How do retirees plan tax around SIPP withdrawals?

older_and_no_wiser

I recently retired early at 56 and got all my savings/pensions in order. I operate a cash ladder type strategy for the early years. ie I am holding around 4 years of living expenses in high interest easy access savings, fixed term bonds of varying duration and dividend paying ETFs/stocks. I also have global index stock trackers and multi asset funds in ISAs and my SIPP for longer term withdrawals. 

I have no other income - no salary, no rentals etc.

Prior to retirement, I didn't have as much in cash/bonds and was thinking about simply withdrawing £x each year from the ISAs and SIPP via FAD to take advantage of my tax allowance and 25% tax free SIPP entitlement.

Now the "issue" is that I will probably be maxing out my tax allowance each year with savings interest and dividend income. I've estimated I'll earn around £12,500 each year as bonds mature and dividends come in - although the earned interest may drop a bit if the bank rate keeps being lowered!

My question is should I still take a withdrawal from my SIPP each year while I'm earning so much interest/dividend income? If I've earned £12,500 in income by April, can/should I still withdraw as part of my 25% tax free SIPP. I have around £600K in the SIPP. I'm not sure if it's better to still withdraw each year even if I don't need to or defer withdrawals until later in retirement.

Obviously I'd like to pay as little tax as possible but aware that I shouldn't let the tax tail wag the dog.

tacpot12

Yes, you should, because you can reinvest it in an ISA and this will produce more tax-free income in the future. So potentially you want to be withdrawing upto £20k a year tax-free from the SIPP to put into your ISA. (Obviously if the ISA limit changes, the amount of tax-free cash you would withdraw would change).

El_Torro

How much are you planning to spend every year? Is there a risk you will be a 40% tax payer in future? Especially once you start getting your state pension. Speaking of state pension, it will be a lot harder to reduce your tax bill once that does start paying out. 

Dazed_and_C0nfused

older_and_no_wiser said:

I recently retired early at 56 and got all my savings/pensions in order. I operate a cash ladder type strategy for the early years. ie I am holding around 4 years of living expenses in high interest easy access savings, fixed term bonds of varying duration and dividend paying ETFs/stocks. I also have global index stock trackers and multi asset funds in ISAs and my SIPP for longer term withdrawals. 

I have no other income - no salary, no rentals etc.

Prior to retirement, I didn't have as much in cash/bonds and was thinking about simply withdrawing £x each year from the ISAs and SIPP via FAD to take advantage of my tax allowance and 25% tax free SIPP entitlement.

Now the "issue" is that I will probably be maxing out my tax allowance each year with savings interest and dividend income. I've estimated I'll earn around £12,500 each year as bonds mature and dividends come in - although the earned interest may drop a bit if the bank rate keeps being lowered!

My question is should I still take a withdrawal from my SIPP each year while I'm earning so much interest/dividend income? If I've earned £12,500 in income by April, can/should I still withdraw as part of my 25% tax free SIPP. I have around £600K in the SIPP. I'm not sure if it's better to still withdraw each year even if I don't need to or defer withdrawals until later in retirement.

Obviously I'd like to pay as little tax as possible but aware that I shouldn't let the tax tail wag the dog.

You seem to be overlooking all the taxable income that can be taxed at 0%.

And that once your Personal Allowance and any 0% rate bands have been used dividends are currently taxed at just 8.75% (assuming income doesn't take you into higher rate territory).

kimwp

I haven't fully read the original post, but it feels like you could make the £5k starter savings thingy work to your advantage.

Albermarle

This topic is a regular source of discussion on the Pensions forum.

Currently better off people will use money from a pension pot last , as what is left of it when they die is not subject to IHT.
This will change in 2027, so moving the goalposts somewhat,

So if taking money now and paying 20% tax means that at some point you can avoid paying 40% income tax ( maybe after the state pension or a DB pension kicks in) Ideally though you would only want to take enough so you can get it all into an ISA each year.
One potential downside is that if you die before 75, currently the pension beneficiary can take it tax free. This rule may get changed at some point ( as can all pension legislation and it regularly does) .

However yours is a special case as explained, due to the fact by taking taxable income, you will lose the Starter savings rate.

fuzzzzy

I would have thought you work out exactly how much savings interest you expect, and then withdraw (£18570 - savings interest) in taxable income from the SIPP?

Edit: but limiting taxable withdrawals to £12570

older_and_no_wiser

El_Torro said:

How much are you planning to spend every year? Is there a risk you will be a 40% tax payer in future? Especially once you start getting your state pension. Speaking of state pension, it will be a lot harder to reduce your tax bill once that does start paying out. 

My current annual spend is £35-40K

older_and_no_wiser

Dazed_and_C0nfused said:

You seem to be overlooking all the taxable income that can be taxed at 0%.

Sorry, I'm not sure what taxable income is taxed at 0%? Are you referring to the £12,750 starting tax rate?

kimwp

https://www.moneysavingexpert.com/savings/tax-free-savings/

Dazed_and_C0nfused

older_and_no_wiser said:

Dazed_and_C0nfused said:

You seem to be overlooking all the taxable income that can be taxed at 0%.

Sorry, I'm not sure what taxable income is taxed at 0%? Are you referring to the £12,750 starting tax rate?

Nope, these are things that apply after your Personal Allowance has been used. 

If you have the right mix of income you can avail yourself of the following rates,

Savings starter rate (upto £5,000 taxed at 0%)
Savings nil rate (upto £1,000 taxed at 0%)
Dividend nil rate (upto £500 taxed at 0%)