SIPP Drawdown and tax

leaphaze

I’m 71 and ready to start drawing income from my SIPP. To do this, I need to take a few steps.

First, I must transfer funds into my drawdown pot. At this stage, I have the option to take 25% of the transferred amount as a tax-free lump sum. However, I prefer to remain fully invested and do not wish to take this lump sum.

Once the money is in my drawdown pot, I plan to make monthly withdrawals, similar to receiving a regular salary. Since I chose not to take the 25% tax-free lump sum upfront, I assume that 25% of my monthly withdrawals will be tax-free instead.

Is this assumption correct?

Dazed_and_C0nfused

leaphaze said:

I’m 71 and ready to start drawing income from my SIPP. To do this, I need to take a few steps.

First, I must transfer funds into my drawdown pot. At this stage, I have the option to take 25% of the transferred amount as a tax-free lump sum. However, I prefer to remain fully invested and do not wish to take this lump sum.

Once the money is in my drawdown pot, I plan to make monthly withdrawals, similar to receiving a regular salary. Since I chose not to take the 25% tax-free lump sum upfront, I assume that 25% of my monthly withdrawals will be tax-free instead.

Is this assumption correct?

You cannot take taxable income from a pension without taking the tax free element.

So if you don't want to take any tax free lump sum up from them yes, each payment will be 25% TFLS and 75% taxable pension income.

Uncrystallised funds pension lump sum (UFPLS) is one common method.

squirrelpie

You will need to ask your provider what the rules for their system are. Contrary to what has been stated, it is possible to take less than 25% tax free though why you would want to is beyond me. If you move money into drawdown than you must take any tax-free money at the outset. Everything taken subsequently is taxed.

https://www.gov.uk/personal-pensions-your-rights/how-you-can-take-pension

Albermarle

Since I chose not to take the 25% tax-free lump sum upfront, I assume that 25% of my monthly withdrawals will be tax-free instead

That is one to do it ( called UFPLS withdrawals) However there are various ways and combinations of how to withdraw, and not all providers allow all options.
So do not assume anything, and speak to your provider first about how you want to proceed and how to do it. 

SVaz

Some pensions don’t do monthly ufpls,  they may let you crystalise your required yearly income, give you 25% tax free then pay the rest as monthly drawdown.
That’s how my Wife does it,  she wanted £5600 in total so had £1400 tax free and then £350 a month.

Albermarle

SVaz said:

Some pensions don’t do monthly ufpls,  they may let you crystalise your required yearly income, give you 25% tax free then pay the rest as monthly drawdown.
That’s how my Wife does it,  she wanted £5600 in total so had £1400 tax free and then £350 a month.

You are correct that not all providers will do a monthly UFPLS payment, or if they do it is a lot of faffing about.
Many posters on here take a yearly UFPLS and put it in a savings account to be used over the year.
Or you use flexi access drawdown like your wife does.
It partly depends on what your pension provider offers. Older pensions are usually more restrictive.

dunstonh

First, I must transfer funds into my drawdown pot. At this stage, I have the option to take 25% of the transferred amount as a tax-free lump sum. However, I prefer to remain fully invested and do not wish to take this lump sum.

The transferring of funds to a drawdown "pot" happens automatically when you crystallise funds. 

So, if you do not take the 25% TFC, then you don't transfer any funds to drawdown.

Once the money is in my drawdown pot, I plan to make monthly withdrawals, similar to receiving a regular salary. Since I chose not to take the 25% tax-free lump sum upfront, I assume that 25% of my monthly withdrawals will be tax-free instead.

Putting aside the first bit (Once the money is in my drawdown pot - which is wrong), the rest of your statement is correct.

The method is known as regular UFPLS.  Of all the different methods, it is the most popular one I use.  So, you are not unusual with what you are after.

However, as mentioned above, while virtually all providers available to intermediaries have that option, it's not very common with DIY providers.