Using my SIPP for an annuity

davethebb

I am 59 and edging upto retirement. I have a large SIPP (£1.05m) and also an ISA (£450k) and are considering using my SIPP (or part of it) as an annuity thus effectively de-risking. I would like to understand how using my SIPP for the annuity would work from a tax point of view e.g. what happens with the TFLS and will I be taxed on all of the annuity income or would 25% of the annuity be tax free. Are there any tax advantages in using a SIPP to buy an annuity?

Albermarle

Most annuities are bought with pension pots, so what you are thinking about is totally normal.

You would define how much of your uncrystallised pot you wanted to use for an annuity. Then choose your type of annuity ( level or inflation linked for example) and shop around for the best quotes.

The money would transfer to your chosen provider and they would give you a 25% tax free lump sum and use the other 75% to provide a taxable income.

Buy an annuity for a guaranteed pension income | MoneyHelper

mrklaw

and therefore all income from the annuity would be taxable income - your PCLS is taken off first so you don’t get 25% of the income tax free as well

question : can the PCLS stay inside the SIPP or is it paid out to you immediately? I could imagine with a large portion eg if OP buys an annuity with 600k, then 150k of tax free cash can be unwieldy to suddenly have outside of a tax advantaged wrapper

af1963

You can't just leave the TFC inside the SIPP and take it later.

 if OP buys an annuity with 600k, then 150k of tax free cash can be unwieldy to suddenly have outside of a tax advantaged wrapper

Low yield bonds, held to maturity, can help to deal with that. The coupon payments are taxable but the capital gain isn't, so you can pick bonds where the bulk of the return will come from capital gains.

If necessary you can then gradually move into ISAs over time.

You could also use the TFC to buy another annuity, this time a 'purchased annuiity', which is partly treated as a return of the capital used to buy it, and therefore only partially liable for income tax. Example from one company here: https://www.canadalife.co.uk/retirement/purchased-life-annuity/product-details/

DRS1

When you get an annuity quote it is possible to vary the amount of the TFLS from the standard 25% but I think if you take only say 10% then you can't later take the "missing" 15% as TFLS. And you can't say well that 15% is really in the annuity so you shouldn't pay income tax on the whole annuity - the annuity is still 100% taxable income.

It would be normal to take the full 25% (unless of course you are bumping into the Lump Sum Allowance - as the OP might with a bit more investment return)

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82017732#Comment_82017732

I like this tactic. If you can’t shelter it quickly you can throw it into even an aggressive low coupon gilt ladder to generate as much as you can safely push into ISAs each year (potentially 40k)

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82017732#Comment_82017732

You could also use the TFC to buy another annuity, this time a 'purchased annuiity', which is partly treated as a return of the capital used to buy it, and therefore only partially liable for income tax. Example from one company here: https://www.canadalife.co.uk/retirement/purchased-life-annuity/product-details/

That is correct, and of course you can buy one of these with any non pension money you have. However Purchased Life Annuities are very much a niche product, which you can only buy via an IFA - AFAIK.

Also the rates are poorer than with 'normal' annuities, I think just down to the fact there is much less competition/companies offering them.

davethebb

Thank you everyone. That has certainly clarified the tax liabilities with some options to limit the tax burden and given me some more options to consider.

ali_bear

Forgive me if you have already planned for this but if you are considering an annuity purchase in the next year or two you may be wise to move that amount into a low-risk fund within your pension, Just to protect against markets going south before then.

I had a similar DC fund and have used about 1/3 of it to buy an annuity designed to cover my regular living costs for rest of life (in combination with state pension). I put some of the TFC into low-yield index-linked gilts. The remaining uncrystallised DC fund is there for drawdown and remains largely invested in global equities.

davethebb

Ali Bear, Thank you. This is one of the options I am thinking off e.g. to have all my living costs covered by my state pension, a section 32 pension and then use part of my SIPP and buy an annuity. My immediate plan was to use my ISA as the main part of my income and top it up with my SIPP (below the tax threshold) until my state pension kicks in and then look at buying and annuity then as this seems to be tax efficient.

ali_bear

The only reason i could think of for delaying the annuity purchase, apart from markets and annuity rates, is whether I could have gone back into paid work. But that is all behind me now!

You'll be wanting to make use of the tax-free and 20% tax bands every year by taking taxable pension income. Otherwise you may end up paying some income tax at 40%. But you also have lots in your ISA fund to live off.