Lump sum payment for an expense - SIPP vs Cash ISA

saucer

Hello folks
I want to access c. £25k to pay for an expense in the next few weeks. My intention is to take this as a first tax free withdrawal from my SIPP. I am aware of the need to avoid triggering the MPAA because I’m expecting to want to contribute above 10k to SIPP for another couple of years, at least. So I’ll take care not to take any taxed money. 

My overall fortunate pension situation is that I’ll/we’ll have most of our retirement income from DBs. Our estate, including pension, is likely to be below IHT levels if that is relevant.

Is there any good reason why I’d be better taking money from a cash ISA? I could do that but it’s on a nice cash fixed rate at the moment.

It will be our first time moving towards drawdown of private pensions, so I thought I’d check I’m not doing something obviously stupid. 

Many thanks

Albermarle

Presume there would be penalties for withdrawing money from a fixed term cash ISA early?

As long as you have adequate pension provision for the future, then withdrawing tax free cash for a purpose seems fine.

saucer

Thank you Albermarle.

Veteransaver

The only downside I could see is that you crystalise the tax free amount, so you'd potentially lose some tax free amount of future growth.
So say your pension is worth £100k now. By taking say £10k tax free (10%) you can only take a further 15% later.
So if your fund grew to £150k in future, you'd only be able to get a further £22.5k later (15% of 150K)
So if you took the 25% later when the fund is worth £150k, you'd get £37.5k tax free in total
Whereas taking £10k now + £22.5k means you've lost out on £5k tax free.
Obviously that assumes you aren't above the c£268kntax free lump sum limit.

FIREDreamer

Veteransaver said:

The only downside I could see is that you crystalise the tax free amount, so you'd potentially lose some tax free amount of future growth.
So say your pension is worth £100k now. By taking say £10k tax free (10%) you can only take a further 15% later.
So if your fund grew to £150k in future, you'd only be able to get a further £22.5k later (15% of 150K)
So if you took the 25% later when the fund is worth £150k, you'd get £37.5k tax free in total
Whereas taking £10k now + £22.5k means you've lost out on £5k tax free.
Obviously that assumes you aren't above the c£268kntax free lump sum limit.

£100k now

Take £10k tax free, £30k moves into drawdown.

£60k is uncrystallised.

So we have £90k left in pension -  1/3 crystallised and 2/3 uncrystallised.

Pension grows by 66.667% to £150k - so crystallised pot is £50k and uncrystallised is £100k.

Tax free is 25% of the uncrystallised pot - so £25,000 tax free plus £10,000 previously taken is £35,000.

Had the earlier tax free cash not been taken, then the £100,000 fully uncrystallised fund would have grown to £166,667 then the tax free is £41,667 so tax free cash “lost” is £6,667.

Of course the £10,000 tax free cash, if unspent, could have grown to £16,667 if similarly invested so the only true loss is any potential tax on that £6,667 gain.

saucer

Thanks all for your thoughts. I have moved the SIPP funds to crystallisation based on my circumstances and tax position. I’ll be leaving 75% untouched for the foreseeable.