pensions are generally tax efficient as long as you withdraw at the same or lower tax rate you contribute at, up until the LSA is exceeded.
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