Avoiding 40% tax in SIPP drawdown

poseidon1

feetupgininhand said:

NoMore said:

feetupgininhand said:

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.

I'm very much aligned with this line of thinking. Just cautious about tripping over this if there's an approach I may have missed

I am fully in agreement with NoMore. My overall income building strategy in retirement is to support a lifestyle I want -  I have no interest at all in limiting myself to 'basic needs and essentials '.

Therefore , having exhausted tax free income generating options each year ( primarily via ISAs)  I am fully prepared for my growing taxable income sources  to push me into 40% tax and  above. 

 The key for me is to have increasing net spendable income year on year to squander ( or not ) as I please.
Manically trying to remain in the 20% income tax bracket at all costs would not achieve my objectives. That said, all my income sources are untaxed at present until such time as I choose to commence SIPP  drawdown - at that point will do so via UFPLSs.

leosayer

penners324 said:

incus432 said:

penners324 said:

incus432 said:

I avoid paying 40% tax on SIPP income by donating to charity. You can open an account with CAF, pay in a lump sum, then make one-off donations to as many charities as you like.

Always find this very odd. You're just depriving yourself of the money you give to charity.

I have always given to charity because I want to support their work. You can look at it as 'depriving yourself of money' if you wish.

Which is perfectly fine. Doing it to avoid paying 40% tax isn't though. 

I plan to do this once I start taking flexible income from my SIPP - structuring my giving in the most tax efficient way.

I could take £50,270 flexible income and donate £4k to charity. Charity gets £5k after gift aid.

Or I could take £54,270 flexible income and donate £4k to charity. Charity would still get £1k gift aid but I could claim back £1k from HMRC which I can then use to give more.

saucer

PropertyGuru_Wannabe said:

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. 

I don’t agree with this. I’m also likely to be paying higher rate tax on a lot of my SIPP and yet continue to contribute to it. Why? Any contribution now is to avoid 40% tax, and this will be then accessible subject to 25% tax free, if the rules don’t change. It is also protected from inheritance tax on the same basis. That and the fact that I can’t see a better alternative whatever way I model it. ISAs maybe but they’re only helpful after I’ve already been taxed out of income. 

As others have suggested, I’d relax and count yourself as very fortunate (as I do). 

Pat38493

saucer said:

PropertyGuru_Wannabe said:

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. 

I don’t agree with this. I’m also likely to be paying higher rate tax on a lot of my SIPP and yet continue to contribute to it. Why? Any contribution now is to avoid 40% tax, and this will be then accessible subject to 25% tax free, if the rules don’t change. It is also protected from inheritance tax on the same basis. That and the fact that I can’t see a better alternative whatever way I model it. ISAs maybe but they’re only helpful after I’ve already been taxed out of income. 

As others have suggested, I’d relax and count yourself as very fortunate (as I do). 

Same here - my thinking is that as long as I am getting 40% tax relief on the contribitutions, I will still be better off even if I end up paying 40% tax on the taxable part.  Even in the worst case that I used up all my TFC, I would be break even.  

The only thing I would avoid is paying pension contributions at 20% tax relief, and then paying 40% on the way out, but I've made so much 40% tax relief up to now, that this isn't really a danger, since I look at it over the whole years that I have been contributing and not just the last year or suchlike.

NoMore

saucer said:

PropertyGuru_Wannabe said:

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. 

I don’t agree with this. I’m also likely to be paying higher rate tax on a lot of my SIPP and yet continue to contribute to it. Why? Any contribution now is to avoid 40% tax, and this will be then accessible subject to 25% tax free, if the rules don’t change. It is also protected from inheritance tax on the same basis. That and the fact that I can’t see a better alternative whatever way I model it. ISAs maybe but they’re only helpful after I’ve already been taxed out of income. 

As others have suggested, I’d relax and count yourself as very fortunate (as I do). 

The point PropreryGuru was making is that above the Lump Sum Allowance you don't get the 25% tax free anymore so that's a reason to not contribute more once you hit the amount to provide the LSA (just over a million in pension). You are advocating still contributing while LSA still available, which nobody is arguing with. Also Pensions are going to be no longer exempt from IHT soon.

Effectively without the 25% tax free, you are neutral if you draw at the same rate you contribute at. Without IHT protection and no LSA available, pensions have little advantage (at >£1 million) anymore if you are withdrawing at the same rate you contribute at.

saucer

NoMore said:

saucer said:

PropertyGuru_Wannabe said:

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. 

I don’t agree with this. I’m also likely to be paying higher rate tax on a lot of my SIPP and yet continue to contribute to it. Why? Any contribution now is to avoid 40% tax, and this will be then accessible subject to 25% tax free, if the rules don’t change. It is also protected from inheritance tax on the same basis. That and the fact that I can’t see a better alternative whatever way I model it. ISAs maybe but they’re only helpful after I’ve already been taxed out of income. 

As others have suggested, I’d relax and count yourself as very fortunate (as I do). 

The point PropreryGuru was making is that above the Lump Sum Allowance you don't get the 25% tax free anymore so that's a reason to not contribute more once you hit the amount to provide the LSA (just over a million in pension). You are advocating still contributing while LSA still available, which nobody is arguing with. Also Pensions are going to be no longer exempt from IHT soon.

Effectively without the 25% tax free, you are neutral if you draw at the same rate you contribute at. Without IHT protection and no LSA available, pensions have little advantage (at >£1 million) anymore if you are withdrawing at the same rate you contribute at.

Good points. I wasn’t attending to all the 25% tax free LSA having been used up.  

Hoenir

feetupgininhand said:

The knock on effect of that is using the same plan above, residual at 67 now forecast to be £200k. 

Forecasting future stock market returns is nigh impossible. In this uncertain world. I'd worry about the "problem" when it arises not before. 

thegentleway

penners324 said:

incus432 said:

I avoid paying 40% tax on SIPP income by donating to charity. You can open an account with CAF, pay in a lump sum, then make one-off donations to as many charities as you like.

Always find this very odd. You're just depriving yourself of the money you give to charity.

You don’t feel deprived though! You feel much happier.

It’s counterintuitive but if you give people money,  one group to spend it on themselves, the other to spend on somebody else. The group who spends it on others reports much higher satisfaction.

penners324

thegentleway said:

penners324 said:

incus432 said:

I avoid paying 40% tax on SIPP income by donating to charity. You can open an account with CAF, pay in a lump sum, then make one-off donations to as many charities as you like.

Always find this very odd. You're just depriving yourself of the money you give to charity.

You don’t feel deprived though! You feel much happier.

It’s counterintuitive but if you give people money,  one group to spend it on themselves, the other to spend on somebody else. The group who spends it on others reports much higher satisfaction.

I often wonder if people don't understand the tax system when they say they're trying to avoid paying 40% tax. 

Charitable giving should be done because the retiree wants to not avoid paying 40% tax on a small element of their income.

Bighitter32

feetupgininhand said:

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.

Yes, this is the basic initial premise for retirement planning, at least one of the primary ones…. Maximizing Tax efficiency on the saving side, but also on the drawing side. Financial Planners make a living out of trying to help you/us do this.