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

Triumph13

WitsEnd101 said:

Triumph13 said:

I can understand your nervousness about the MPAA, but do the sums.  Each year you hold off is £24k of your pension that moves from 20% to 40% tax, so a net cost of just under £5k.  If you do go back to work, how much is being able to contribute more than £10k pa to a DC scheme going to save you?

Also, does your OH have a job that can be done remotely?  If so, then there are lots of nice warm places you could afford to spend chunks of the winter.

These comments have been incredibly helpful and challenging to my assumption that I should return to work after a bit of a hiatus. 

Based on the above I should probably assess my income from both work and pensions up to the end of Mar 25 and take an ufpls of £50,270 less the income plus the 25% TFC. Does that sound about right? 

If you're not sure about going back to work, and think that the MPAA could be an issue if you do, then you can probably afford to wait until Feb 2027 if that helps.  Let's take a look at your numbers:

£500k SIPP is £375k taxable and £125k tax free.  I would be looking to get the £125k out of your SIPP and into your ISAs over time, so all my timing for that would be driven by availability of ISA allowance for you and your other half.  Remember that although taking tax free cash of X means putting 3X into drawdown, you don't have to actually take any of it, so it can sit there happily waiting until it's tax efficient for you to withdraw it.

Now to the taxable bit.  Lets say you did wait until the new tax year, which would give you until Feb 2027 to decide, and then start drawing an income.  At the start of the year you'd still have say 7 years before state pension, so that's 7x12 = £84k to be taken out, leaving you less than £300k for long term drawdown.  Between SP and DB you use up £38,500 of the £50,270 limit, so you'd have £11.8k of 20% band left.  3% or 3.5% withdrawal on the remaining £300k is comfortably below that.  4% is spot on.

Having said that, if the investments perform well, or fiscal drag continues, you end up solidly in 40% tax, so I wouldn't want to risk doing it for more than one year, unless you really do expect to need to put more than £10k a year into a pension in future.

Now to the more fun numbers, what happens if you just forget about going back to work?

£375k of pension, less say 7.5 years of bridging the state pension = £285k.  3% drawdown on that is £8.5k pa.  Add that to £12k of SP (or bridging) and £26.5k of DB makes £47k pa.  That's £40k pa after tax.

3% drawdown on your ISAs + tax free cash is another £14k pa, so that's £54k pa vs the £35k you say you need.  Now why exactly were you thinking of going back to work?

My suggestion therefore:

1. Take a little while to digest and convince yourself you don't need to go back to work.  You should be able to do that this tax year on the above numbers, but, if it takes until the end of the next one, it's not a disaster.
2. Start crystallising your pension so as to use your available ISA allowance.  If you've already used this year's then you might need to hold a bit unwrapped for a short while between taking any taxable income at the end of this year and having the new allowance on 6 April, but no big deal.
3. Once you are happy to ignore the MPAA issue, withdraw your full 20% band each year from the SIPP.  If it's more than your preferred drawdown rate, just draw less from the ISAs that year.
4. Enjoy your retirement!

kimwp

WitsEnd101 said:

Why do you feel guilty?

I said "slightly guilty". I think its because I know some colleagues of similar age who were a bit envious that they have years to go before they can afford to pull the trigger themselves.

Ah. We've all got much bigger comparisons to feel guilty about, so best just to enjoy what you have and give back if you feel inclined.

GunJack

Couple of points...

ISAs form part of your estate so have to be taken into account for IHT purposes.

Don't worry about paying a bit of 40% tax, it still means you've got more in your pocket. And it's only income over £50.3k that's at 40% anyway,  and most of your pensions will have been built with 40% relief anyway.

WitsEnd101

My suggestion therefore:

1. Take a little while to digest and convince yourself you don't need to go back to work.  You should be able to do that this tax year on the above numbers, but, if it takes until the end of the next one, it's not a disaster.
2. Start crystallising your pension so as to use your available ISA allowance.  If you've already used this year's then you might need to hold a bit unwrapped for a short while between taking any taxable income at the end of this year and having the new allowance on 6 April, but no big deal.
3. Once you are happy to ignore the MPAA issue, withdraw your full 20% band each year from the SIPP.  If it's more than your preferred drawdown rate, just draw less from the ISAs that year.
4. Enjoy your retirement!

Triumph, I'm extremely grateful for your post - there's a lot there for me to unpack.

I am probably going to wait until Dec/Jan to decide whether to go back to work, but am warming to the idea of full retirement atm. I am thinking that triggering the MPAA may not be such a bad thing thanks to guidance from you and GunJack above.

With regards to crystallising and moving the money between now and SP age, would you suggest FAD or ufpls? If the former obviously the £375k taxable goes into a drawdown account to be taken whenever. Could the £125k tax free money also stay in the pension wrapper (possibly still invested in a mix of equities, bonds and STMMFs) until the next financial years ISA allowances become available?

Notepad_Phil

WitsEnd101 said:
...Could the £125k tax free money also stay in the pension wrapper (possibly still invested in a mix of equities, bonds and STMMFs) until the next financial years ISA allowances become available?

Unfortunately the tax free money has to come out of the pension wrapper. You could look into whether you're allowed to put a percentage of your pension into FAD rather than all of it (some schemes may not allow it) - e.g. put £80k into FAD so that you'll get £20k tax free that you can put into an ISA, or put £160k into FAD to get £40k tax-free.

NoMore

WitsEnd101 said:

With regards to crystallising and moving the money between now and SP age, would you suggest FAD or ufpls? If the former obviously the £375k taxable goes into a drawdown account to be taken whenever. Could the £125k tax free money also stay in the pension wrapper (possibly still invested in a mix of equities, bonds and STMMFs) until the next financial years ISA allowances become available?

You don't have to FAD or UFPLS the entire pot at once, you can do it in chunks to suit your objectives, so only crystalise and remove what you need, no need to do the whole lot at once.

WitsEnd101

Notepad_Phil said:

Unfortunately the tax free money has to come out of the pension wrapper. You could look into whether you're allowed to put a percentage of your pension into FAD rather than all of it (some schemes may not allow it) - e.g. put £80k into FAD so that you'll get £20k tax free that you can put into an ISA, or put £160k into FAD to get £40k tax-free.

That's good to know but still leaving me confused as to the best approach, in the circumstances laid out above,  to move the money out of the SIPP to ISA accounts - UFPLS vs FAD?

MallyGirl

Hasn't this circled around to the MPAA? UFPLS will trigger it as you are taking a slice with 25% tax free/75% taxable, and FAD where you only take the tax free bit wouldn't 

WitsEnd101

MallyGirl said:

Hasn't this circled around to the MPAA? UFPLS will trigger it as you are taking a slice with 25% tax free/75% taxable, and FAD where you only take the tax free bit wouldn't 

Yes MPAA is a factor, but as discussed above I am warming to the idea of fully retiring. So if we are taking MPAA out of the mix its UFPLS vs FAD. So in these circumstances any views on the best approach?

Notepad_Phil

WitsEnd101 said:

MallyGirl said:

Hasn't this circled around to the MPAA? UFPLS will trigger it as you are taking a slice with 25% tax free/75% taxable, and FAD where you only take the tax free bit wouldn't 

Yes MPAA is a factor, but as discussed above I am warming to the idea of fully retiring. So if we are taking MPAA out of the mix its UFPLS vs FAD. So in these circumstances any views on the best approach?

If you're with a more modern plan then it's not a case of using only one or the other drawdown methods, you could put one or more chunks into FAD and also do one or more UFPLS drawdowns. So if you're wanting to drain the pension as quickly as reasonably possible then personally I'd use UFPLS up to the amount where you start paying 40% tax, and then put a chunk every year into FAD to fill up the ISAs.