SIPP drawdown without taking tax free lump sum

aroominyork

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

Dazed_and_C0nfused

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Thanks. Say you have no taxable income and need £12,570 spending money. You withdraw £16,760 to use up your personal allowance. The spare £4,190 could go into an ISA (if the £20k allowance is unused) or something like a low coupon gilt. In theory it could go back into the SIPP (MPAA?) but if you have no taxable income it would be a gross contribution (no tax reclaimed) and 75% of it would be taxed on future withdrawal so that would make no sense!

zagfles

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Technically, you can crystalise and not take tax free cash but then you lose it forever, so it's almost always a bad idea for DC pensions. Often a good idea for DB where the commutation rate is very bad. 

Dazed_and_C0nfused

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Thanks. Say you have no taxable income and need £12,570 spending money. You withdraw £16,760 to use up your personal allowance. The spare £4,190 could go into an ISA (if the £20k allowance is unused) or something like a low coupon gilt. In theory it could go back into the SIPP (MPAA?) but if you have no taxable income it would be a gross contribution (no tax reclaimed) and 75% of it would be taxed on future withdrawal so that would make no sense!

If you make relief at source contributions to a SIPP and are under age 75 then you should always be able to get basic rate relief on £3,600 i.e. you pay £2,880 and the pension company, courtesy of HMRC, adds £720 in basic rate relief.

Whether you have paid any tax in the same tax year (or any other tax year) is irrelevant.

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Thanks. Say you have no taxable income and need £12,570 spending money. You withdraw £16,760 to use up your personal allowance. The spare £4,190 could go into an ISA (if the £20k allowance is unused) or something like a low coupon gilt. In theory it could go back into the SIPP (MPAA?) but if you have no taxable income it would be a gross contribution (no tax reclaimed) and 75% of it would be taxed on future withdrawal so that would make no sense!

If you make relief at source contributions to a SIPP and are under age 75 then you should always be able to get basic rate relief on £3,600 i.e. you pay £2,880 and the pension company, courtesy of HMRC, adds £720 in basic rate relief.

Whether you have paid any tax in the same tax year (or any other tax year) is irrelevant.

Yes, of course (duh). And HMRC do not mind people recycling in that way, re-investing a (partial) tax free withdrawal, having it grossed up and then withdrawn with another tax free 25%, and so on again?

Dazed_and_C0nfused

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Thanks. Say you have no taxable income and need £12,570 spending money. You withdraw £16,760 to use up your personal allowance. The spare £4,190 could go into an ISA (if the £20k allowance is unused) or something like a low coupon gilt. In theory it could go back into the SIPP (MPAA?) but if you have no taxable income it would be a gross contribution (no tax reclaimed) and 75% of it would be taxed on future withdrawal so that would make no sense!

If you make relief at source contributions to a SIPP and are under age 75 then you should always be able to get basic rate relief on £3,600 i.e. you pay £2,880 and the pension company, courtesy of HMRC, adds £720 in basic rate relief.

Whether you have paid any tax in the same tax year (or any other tax year) is irrelevant.

Yes, of course (duh). And HMRC do not mind people re-investing part of the lump sum withdrawal in that way?

There might be recycling rules complexities (not something I know much about) but the pension tax relief will happen automatically.

I think you need to make sure recycling isn't an issue.

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

Leaving aside the question of whether the budget might tinker (or take a sledgehammer to) the tax free lump sum, is it allowed to make a taxable withdrawal from your SIPP while leaving the tax free 25% untouched for a later time? This would essentially be the flip side of taking a tax free lump sum and moving 3x into drawdown. It seem relevant in years leading up to state pension if you have unused personal allowance.

No.  You can take a TFLS and no taxable income but to take taxable income you have to have first taken the TFLS element.

The TFLS can be taken upfront or at the same time as the taxable element.

Thanks. Say you have no taxable income and need £12,570 spending money. You withdraw £16,760 to use up your personal allowance. The spare £4,190 could go into an ISA (if the £20k allowance is unused) or something like a low coupon gilt. In theory it could go back into the SIPP (MPAA?) but if you have no taxable income it would be a gross contribution (no tax reclaimed) and 75% of it would be taxed on future withdrawal so that would make no sense!

If you make relief at source contributions to a SIPP and are under age 75 then you should always be able to get basic rate relief on £3,600 i.e. you pay £2,880 and the pension company, courtesy of HMRC, adds £720 in basic rate relief.

Whether you have paid any tax in the same tax year (or any other tax year) is irrelevant.

Yes, of course (duh). And HMRC do not mind people re-investing part of the lump sum withdrawal in that way?

There might be recycling rules complexities (not something I know much about) but the pension tax relief will happen automatically.

I think you need to make sure recycling isn't an issue.

Thanks. You posted about recycling just as I edited my previous post to ask just that. 

See https://www.ipm-pensions.co.uk/a-useful-reminder-of-the-pension-recycling-rules/, especially 

- The individual receives a pension commencement lump sum.

- Because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.
That links through to HMRC manuals which define 'significant' as "the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected."

aroominyork

How does drawdown actually operate? Say I want £25k cash from my SIPP. Do I liquidate £100k of assets in my SIPP, of which £75k is transferred into a new drawdown pot (which appears on my Interactive Investor portfolio as a fourth account, alongside SIPP, ISA and Trading?)… and I can then invest that £75k in whatever assets I wish, and when I withdraw from it (the funds may have grown or shrunk) I pay income tax through self-assessment?

molerat

Take £16760 out of SIPP, put £2880 back in - plus £720 added by the taxman -  so £13880 to spend at a cost of £13160 to the SIPP.  If you only really want £12570 you can put the spare £1310 away elsewhere.

Dazed_and_C0nfused

aroominyork said:

How does drawdown actually operate? Say I want £25k cash from my SIPP. Do I liquidate £100k of assets in my SIPP, of which £75k is transferred into a new drawdown pot (which appears on my Interactive Investor portfolio as a fourth account, alongside SIPP, ISA and Trading?)… and I can then invest that £75k in whatever assets I wish, and when I withdraw from it (the funds may have grown or shrunk) I pay income tax through self-assessment?

No, it is just treated like employment income.

The emergency tax code (1257L) will be used on the first payment and then, if necessary, HMRC will calculate a new code based on your personal circumstances.

Why do you need to file a tax return?  Any refund due to you or additional tax payable is normally sorted without a tax return.  But if you need to file one for some other reason then yes, it would come out in the wash as part of your return (of there was an under or overpayment of tax).