On retiring what are the rules for withdrawing money from a SIPP

reginald_rexxy

I have a SIPP and I don't want to go down the annuity route when I retire.  My plan is to take up to the 25% tax free amount when I retire.  But then how do I withdraw the rest when I need it?

For example can I simply withdraw an annual amount each year to live on in retirement.  So I leave the SIPP investment in place and sell some shares when I need the pension income?  When I withdraw does the provider know that I need to pay tax and withholds say the 25% or whatever income tax rate is at the time?  Or do I just report my income to HMRC each year?

Is it really as simple as that?

My SIPP provider is hl.co.uk

Marcon

reginald_rexxy said:

I have a SIPP and I don't want to go down the annuity route when I retire.  My plan is to take up to the 25% tax free amount when I retire.  But then how do I withdraw the rest when I need it?

For example can I simply withdraw an annual amount each year to live on in retirement.  So I leave the SIPP investment in place and sell some shares when I need the pension income?  When I withdraw does the provider know that I need to pay tax and withholds say the 25% or whatever income tax rate is at the time?  Or do I just report my income to HMRC each year?

Is it really as simple as that?

My SIPP provider is hl.co.uk

HL's website gives a clear explanation: https://www.hl.co.uk/help/adding-and-withdrawing-money/withdrawing-money/sipp

reginald_rexxy

I didn't find the hl website very clear hence my question, but I did find this from this site:

Take lump sums leaving the rest invested until you need it

Here you don’t take the 25% tax-free lump sum in one go, but instead take bits of money as and when you need it – with the bulk of your money remaining invested in your pension. When you do take cash, a quarter of each amount is tax-free, the rest is taxed as income.

Which is what I will do

Marcon

In that case a bit more info might help you. Try https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown

dunstonh

I have a SIPP and I don't want to go down the annuity route when I retire.  My plan is to take up to the 25% tax free amount when I retire.  But then how do I withdraw the rest when I need it?

There are a range of methods and its about picking which is best for you.

For example can I simply withdraw an annual amount each year to live on in retirement.  So I leave the SIPP investment in place and sell some shares when I need the pension income?

That is one method.  Some will do annually.  Some monthly.  Some will use UFPLS (single or monthly). Some will use flexi access drawdown.   Some will use a combination.    Some will use multiple tax wrappers for long term tax efficiency.

 When I withdraw does the provider know that I need to pay tax and withholds say the 25% or whatever income tax rate is at the time? 

They use PAYE for accessing the 75% chunk.  The 25% chunk is not taxable.

Albermarle

When I withdraw does the provider know that I need to pay tax and withholds say the 25% or whatever income tax rate is at the time?  Or do I just report my income to HMRC each year?

From your perspective the pension provider is like an employer.
They are issued a tax code by HMRC and any taxable income you take is taxed accordingly.
As with any new employer your tax maybe incorrect for the first couple of months until it settles down.
The main issue is if you take irregular payments, such as one or two lump sums per year. This normally mean you get overtaxed and you have to claim it back . Or wait until the HMRC system automatically refunds you, which can take some time. 

Roger175

reginald_rexxy there are various ways of doing this. The key thing is whether you want to crystallise your pot now.

If you take the 25% tax free right at the start of retirement, this will crystallise the pot. This means you will have taken all your tax free allowance up front and everything you draw thereafter will be subject to tax.

I have recently retired and I've chosen to leave my pot uncrystallised and take lump sums as and when I need them. Each of these lump sums has a 25% tax free amount with the other 75% subject to tax. (this is known as UFPLS) I have chosen to do this because I won't need a regular amount from my pension and having retired 6 years before state pension age, I am simply taking the max possible out for the next 6 years to get money out without paying any tax - I take an annual lump sum of £16,760, the first £4,190 (25%) is tax free and the next £12,570 (75%) is subject to tax, but because this is the nil tax band amount, you won't actually pay any tax. In years to come, I'll review things and may choose to take more or less. In the meantime I am confident the pot will continue to grow well ahead of drawings, so I will potentially have a large tax free amount available.

You need to decide which method suits your circumstances and whether you actually need the 25% up front etc.

If you do it the way I have, you need to fill out a P55 form to address the tax situation. I'm not sure how it works with the other methods.

Albermarle

In the meantime I am confident the pot will continue to grow well ahead of drawings, so I will potentially have a large tax free amount available.

Just to expand on this comment for the OP

Whether your pot grows or shrinks as you withdraw from it each year, depends on two factors;
1) Investment growth ( or not) 
2) The % rate of withdrawal.  There are various theories and opinions about this, but it is probably fair to say if you keep the withdrawal rate below 3.5% pa the pot will very likely never run out and maybe even grow .  If you go to 6% it most likely will run out, maybe even after just 15 years or so ( it depends on Point 1 ) 
So you just need to be careful not to withdraw too much each year, as another useful point is that people generally tend to live longer than they think they will.

Roger175

Albermarle said:

In the meantime I am confident the pot will continue to grow well ahead of drawings, so I will potentially have a large tax free amount available.

Just to expand on this comment for the OP

Whether your pot grows or shrinks as you withdraw from it each year, depends on two factors;
1) Investment growth ( or not) 
2) The % rate of withdrawal.  There are various theories and opinions about this, but it is probably fair to say if you keep the withdrawal rate below 3.5% pa the pot will very likely never run out and maybe even grow .  If you go to 6% it most likely will run out, maybe even after just 15 years or so ( it depends on Point 1 ) 
So you just need to be careful not to withdraw too much each year, as another useful point is that people generally tend to live longer than they think they will.

In my original comment, I actually meant to say 'so I will potentially have a larger tax free amount available'. Emphasising the fact that if the pot is crystallised on day one, there is no potential to ever increase the tax free amount.