Should I start planning to move money from my SIPP to ISAs?

WitsEnd101

Some basic facts and figures.

Age – 59

Recently early retired

DB Pensions (just started receiving) - £26,500 / yr fully indexed linked

SIPP - £500k approx.

SSISA - £350K

My number – I need about £35k / yr

Cash – c.£70k for emergencies and such like.

Mortgage free and no debt.

SP – full amount expected.

My objective is to avoid HR tax when the SP kicks in and to tax efficiently plan for IHT.

I have read various contributors to this great forum talk about draining SIPPs first instead of ISAs. So, I was wondering if it is worth starting (from 26/27 tax year) to move say £50k of TFC from the SIPP to ISAs/SSISAs and repeat the following year? That would be £20k for both mine and my OH and £10k towards my £35k target income. I would plan to keep the funds in low cost global trackers which is were they are currently invested in the SIPP.

My previous thoughts were to leave the SIPPs last and draw the ISAs first before the proposed changes to pensions and IHT were floated.

I would be grateful for some views on this strategy and any obvious flaws I am missing.

DRS1

If you have spare headroom between your total taxable income and the higher rate threshold then maybe think about UFPLS?  Preserves the tax free cash for longer - for when (if) you turn into a higher rate tax payer.

Or are you thinking of going back to work and contributing to a new pension? 

BTW are you sure the DB pension is "fully" index linked?  Most of them have caps on the increases - 5% for example.

NoMore

I think the plan would be to move as much taxable (at 20% tax) out of your SIPP into ISA before high rate tax not just tax-free cash. Otherwise, all you've done is made all withdrawals from your Pensions taxable at HRT when you reach that level.

WitsEnd101

DRS1 said:

If you have spare headroom between your total taxable income and the higher rate threshold then maybe think about UFPLS?  Preserves the tax free cash for longer - for when (if) you turn into a higher rate tax payer.

Or are you thinking of going back to work and contributing to a new pension? 

BTW are you sure the DB pension is "fully" index linked?  Most of them have caps on the increases - 5% for example.

Thanks for the reply. By way of additional info I am trying a career break at the moment. I am keeping my powder dry about going back to work so at this stage I am not thinking about UFPL.

It's a Govt agency pension (but not CS) that is indexed to CPI I believe - no caps.

kimwp

Given that you only need about 100k from your sipp and ISA, you have a house if you need to find care and you are thinking about inheritance tax, particularly given that smaller injections of funds early in life have a larger effect than larger injections later, I'd be making sizeable gifts to your children now.

WitsEnd101

NoMore said:

I think the plan would be to move as much taxable (at 20% tax) out of your SIPP into ISA before high rate tax not just tax-free cash. Otherwise, all you've done is made all withdrawals from your Pensions taxable at HRT when you reach that level.

Thanks for the reply, which seems to imply that moving from SIPPs to ISAs is worth doing which was the crux of my post. 

I still haven't fully got my head around the whole drawdown procedure but was thinking of taking the TFC first as i am still not sure about whether to go back to work at some stage. So I don't want to trigger the MPAA just yet.

WitsEnd101

kimwp said:

Given that you only need about 100k from your sipp and ISA, you have a house if you need to find care and you are thinking about inheritance tax, particularly given that smaller injections of funds early in life have a larger effect than larger injections later, I'd be making sizeable gifts to your children now.

Kimwp - great point. Gifting will be the subject for me of a future post, as i am sure there are complexities to this for the purposes of HMRC to consider.

leosayer

I suggest the first thing so should do is fully utilise your basic rate tax bracket each tax year by drawing what you can from your SIPP. 

Your DB pays 26,500 so you can take 23,770 as flexible taxable income from your SIPP which will give you 7,923 tax free cash less 4,752 tax leaving you with 26,921 net. Then you can take further tax free cash as needed to fill your ISAs each year.

The only real problem I seen is that your target income of £35k is far below what you can actually afford to spend. Your state pension + DB will give you more than that. You said you want to mitigate IHT so you need to consider a gifting strategy with your excess assets.

ali_bear

Similar position to me although you have more. Basically you need to make the most of your income tax allowances every year to avoid paying 40% tax in retirement, and that means drawing taxable income up to the 50K threshold every year (except maybe this year if you intend to return to work). 

Assuming you have used at least the 12570 tax-free allowance this year. You can leave it until Feb/Mar 2027 before taking pension income in the 26-27 tax year to use up that years allowance. And you have until then to finally decide whether to go back to work or not. You could still go back after but you will have triggered the MPAA by taking the pension income. 

Until then you can take up to 3 small pots from your DC fund plus as many dips into TFC as you need without triggering the MPAA. 

WitsEnd101

leosayer said:

Your DB pays 26,500 so you can take 23,770 as flexible taxable income from your SIPP which will give you 7,923 tax free cash less 4,752 tax leaving you with 26,921 net. Then you can take further tax free cash as needed to fill your ISAs each year.

Thanks Leo. Are you suggesting I do an UFPLS of £26,921? As I said above, I don't want to trigger the MPAA just yet. On the other hand, given your point about my spend levels and gifting, perhaps I should turn this career break into a full time one and just splurg a bit and enjoy retirement?

leosayer

WitsEnd101 said:

leosayer said:

Your DB pays 26,500 so you can take 23,770 as flexible taxable income from your SIPP which will give you 7,923 tax free cash less 4,752 tax leaving you with 26,921 net. Then you can take further tax free cash as needed to fill your ISAs each year.

Thanks Leo. Are you suggesting I do an UFPLS of £26,921? As I said above, I don't want to trigger the MPAA just yet. On the other hand, given your point about my spend levels and gifting, perhaps I should turn this career break into a full time one and just splurg a bit and enjoy retirement?

The UFPLS will be for whatever amount brings your total taxable income to the basic rate tax threshold of £50,270. The actual amount to take will depend on other income received in that tax year eg. your DB pension and salary.

The end of this tax year is over 6 months away so you've got plenty of time to mull over whether you want to work again before you "commit" by taking UFPLS and triggering the MPAA. Even then, MPAA doesn't stop you working in the future, it just limits the tax benefits of future pension contributions.

As someone who stopped working last year with similar mix of DB and other savings to you, I can certainly recommend it.  

Do you actually want to stop working?

Was your early retirement unplanned?

Does your OH have any assets or entitlements that should be considered for your planning purposes?