Withdrawing Money from SIPP Prior to Becoming a Higher Rate Taxpayer

marycanary

My Situation

- Age: 62

- Sufficient NI to receive a full State Pension at 67 years

- Annual Defined Benefit (DB) Pension: £38700, uprated by CPI (uncapped)

- Various Stocks and Shares (S&S) and Cash ISAs

- Untaxed Interest: £300 collected through a reduction in Tax Code

- Self-Invested Personal Pension (SIPP): £60000 - I have earmarked this money for use when I am    80+ years old (assuming I am still around)

- Estate is currently near the IHT threshold but will decrease by making gifts to grandchildren for      significant birthdays

I recently realised that, unless circumstances change in the next five years, I will likely become a higher-rate taxpayer once I start receiving the State Pension. While I understand that many factors could affect this before I access my SIPP funds, I plan to withdraw from the SIPP up to the higher-rate threshold at the end of each March until I reach State Pension Age. I intend to use money withdrawn from the SIPP to fund a Stocks and Shares ISA each April. Are the calculations as follows? 

Are the calculations as follows? - 

50270 -(38700+300) = 11270

75% = 11270

100% = 15026

The downside of this strategy is that the amount of cash I can shelter in an ISA will be reduced. Are there any other downsides?

Thank you

Marcon

With a DB pension of £38,700 and a full state pension when you get to state pension age, does 'sheltering cash in an ISA' really matter that much? You're in a fantastically comfortable position, assuming you don't have huge housing costs to pay.

You could always make some contributions to a personal pension and get tax relief on those if you become a higher rate taxpayer in the future (up to age 75). 

phlebas192

When you say "Untaxed Interest: £300 collected through a reduction in Tax Code" does that actually mean £1,300 of interest of which £300 is taxed? I assume so since if it's £300 total then it would be tax free. If so then the basic rate headroom is 50270 -(38700+1300) = 10270. Note that if you should go over this amount then you lose £500 of the interest zero rate so make sure your sums are right!

marycanary

Marcon said:

With a DB pension of £38,700 and a full state pension when you get to state pension age, does 'sheltering cash in an ISA' really matter that much? You're in a fantastically comfortable position, assuming you don't have huge housing costs to pay.

You could always make some contributions to a personal pension and get tax relief on those if you become a higher rate taxpayer in the future (up to age 75). 

 Thank you, no it doesn't matter that much if I have cash outside of an ISA, it's a minor point. I was trying to give the complete situation. The main point of my post was to check the maths before withdrawing from my SIPP.

ali_bear

Not sure about your calculations but I think your reasoning is sound. Is your 60k SIPP crystallised or can you still take a 25% TFLS out of it? 

You have only five years before the state pension kicks in, so you could aim to take 12k a year out of it and pay a small amount of higher rate tax. Or get the initial TFLS of 15k and take 9k a year (thus paying no higher rate tax and less standard rate). Or take it using UFPLS. The point being that if you withdraw from your SIPP before state pension you may pay a small amount of higher rate tax, but not a huge amount, and possibly none. 

marycanary

ali_bear said:

Not sure about your calculations but I think your reasoning is sound. Is your 60k SIPP crystallised or can you still take a 25% TFLS out of it? 

You have only five years before the state pension kicks in, so you could aim to take 12k a year out of it and pay a small amount of higher rate tax. Or get the initial TFLS of 15k and take 9k a year (thus paying no higher rate tax and less standard rate). Or take it using UFPLS. The point being that if you withdraw from your SIPP before state pension you may pay a small amount of higher rate tax, but not a huge amount, and possibly none. 

Thank you for your reply.

None of the SIPP is crystallised and I intend to use UFPLS each March. 

It's not the end of the world if I pay the higher tax rate as I am in a comfortable position but I was hoping someone on here would check the calculations. I don't want to get it wrong, tip into the higher-rate tax band, by mistake and pay tax on more of the interest from the non-ISA cash. 

MC

Dazed_and_C0nfused

In your original post you said this

- Untaxed Interest: £300 collected through a reduction in Tax Code

There are normally only two reasons why untaxed interest of £300 (£300 being the total you receive) would be included in your code.

1.  You are an additional rate payer
2.  You have spare Personal Allowance

Neither seems to be relevant here so do you know why your tax code has that entry?

marycanary

Dazed_and_C0nfused said:

In your original post you said this

- Untaxed Interest: £300 collected through a reduction in Tax Code

There are normally only two reasons why untaxed interest of £300 (£300 being the total you receive) would be included in your code.

1.  You are an additional rate payer
2.  You have spare Personal Allowance

Neither seems to be relevant here so do you know why your tax code has that entry?

Perhaps I haven't worded that right


The Tax Code Notice states

Less Untaxed Interest - £300  Go to Note 2

Note 2 states as below

Thank you

Dazed_and_C0nfused

marycanary said:

Dazed_and_C0nfused said:

In your original post you said this

- Untaxed Interest: £300 collected through a reduction in Tax Code

There are normally only two reasons why untaxed interest of £300 (£300 being the total you receive) would be included in your code.

1.  You are an additional rate payer
2.  You have spare Personal Allowance

Neither seems to be relevant here so do you know why your tax code has that entry?

Perhaps I haven't worded that right


The Tax Code Notice states

Less Untaxed Interest - £300  Go to Note 2

Note 2 states as below

Thank you

Can you clarify what other taxable income you have this year?

£300 in your tax code usually means your untaxed interest is either £800 (higher rate payer) or £1,300 (basic rate payer).

marycanary

I haveDazed_and_C0nfused said:

marycanary said:

Dazed_and_C0nfused said:

In your original post you said this

- Untaxed Interest: £300 collected through a reduction in Tax Code

There are normally only two reasons why untaxed interest of £300 (£300 being the total you receive) would be included in your code.

Can you clarify what other taxable income you have this year?

£300 in your tax code usually means your untaxed interest is either £800 (higher rate payer) or £1,300 (basic rate payer).

I have two DB pensions totalling £38,700 per year,  interest from non-ISA cash of £1,300 of which £1000 is not taxed, (figures have been rounded). In addition, interest from Cash ISAs and growth in S&S ISAs. I am a basic rate tax payer, but when I receive my SP in 5 years I will be a higher rate tax payer, hence why I want to remove funds from the small SIPP.

Dazed_and_C0nfused

marycanary said:

I haveDazed_and_C0nfused said:

marycanary said:

Dazed_and_C0nfused said:

In your original post you said this

- Untaxed Interest: £300 collected through a reduction in Tax Code

There are normally only two reasons why untaxed interest of £300 (£300 being the total you receive) would be included in your code.

Can you clarify what other taxable income you have this year?

£300 in your tax code usually means your untaxed interest is either £800 (higher rate payer) or £1,300 (basic rate payer).

I have two DB pensions totalling £38,700 per year,  interest from non-ISA cash of £1,300 of which £1000 is not taxed, (figures have been rounded). In addition, interest from Cash ISAs and growth in S&S ISAs. I am a basic rate tax payer, but when I receive my SP in 5 years I will be a higher rate tax payer, hence why I want to remove funds from the small SIPP.

You have misunderstood how tax on interest works.  Tax from an ISA isn't taxed. 

Non ISA interest paid by banks and building societies is taxable income and as your Personal Allowance has all been used by your pension income the whole £1,300 is taxed.

At the moment, for you, the first £1,000 at a 0% rate and the rest at 20%.

You cannot simply ignore that £1,000 though when determining if you are a higher rate payer or not.

Basically you need to ignore all your previous calculations in this thread as you have omitted £1,000 of taxable income.