Tax free withdrawals

Straight_Shooter

I intend to stop working next April 2026. I will then have 30 months of full tax threshold (£12570) available to me before my state pension kicks in. I'm considering opening a new SIP and funding £16,800 (£21000) next month and same again next March 2026. I will then withdraw the £42k at £16750 per month for 30 months. 
Seems straightforward enough or am I missing something? 

SVaz

£1675 a month for 30 months is over £50k. 

£42k is £1400 a month.   You’re also forgetting the tax free element which is paid upfront. 
You can get a bit more if you put the bulk into a short term money market fund and sell say 3 months at a time.

NoMore

If your wanting to avoid paying income tax and only fund the SIPP with the correct amount to do that, then your withdrawal of £1675 is wrong. 

£12570 gives £1047.50 per month tax free, plus a 25% tax free of £349.16 (actually this is slightly less as the final 6 is recurring in the maths) so a total of £1396.66 per month, 30 months is £41900.

To get £41900 in to a pension you only need to pay in £33250 in total. This is assuming no return at all, I would suggest you at least get some return whether that's by a Money Market Fund or the Sipp it self paying interest on cash.

This is also assuming you have enough relevant earnings to cover the tax relief over the timeframe you want to contribute.

squirrelpie

Maybe the typo was writing 'per month' instead of 'per year', and the amount of £16750 was correct? The OP needs to clarify.

Straight_Shooter

SVaz said:

£1675 a month for 30 months is over £50k. 

£42k is £1400 a month.   You’re also forgetting the tax free element which is paid upfront. 
You can get a bit more if you put the bulk into a short term money market fund and sell say 3 months at a time.

Sorry, to clarify, £1675 per month until the £42k is exhausted (25 months) I envisaged taking the tax free element within each monthly withdrawl, didn't realise that I'd have to take it upfront, but for the purpose of the exercise it makes no difference I suppose.

squirrelpie

Straight_Shooter said:

SVaz said:

£1675 a month for 30 months is over £50k. 

£42k is £1400 a month.   You’re also forgetting the tax free element which is paid upfront. 
You can get a bit more if you put the bulk into a short term money market fund and sell say 3 months at a time.

Sorry, to clarify, £1675 per month until the £42k is exhausted (25 months) I envisaged taking the tax free element within each monthly withdrawl, didn't realise that I'd have to take it upfront, but for the purpose of the exercise it makes no difference I suppose.

You can do it the way that you were thinking, by taking a sequence of UFPLS payments. Or you can take the tax free cash in advance by using flexible drawdown. So many buzzwords   Some providers don't offer sequences of UFPLS so you'd have to arrange each payment individually if you happen to be with one of those providers.

DRS1

Straight_Shooter said:

SVaz said:

£1675 a month for 30 months is over £50k. 

£42k is £1400 a month.   You’re also forgetting the tax free element which is paid upfront. 
You can get a bit more if you put the bulk into a short term money market fund and sell say 3 months at a time.

Sorry, to clarify, £1675 per month until the £42k is exhausted (25 months) I envisaged taking the tax free element within each monthly withdrawl, didn't realise that I'd have to take it upfront, but for the purpose of the exercise it makes no difference I suppose.

You can do it the way you thought - it is called UFPLS.  Whether your SIPP will accommodate monthly UFPLS is another matter.  UFPLS is supposed to be a bit more tax efficient but that is where the payments are spread out over years and the pot grows over that time.  With a short timescale as here it probably makes no difference (unless something dramatic happens to your investments).

Straight_Shooter

NoMore said:

If your wanting to avoid paying income tax and only fund the SIPP with the correct amount to do that, then your withdrawal of £1675 is wrong. 

£12570 gives £1047.50 per month tax free, plus a 25% tax free of £349.16 (actually this is slightly less as the final 6 is recurring in the maths) so a total of £1396.66 per month, 30 months is £41900.

To get £41900 in to a pension you only need to pay in £33250 in total. This is assuming no return at all, I would suggest you at least get some return whether that's by a Money Market Fund or the Sipp it self paying interest on cash.

This is also assuming you have enough relevant earnings to cover the tax relief over the timeframe you want to contribute.

Your calculations are of course correct and match my own. I mistakenly quoted the annual sum £16750 as the monthly withdrawl.

af1963

You don't get "x months of tax threshold" - it works by considering all your income in whole tax years.  So you'll need to consider what you have coming in once state pension starts part of the way through the tax year. Also any other pensions that you'll be drawing from ? And you'll need to allow for any income from your job, if you get any in the tax year when you leave. 

As was mentioned above, you can only contribute up to (broadly) the amount you earn during each tax year, in total, including any previous/regular contributions.

Straight_Shooter

af1963 said:

You don't get "x months of tax threshold" - it works by considering all your income in whole tax years.  So you'll need to consider what you have coming in once state pension starts part of the way through the tax year. Also any other pensions that you'll be drawing from ? And you'll need to allow for any income from your job, if you get any in the tax year when you leave. 

As was mentioned above, you can only contribute up to (broadly) the amount you earn during each tax year, in total, including any previous/regular contributions.

My post was based upon contributing within my earnings and the 'x' months is the period of no taxable income up until the commencement of my state pension.

Shadyocuk

The number of months is not relevant , as has been pointed out it is the total taxable income in the relevant tax year.
If you recieve any other taxable income in  26/27 (eg get paid for April 26) then you wont have a full £12570 left unused for the rest of that tax year so even only drawing £1396 each future month will still leave you with a tax to pay for the year 26/27 , the same will be true in the financial year that ypur state pension starts.