Any reason not to aim to empty SIPP ASAP in retirement?

hugheskevi

That is largely my plan too, but with one slight tweak.

Between the age of 55 and State Pension age I will draw as much as possible from DC pension without going into higher rate tax. But at State Pension age I will almost certainly be a higher rate taxpayer from State Pension and DB pension alone.

At the point I will pause withdrawals, as if I die between State Pension age and 75 my wife could inherit the pension without income tax. Shortly before age 75 I will withdraw the remainder, timing withdrawals to avoid 60% income tax.

I'll ensure I use all ISA allowance each year. This will either be by using pension income, and if that is insufficient to use the full allowance I will fill it by temporarily drawing from an offset mortgage savings account to take advantage of flexible ISAs at the end of the tax year, returning the funds after the start of the next tax year. That should ensure I always have headroom to move pension funds into ISA whenever I choose to draw the pension.

In practice, rules will change, and the plan above will change with them, but that is the current position.

phlebas192

https://forums.moneysavingexpert.com/discussion/6659967/any-reason-not-to-aim-to-empty-sipp-asap-in-retirement

You don't say what your other income will be so we can't tell whether higher rate tax is going to be an issue for you or not. But if it is then withdrawing enough at basic rate to avoid that certainly makes sense.

That said, there is still a significant tax benefit for leaving assets in a SIPP if you might die before you are 75. This is especially so if it is left to a spouse in which case they will get the full amount tax-free. If it is left to someone else then from April 2027 it will be included in your estate so potentially subject to IHT but that would be the case anyway if withdrawn. Crucially, if still in the SIPP it will be passed to your beneficiaries within the SIPP tax wrapper so can grow free of tax until they need it. If you withdraw it then they will inherit outside of any tax wrapper.

RogerPensionGuy

A poster has mentioned rules can be changed in the future and historically unfortunately we see governments do like tinkering with pensions and I can only guess they will keep tinkering with pensions.

With such debt issues I can only guess pensions and property wealth and will be seen as easy low hanging fruit for many many decades.

Reference the OP initial point, my feeling is pretty similar, the last 10 years I was liklihood be keeping SIPP untouched or just trim it as its IHT treatment was potentially helpful for others, but from April 2027 that's all changing and emptying out SIPP looks prudent on balance in my opinion.

§§§§§§

I do wonder how some IFAs who helped people transfer good solid DB pensions in to SIPPs due potential IHT and how they now explain to clients how the April 2027 changes will affect planning.

I was hoping the LTA figure of 1.073M to increase, but I'm making a guess that it won't be increased in the next 5 to 15 years, so I'll probably do similar to the OP and empty SIPP or maybe just leave a small % of current value in it.

Just a guessing game, what a mess these pensions are in & changing rules all the time, short-term income for governments, but a long-term pensions issue unfortunately!

dunstonh

I do wonder how some IFAs who helped people transfer good solid DB pensions in to SIPPs due potential IHT and how they now explain to clients how the April 2027 changes will affect planning.

You could look at it that 60% of something is better than getting nothing.

It is worth noting that with the change in pensions being included for IHT, the UK now has one of the worst inheritance tax levels in the developed world**. So, it's possible that a right-leaning government would address that in the future. Historically, the left tends to like taxing wealth, and the right does not. We currently have a Government that likes taxing wealth, but that won't always be the case.

Part of you says you can only act on what you know now. However, history tells us that things change. So, you need to be careful not to take knee jerk reactions but just think it out a bit more.

In respect of this thread, if the beneficiaries were to draw the pension on a basic rate tax basis and not enter a higher rate, then the outcome is the same.

If the inherited fund could be used to allow earlier-than-state-pension-age retirement, then some personal allowance would be available to the beneficiary. So emptying the pension may not be a good idea in that scenario.

If IHT is going to be inevitable, then the rules allow the IHT bill to be directed from specific assets. Any IHT payment directed to the pension sees the IHT paid without any deduction for income tax. Using the pension for paying the IHT bill allows retention of other assets that can be passed on without needing to be sold to cover the IHT. That could be especially useful if there is property or physical assets that would otherwise need to be sold to pay the bill.

** AI tells me to soften my stance from saying "one of the worst". It suggests that whilst broadly correct, I change it to "The UK is toward the harsher end of the spectrum among advanced economies" as a softer statement. ;)

It also stated that it was before the 2027 changes. So, that is the current position, not the worsening one to come.

Lorian

@dunstonh how and where does someone opt where the IHT bill paid from? Will?

dunstonh

https://forums.moneysavingexpert.com/discussion/comment/81926578#Comment_81926578

The executor does it. Usually in conjunction with the beneficiaries to ensure fairness.

For example, if the pension beneficiaries and instructions do not match the Will, then it can create issues.

e.g. persons A&B get 50% of the pension each and person C gets the estate. If the IHT is directed to the pension, then A&B woudnt get their fair share and C would get more.

That can be handled with sensible beneficiaries agreeing a deed of variation or by making sure your EOW and Wills align.

MallyGirl

https://forums.moneysavingexpert.com/discussion/comment/81926758#Comment_81926758

this is an interesting concept that I don't remember reading about before.

Triumph13

I hadn't seen anything saying this was allowable either? It's areal game changer if all of IHT can be paid from the pension, rather than just the portion attributable to pension assets.

artyboy

https://forums.moneysavingexpert.com/discussion/comment/81926444#Comment_81926444

I think the next, most likely, "right leaning" government is in for a very rude awakening about a certain magic money tree that they believe exists to fund tax cuts.

Personally I'd be very surprised if the IHT rules softened much or at all in my lifetime. So both Mrs Arty and I will be drawing down to a level that keeps us just below £100k taxable income each, and the kids will get some surplus income as an early inheritance. I'm confident that we're not going to go short - not that it justifies that usurious tax levels we have right now.

dunstonh

https://forums.moneysavingexpert.com/discussion/comment/81926812#Comment_81926812

Nor have I. I haven't looked it up to confirm but it was something I heard recently. So, don't rely on it yet. I have a meeting to attend after tax year-end that covers topics like that, and the rep putting the meeting together suggested there would be scope to allocate the payment.

My understanding was that the executors and beneficiaries can use the pension to meet the IHT charge on the pension share of the estate, but they cannot use the pension as a general pot to pay the whole estate IHT bill. So, this is why I am attending that meeting.

Edit: I just phoned him up to check, and he denies ever saying that and says I misheard him and it was the other way around - i.e. paying IHT attributable to pensions from the free estate. So, that leaves me with egg on my face. Sorry for getting your hopes up unnecessarily.