Taking 25% tax free from a SIPP

SVaz

The main thing is to understand is that if you take all 25% now,  that’s it, no matter how much the crystallised portion grows you can never get any more tax free cash. 

  Not counting any future contributions that will build up an uncrystallised pot.

In 2021,  I took 22% tax free cash from my Sipp,  no choice really as my Daughter needed the money for a house deposit that should have come from an inheritance of my Dad’s house - the original sale had fallen through and she would have lost her intended house, so it had to be done. 

That Sipp is now worth £40k more than it was in  2021 but I only have £15k uncrystallised,  which is mainly made up of contributions since then.  

So in effect I’ve ‘lost’ over £10k tax free cash, compared with now. 

If you are years away from retiring and still contributing large amounts it might not matter that much but if you are nearing State pension age where all your income is taxable……

Albermarle

I am concerned about the November budget where there is speculation about abolishing the 25% lump sum.

OP - There is a lot of politically motivated speculation in the media.
There is zero chance that the 25% tax free from a pension will be abolished.
The current maximum you can take ( £268,000) maybe be reduced, but most likely not. This would not affect you anyway.
It is golden rule, not to make financial decisions based on unfounded speculation.

scoobyjones1

SVaz said:

The main thing is to understand is that if you take all 25% now,  that’s it, no matter how much the crystallised portion grows you can never get any more tax free cash. 

  Not counting any future contributions that will build up an uncrystallised pot.

In 2021,  I took 22% tax free cash from my Sipp,  no choice really as my Daughter needed the money for a house deposit that should have come from an inheritance of my Dad’s house - the original sale had fallen through and she would have lost her intended house, so it had to be done. 

That Sipp is now worth £40k more than it was in  2021 but I only have £15k uncrystallised,  which is mainly made up of contributions since then.  

So in effect I’ve ‘lost’ over £10k tax free cash, compared with now. 

If you are years away from retiring and still contributing large amounts it might not matter that much but if you are nearing State pension age where all your income is taxable……

I agree with this approach. Use your personal allowance, yes...especially pre state pension but only crystallise what you need, let the uncrystallised pot (hopefully) grow if you can. Once crystallised it's all taxable when you take it out.
https://www.youtube.com/watch?v=1gTlVRVr8xQ&t=335s

tribetown

Thank-you all for the information, I do appreciate it (and for posting the youtube clip, I did watch it yesterday and again today).

I am 8 years from retirement age. Self employed, down to 2 days a week so I do not see myself making much more contributions. I do plan on adding to my ISA with free cash.

Based on the replies, it is probably sensible for me to not take out the 25% tax free lump sum now.

michaels

SVaz said:

The main thing is to understand is that if you take all 25% now,  that’s it, no matter how much the crystallised portion grows you can never get any more tax free cash. 

  Not counting any future contributions that will build up an uncrystallised pot.

In 2021,  I took 22% tax free cash from my Sipp,  no choice really as my Daughter needed the money for a house deposit that should have come from an inheritance of my Dad’s house - the original sale had fallen through and she would have lost her intended house, so it had to be done. 

That Sipp is now worth £40k more than it was in  2021 but I only have £15k uncrystallised,  which is mainly made up of contributions since then.  

So in effect I’ve ‘lost’ over £10k tax free cash, compared with now. 

If you are years away from retiring and still contributing large amounts it might not matter that much but if you are nearing State pension age where all your income is taxable……

Only an issue if the drawn down funds are not put into a S&S ISA

af1963

tribetown said:

Thank-you all for the information, I do appreciate it (and for posting the youtube clip, I did watch it yesterday and again today).

I am 8 years from retirement age. Self employed, down to 2 days a week so I do not see myself making much more contributions. I do plan on adding to my ISA with free cash.

Based on the replies, it is probably sensible for me to not take out the 25% tax free lump sum now.

Whatever you invest in within an ISA, you can also invest in within a SIPP. Inside the SIPP, it would receive up-front tax relief, and (under the current rules and even if the maximum TFLS was to be reduced), you're likely to still be able to withdraw 25% of it tax free.  And as you're 58 already, you can withdraw from the SIPP any time. 

£80 added to SIPP becomes £100 with tax relief, then £85 after paying tax on the taxable part of the withdrawal. (maybe more, if you can take it while you have unused annual allowance)

£80 added to ISA remains as £80.

Only real advantage of the ISA would be if you thought you'd need to access a *large* lump sum in a single year which could push you into higher rate tax if you took it from the SIPP.