Reaching Tax Free Lump Sum Limit in SIPP - Worth taking this part now?

UncleTomCobley

So I'm wonder what's the best thing to do (mostly tax wise) if someone was fortunate to have a SIPP where the tax free element had reached the c. £268,000 lump sum allowance limit. Would it be better to keep it in the pension - where any growth linked to this amount that was subsequently withdrawn would be subject to "standard" income tax in the normal way - or take it out - where any growth (in a now unwrapped product) would be subject to interest/dividend/CGT depending on the assets invest in?

For the sake of discussion, there won't be a change to any investment strategy/asset types, just, in the case of withdrawal, it will be taking these out of the SIPP wrapper, whilst trying to limit any market movement exposures and costs in the process.

I'm thinking that with basic tax rates of 20%, 8.75% & 18% for interest, dividends and CGT respectively rather than 20% or so for "standard" income tax seem better. Further, the, ever reducing, tax allowances also make the "take the tax free lump sum out" option a little more favourable (I'm assuming the normal £12,570 personal allowance is already used up in other ways - such as via the state pension).

At higher tax rates, the difference seems is more distinct - especially the CGT at 24% rather than the income tax at around 40%.

The will be some other costs perhaps - running the two portfolios (pension and unwrapped) - and there is that inheritance tax rule about pensions being excluded - well, until 2027 it seems...however the withdrawal option looks better in terms of tax and, separately, in terms of usability - i.e. the money is now free of the pension.

Any views  - have I missed anything big, I wonder?

PS I've ignored the "move into an ISA" option in this current pondering as that would take some time.

Marcon

UncleTomCobley said:

So I'm wonder what's the best thing to do (mostly tax wise) if someone was fortunate to have a SIPP where the tax free element had reached the c. £268,000 lump sum allowance limit. 

Any views  - have I missed anything big, I wonder?

Take some proper financial advice? Could be an excellent investment!

UncleTomCobley

And where's the fun in that?    

Anyway, for what it's worth, I'm suspecting this is more in the realms of tax accounting than financial advice.

 

dunstonh

Anyway, for what it's worth, I'm suspecting this is more in the realms of tax accounting than financial advice.

Not really. Financial planning looks forward. i.e. utilise allowances and wrappers to reduce tax.   Accounting looks backwards at what has happened and reporting it accordingly.

Marcon

Relying on free 'advice' on this forum, which can only be based on hopelessly inadequate knowledge of your situation, attitude etc, could prove rather more expensive then paid-for professional advice...

poseidon1

UncleTomCobley said:

So I'm wonder what's the best thing to do (mostly tax wise) if someone was fortunate to have a SIPP where the tax free element had reached the c. £268,000 lump sum allowance limit. Would it be better to keep it in the pension - where any growth linked to this amount that was subsequently withdrawn would be subject to "standard" income tax in the normal way - or take it out - where any growth (in a now unwrapped product) would be subject to interest/dividend/CGT depending on the assets invest in?

For the sake of discussion, there won't be a change to any investment strategy/asset types, just, in the case of withdrawal, it will be taking these out of the SIPP wrapper, whilst trying to limit any market movement exposures and costs in the process.

I'm thinking that with basic tax rates of 20%, 8.75% & 18% for interest, dividends and CGT respectively rather than 20% or so for "standard" income tax seem better. Further, the, ever reducing, tax allowances also make the "take the tax free lump sum out" option a little more favourable (I'm assuming the normal £12,570 personal allowance is already used up in other ways - such as via the state pension).

At higher tax rates, the difference seems is more distinct - especially the CGT at 24% rather than the income tax at around 40%.

The will be some other costs perhaps - running the two portfolios (pension and unwrapped) - and there is that inheritance tax rule about pensions being excluded - well, until 2027 it seems...however the withdrawal option looks better in terms of tax and, separately, in terms of usability - i.e. the money is now free of the pension.

Any views  - have I missed anything big, I wonder?

PS I've ignored the "move into an ISA" option in this current pondering as that would take some time.

I suspect the few fortunate  individuals in this position could (in all likelihood), find  the entirety  of their pension pots IHT exposed from 2027 onwards.

This could well be a deciding factor for many in considering draining their TFC sooner rather than later. For those with protected TFC exceeding £268k, the 'wisdom' of extracting all at once may be even more compelling.

Of course there is no replacement for targeted bespoke advice, for those in this position.

Ciprico

I did as you suggest. Depending on your age, and planned retirement age, you may struggle to get all the money out of the sipp at lower tax rate, so all future growth could well be taxed at 40% or more.

Having 25% of this future growth outside the sipp provides options...

Also, if you expire after 2027, any untaken tax free pension becomes taxed pension regarding your estate, so use it or lose it. (I think this is under review, hopefully someone will clarify)

ali_bear

You don't mention your age, still working or not, taken any pension lump sums or income yet. 

DRS1

Yes In that situation taking the max TFLS out of the pension makes sense.

You could be missing a tax planning trick though.  If you die before 2027 and before age 75 all the pension could pass tax free to the nominated beneficiaries.  In that case what you have taken out of the pension would not be protected (it could be caught by IHT unless you leave it all to your spouse and the income and capital gains will be taxable in the beneficiaries hands)

You talk about putting the TFLS into the same investments outside the pension as it was in inside the pension.  I wonder about that.  You could find there are complications like ERI which rear their head for an investment outside the pension tax wrapper.

If you can't get the  money into an ISA then maybe think about low coupon gilts (or premium bonds or even VCTs/EIS - a good way to reduce your capital)

artyboy

poseidon1 said:

UncleTomCobley said:

So I'm wonder what's the best thing to do (mostly tax wise) if someone was fortunate to have a SIPP where the tax free element had reached the c. £268,000 lump sum allowance limit. Would it be better to keep it in the pension - where any growth linked to this amount that was subsequently withdrawn would be subject to "standard" income tax in the normal way - or take it out - where any growth (in a now unwrapped product) would be subject to interest/dividend/CGT depending on the assets invest in?

For the sake of discussion, there won't be a change to any investment strategy/asset types, just, in the case of withdrawal, it will be taking these out of the SIPP wrapper, whilst trying to limit any market movement exposures and costs in the process.

I'm thinking that with basic tax rates of 20%, 8.75% & 18% for interest, dividends and CGT respectively rather than 20% or so for "standard" income tax seem better. Further, the, ever reducing, tax allowances also make the "take the tax free lump sum out" option a little more favourable (I'm assuming the normal £12,570 personal allowance is already used up in other ways - such as via the state pension).

At higher tax rates, the difference seems is more distinct - especially the CGT at 24% rather than the income tax at around 40%.

The will be some other costs perhaps - running the two portfolios (pension and unwrapped) - and there is that inheritance tax rule about pensions being excluded - well, until 2027 it seems...however the withdrawal option looks better in terms of tax and, separately, in terms of usability - i.e. the money is now free of the pension.

Any views  - have I missed anything big, I wonder?

PS I've ignored the "move into an ISA" option in this current pondering as that would take some time.

I suspect the few fortunate  individuals in this position could (in all likelihood), find  the entirety  of their pension pots IHT exposed from 2027 onwards.

This could well be a deciding factor for many in considering draining their TFC sooner rather than later. For those with protected TFC exceeding £268k, the 'wisdom' of extracting all at once may be even more compelling.

Of course there is no replacement for targeted bespoke advice, for those in this position.

100% I will be taking the full £268k on my 57th birthday. Fair to say that this is one area where I don't need any formal advice to tell me the blinkin' obvious. 

The rest of my estate planning may be another matter...

UncleTomCobley

Ciprico said:

I did as you suggest. Depending on your age, and planned retirement age, you may struggle to get all the money out of the sipp at lower tax rate, so all future growth could well be taxed at 40% or more.

Having 25% of this future growth outside the sipp provides options...

Also, if you expire after 2027, any untaken tax free pension becomes taxed pension regarding your estate, so use it or lose it. (I think this is under review, hopefully someone will clarify)

It does seem that once the tax free lump sum benefit of a pension has been exhausted (ie the total pot is over £1M or so) the taxation of any further growth of the TFLS portion would be lower outside the pension that it would be inside.

 

The difference appears relatively small (I had it about 5% on my portfolio) paying at base rate but is much more significant when higher rates are involved (esp. given CGT @ 24% v income tax @ 40% or so). .

Apart from the IHT benefit (noted to be gone on 2027) and the simplicity of having one pot of assets rather than two, I can't see any other downside - though a few other upsides.

Just for completeness, this isn't really about changing any underlying shares or funds or the like (so FAs rest easy) just moving a portion of these assets to a more tax efficient, unwrapped, vehicle.

I do recognise the general point about trying to get all money out the SIPP before being as old as Methuselah, though the discussed figures don't necessarly mean that my SIPP is at this level...here's hoping