SIPP to ISA - tax free income.

Pizzadiactione

I have recently turned 55 and can therefore access my pension ( SIPP ).
I am thinking of taking out tax free lump sums and paying them into my ISA. 
My reasoning is that I can have exactly the same investments in my ISA and SIPP but once over the tax threshold I'd pay tax on income from SIPP but not from ISA.

I am aware of the inheritance tax implications but, disregarding them, does anyone have an opinion as to whether it's a good or bad idea?
To me it seems a no brainer but from searching the internet, it does not seem to be a common thing. 

E.g.
ISA pot £240k, SIPP pot £240k.
Drawdown £80k from SIPP. Leave £60k in drawdown account. Pay tax free 25%, £20k into ISA. Invest in 5% income fund. Get the income tax free.
Repeat for the next two years.

Sam_666

Nothing wrong with that, many do it.
However, you need to reconsider your ISA plan, as 5% is very poor return.

SVaz

Not a poor return at all if you are going to be using the money for early retirement etc.
For longer term there are S+S ISAs.
That’s what my Wife is doing,  she can get her entire Sipp out tax free over the next 6 years,  half going in a cash ISA, half invested long term in a global index tracker. 

eskbanker

SVaz said:

Not a poor return at all if you are going to be using the money for early retirement etc.
For longer term there are S+S ISAs.
That’s what my Wife is doing,  she can get her entire Sipp out tax free over the next 6 years,  half going in a cash ISA, half invested long term in a global index tracker. 

The 5% referred to S&S investing, not cash:

Pizzadiactione said:

Invest in 5% income fund.

poseidon1

eskbanker said:

SVaz said:

Not a poor return at all if you are going to be using the money for early retirement etc.
For longer term there are S+S ISAs.
That’s what my Wife is doing,  she can get her entire Sipp out tax free over the next 6 years,  half going in a cash ISA, half invested long term in a global index tracker. 

The 5% referred to S&S investing, not cash:

Pizzadiactione said:

Invest in 5% income fund.

Rather depends on the income fund.

As an example,  I have Man Income Professional income fund units in a SIPP . Historical yield is 5.25%, dividends are ( unusually)  paid monthly and  there is the additional prospects of capital growth from the actively managed equity portfolio.  I consider it an ideal part of a  SIPP equity income investment, which throws out a decent level of recurring income.

TheTelltaleChart

Pizzadiactione said:

My reasoning is that I can have exactly the same investments in my ISA and SIPP but once over the tax threshold I'd pay tax on income from SIPP but not from ISA.

I think you're looking at the the wrong way here. What you're thinking of doing may be OK, but it doesn't have the tax advantage you suggest. Income and growth inside an ISA is tax-free, but 25% of the SIPP — including the investment income / growth it generates — is also tax-free. So in this sense, there is no tax advantage either way.

More specifically: suppose you want to invest 25% of a SIPP (£60k out of £240k) in a fund paying 5% income, and spend the income (£3k) each year.

As you say, if you crystallize the SIPP over 3 tax years, you can shift the £60k investments into an ISA, and draw the income tax-free from the ISA.

But you could do the same thing without using an ISA, by investing the £60k in the income fund within the SIPP, and drawing the £3k you want to spend from the SIPP by making much smaller partial crystallizations each year. The income funds pays the £3k income within the SIPP (not taxable because that's internal to the SIPP), and then you crystallize £12k of the SIPP, taking out £3k tax-free and leaving £9k crystallized.

That might appear unsustainable — won't it all be crystallized eventually? — but it won't if you are only crystallizing the income / growth within the SIPP. E.g. if the whole SIPP grows by 5% (though I realize you might not be investing the other 75% of it in the same income fund), then £240k becomes £252k after a year. So after crystallizing £12k and taking £3k tax-free, the SIPP is left with £240k uncrystallized and £9k crystallized. (The £9k is the income/growth on the other £180k.)

So broadly, shifting from tax-free part of SIPP to tax-free ISA is neutral, not a gain. One thing to consider if whether you can fill your ISA from other sources, e.g. savings from earned income, or shifting unsheltered savings / investments into an ISA. The latter is more benefical, because it is shifting from taxable into tax-free.