SIPP and reaching age 75

etienneg

My understanding is that if you die before reaching age 75, then a SIPP is inherited (let's say by your widow) and can be taken free of tax. But if you die after reaching 75 then she pays tax at her marginal rate on withdrawals from the SIPP. What I hadn't appreciated, but have recently read, is that in the latter case the 25% that would normally be tax free does not apply after inheritance. Is this so? In other words, would a widow pay tax at her marginal rate on 100% of withdrawals from the SIPP?

If this is so, then it would seem sensible to withdraw the 25% tax-free yourself at around age 75. Is this so? Does it make any appreciable difference if this is done before or after your 75th birthday?

Apologies if my post demonstrates a misunderstanding around this, but I'm confused that what I had thought may not be the case, so any information about the real position would be most welcome.

MallyGirl

the 25% tax free is not inheritable if the death occurs after the 75th birthday. It is still available to the original pension holder

Marcon

If this is so, then it would seem sensible to withdraw the 25% tax-free yourself at around age 75. Is this so? Does it make any appreciable difference if this is done before or after your 75th birthday?

That's certainly an approach which has been mentioned more than once on this board. Whether it is sensible to do so will, as always, depend on individual circumstances. The main 'appreciable difference' would, of course, be if you passed your 75th birthday and died before taking the 25% tax free cash.

Qyburn

I'm planning drawing out the tax free in stages, £40k at a time, to be fed into our two investment ISAs.

Aretnap

If you are run over by a bus on your 75th birthday then the opportunity to withdraw 25% tax free is gone forever, so if you expect to leave it to your wife then yes, it does broadly make sense to withdraw it before you are 75, to ensure that the tax free allowance is used.

The caveat is that once withdrawn any growth or interest becomes taxable. You can put it into ISAs of course to reduce the tax you pay, but if it's a large amount or your already using most of your ISA allowance that could take a number of years. So you have to balance the tax you save by withdrawing 25% tax free with the extra tax you might pay on growth. I suspect that in most cases it will work out best to withdraw it, but there might be cases where it doesn't (some combination of a large sum, living for many more years after 75, having no spare ISA allowance to use etc etc).

cfw1994

I sometimes worry that people are withdrawing their pensions just to further invest them…..is nobody spending their money on crazy cars/holidays any more? 🤣

Bravepants

https://forums.moneysavingexpert.com/discussion/comment/81911314#Comment_81911314

Well, funnily enough, I was thinking of putting the rest of mine into draw down so I can access the 25% tax free cash to put towards a house move. I still work part time so I can still contribute to the SIPP up to £10k, but maybe I would be better sticking future contributions into my income fund/share ISA. I've got plenty of income, but cash reserves could be depleted quite heavily in our move, even including the fact that our current house is mortgage free! Horses for courses.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81911314#Comment_81911314

I am sure many do that, but probably not the sort of people who inhabit pension forums !

Exodi

https://forums.moneysavingexpert.com/discussion/comment/81911314#Comment_81911314

I think people spend their whole life scrimping and saving every penny into their pension (I'm no exception) with a belief that when they hit retirement, they'll switch to spend mode and enjoy the fruits of their labour.

The problem is, as I've read about and seen from this forum countless times, is people that have been savers their whole life have significant difficulty transitioning to spenders. To be honest, I anticipate I'll be the same.

Pretty much all of my elderly relatives live a modest, perhaps even meagre, lifestyle laser-focused on continuing to squirrel away as much money as possible, but with a redesigned goal - to provide as much inheritance to their heirs as possible. In some cases, they're not even particularly close to their heirs.

I can imagine there's a lot of mental pull factors at play too. Saving is generally viewed positively, sensible, spending is generally viewed negatively, reckless. There's also a more sinister undertone, which makes me uncomfortable to think about - flipping from spending to saving could be perceived as a signal you've entered the last stage of your life. You would be planning on whittling down your savings to your (optimistic) date of demise, your reducing balance a grim reminder of the reducing time you have left.

Of course I can sit here today, level-headed and think that I'll be sailing around on round the world cruises multiple times a year for a decade or two after I retire, looking at pictures of the expensive new car I just purchased on my phone - but realistically I bet I'll be sweating and obsessing over the spend rate, warning that recession could be just around the corner and it's best to hold on to our money for now, etc.

Fortunately my wife is a spender (not frivolous in the slightest) - she keeps me grounded and reminds me that the decades before retirement are for living, just as the decades after retirement are, we balance each other quite well in that regard. I expect (and count on) her telling me to shut up and just book the cruise when we're retired!

Sorry, rambled a bit there. As @albemarle said, I suspect the people splashing all their cash on crazy cars and holidays aren't the sorts you'd find on a forum like this!

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81911512#Comment_81911512

If all you do is take the tax free cash then you don't trigger the MPAA. Putting a pension into drawdown won't do it. It is only when you actually draw an amount of taxable income from the pension that you trigger it.

Bravepants

https://forums.moneysavingexpert.com/discussion/comment/81911908#Comment_81911908

I started drawing from my SIPP about two years ago, so that ship has sailed. 😊