DC SIPP withdrawal

hgst

Hello,

 I have a defined contribution scheme pension at AJBell with value of £321000. Last tax year 2023-2024 I was made redundant and I have lived off savings since. My tax code is 1257L this year being unused, so I am planning to withdraw £12570 from my pension tax free, my first ever pension withdrawal. However, I am worried that by doing that, my withdrawal might be mistaken of the 25% tax free lump sum part. So, is there a way to withdraw from SIPP only income tax personal allowance 0% limit without affecting 25% tax free lump sum part? Any help would be much appreciated.

Qyburn

You can't withdraw only taxable money while leaving the tax-free untouched.

What you can do is take out £16,760 as a "UFPLS". This will be paid as £4,190 tax-free and £12,570 taxable. The provider will deduct tax off the latter, possibly quite a lot, but you will be able to get that refunded by HMRC.

If you don't need the tax-free you can stick it in an ISA using the same investment as your SIPP.

Edit - all assuming you've reached the minimum age to access your pension.

Note also tht doing this triggers a limit of £10,000 (gross) per year on future pension contributions.

Alexland

Do you have any concerns that starting to draw upon the 75% will trigger the MPAA? Might be an issue if you intend to go back into work and have pension contributions over £10k pa in future? This can be avoided if you only draw upon the 25% but of course that doesn't make good use of this tax year's personal allowance.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

hgst

Thank you for a quick reply. I've reached the minimum age to access your pension and also aware about future pension contributions limit once I withdraw from the pension. One thing unclear to me is how that first withdrawal will affect future 25% tax free withdrawal.

For instance, currently pension balance £321,000 and I withdraw £16,760 as a "UFPLS". This will be paid as £4,190 tax-free and £12,570 taxable.

Now suppose, in the tax year 2025-2026 my pension investments does exceptionally well and is worth £500000. Will 25% tax free lump sum be £500,000*0.25-£4,190=£120,810 or will it be £321,000*0.25-£4,190=£76,060 as I crystallised my investments for the first withdrawal and that set the maximum tax free lump sum I can withdraw?

NoMore

Because your using UFPLS, that means you take both the crystallised portion and the tax free lump sum at the same time out of the pension, leaving only uncrystallised funds in the pension. So whatever this uncrystallised portion grows to will determine the remaining tax free cash (up to the Lump Sum Allowance). So in your example, if the remaining funds grow to £500000, you can now take up to £125000 out as tax free cash. As long as your total tax free cash accessed remains under the Lump Sum Allowance of £268275

In general if you do ever have both crystallised and uncrystallised pots in your pension, its the uncrystallised part that determines the amount of tax free cash available.

hgst

 Thank you for all your replies. I need to educate myself about UFPLS. Do you happen to know any websites with concrete examples or calculator of sorts? 

NoMore

UFPLS is easy, if you request a UFPLS payment of x, then 25% of x will be tax free and the remaining 75% is taxable.

Hoenir

Are you utilising your annual ISA allowance? 

NoMore

Have you had a pensionwise appointment ? 

Pension Wise: free pension guidance | MoneyHelper

UFPLS is not the only way to access a Pension, they will go over all the available options to you, they won't advise which one to use but they will explain how they all work. They were set up by the government specifically for this as the options can seem confusing at first.

hgst

My ISA allowance is currently unused. 

molerat

Plus if you don't want all that £16760 you could pay £2880 back in which will be grossed up to £3600 which means you get £13880 to spend at a cost of £13160 to your SIPP.

If you want to make your tax life simple you could make a first UFPLS withdrawal of under £1396 which would mean that when the pension apply the 1257X code no tax would be deducted.  When HMRC allocate the code, which will be within a few days of the first withdrawal, you can make further withdrawals making sure you leave some headroom for a withdrawal in March so that the correct tax can be reconciled for the year.  You would also need to ensure the correct code has been allocated as HMRC have been known to set a non cumulative X code which would need changing.