Should I start to empty my SIPP

seacaitch

Thanks DRS1, since my wife/I are close to commencing SIPP drawdown, I've only just begun looking into the details and of how to efficiently do this without (temporarily) overpaying tax. And, having not been on a payroll for a very long time, we have little experience with the nuances of tax codes, so there's a learning curve for how to best organise the withdrawals, getting onto a cumulative tax code, the timing of withdrawals & so on!

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82145946#Comment_82145946

In my case, I took one taxable payment from my SIPP last tax year and it was then allocated a BR code ( my personal allowance is used up elsewhere) . So any amount I take it from is taxed at 20% regardless of the timing. Which makes things nice and simple.

DRS1

@seacaitch Like you I spent a long time outside PAYE so I can't claim to know much, if anything. But it seems the main catch is taking a large payment initially early in the tax year. This is because your personal allowance (assuming you have a 1257L code) gets spread evenly across the tax year. So you take a payment in April and you only have one month of allowance but you take it in March and you have the whole year.

One other thing to watch out for is the very first taxable pension payment you take. That has an emergency code applied to it. A proper tax code is then generated for later payments. The suggestion you see on here is to take a small payment first to generate the tax code and then a bigger one later. Doing that may have saved @hoofy from having to make a tax reclaim (but that probably depends on the timing of the payments as well).

And if you get a BR tax code like @Albermarle then watch out if you decide to take a large taxable amount out of the SIPP - eg £100k in one tax year. The tax deducted would not be enough and you'd have a tax bill to settle later.

Albermarle

And if you get a BR tax code like @Albermarle then watch out if you decide to take a large taxable amount out of the SIPP - eg £100k in one tax year. The tax deducted would not be enough and you'd have a tax bill to settle later.

That is true but if you stay in the 20% tax zone, having the BR code simplifies the tax on withdrawals.

seacaitch

https://forums.moneysavingexpert.com/discussion/comment/82147253#Comment_82147253

I've been reading around the subject over the past year, but haven't yet fully settled on the approach we'll take, but here is my thinking…

The current intention is that prior to State Pension receipt, we'll be drawing down SIPPs at the rate of (Personal Allowance / 0.75), ie. £16,760 for now, in order to fully utilise the Personal Allowance + a slice of PCLS.

Other potentially taxable income sources are rent from land, but that falls within the Property Allowance so not taxable, and savings interest income, but that falls within Personal Savings Allowance & starting rate for savings, hence the full Personal Allowance is available for calibrating SIPP withdrawals to. Additional spending power will come from ISA withdrawals in order to top-up SIPP withdrawals to "target income" levels.

We'll probably use Flexi Access Drawdown, to take between 1-4 SIPP withdrawals per tax year. All of the cash intending to be withdrawn for the year will already be sat in a money market fund or similar. So, it could all be withdrawn early in the tax year, and then a P55 submitted for any overpaid tax, or it could be taken out piecemeal.

If withdrawn piecemeal, we'd be looking to take whatever steps are needed* to be put onto cumulative tax codes, so that we can then make ad-hoc SIPP withdrawals throughout the year (1-4 withdrawals) that enable each payment to be made without any overpayment of tax (i.e paying no tax on withdrawals as they're made, since they'll all be within the cumulative Personal Allowance), in order to remove that additional reclaim admin or have to wait for a refund if refunded via PAYE.

Following this plan, and assuming current rules (LOL), one person's SIPP would be fully depleted prior to State Pension, while the other person's much larger SIPP would be drawn down sustainably across the holder's lifetime. This larger SIPP is not so large that the Lump Sum Allowance is a factor, so unless or until that changes eg. due to LSA being reduced or otherwise, it seems beneficial currently to draw the PCLS piecemeal (using FAD akin to UFPLS) in order to maximise the size of PCLS, rather than trying to withdraw it in an accelerated manner and shoving it into ISAs, say.

Does this all sounds reasonable? Any further input on the above welcomed.

NB The provider of both these SIPPs is ii currently.

* I need to better understand the mechanics of the technique of making a very small initial SIPP withdrawal in order to obtain a cumulative tax code.

I could have put all of this in another thread, but the above seems to overlap reasonably well with the OP's… ;)

DRS1

@seacaitch That does sound reasonable. My only thoughts

If you are drawing 16760 as FAD then one way which would certainly avoid over deduction of tax is to have 12 equal monthly instalments of the taxable pension. You would take the tax free bit upfront. If you take the taxable pension in 1 - 4 instalments during a tax year then the timing of those instalments will be important (especially making sure the last one is in March).

The thing about taking a small payment upfront to trigger a tax code is I think only applicable to the very first year you start to draw from each pension. I don't think you have to worry about it for subsequent tax years. I admit I have no idea how you make sure the tax code that gets issued is actually a cumulative code.

You talk about additional spending coming from ISAs. But you have some non ISA savings which seem to be using up the PSA and the starter rate for savings. I don't know if the interest uses up all £6k of those rates but my instinct would be to use those savings first before the ISAs (and to get as much as you can into an ISA). Once the state pension starts (assuming it is the full new state pension) that will eat away at the starter rate band even if you don't draw anything from the SIPP. Of course maybe the actual figures mean that doesn't matter.

seacaitch

Thanks, @DRS1

1. For the SIPP withdrawals, the intention would to size and time each one such that it fully utilises the cumulative personal allowance up to that point, eg. if split into 4 tranches of £4,190 each, make the withdrawals in Jun, Sep, Dec & Mar, so no tax would be withheld.
⇒ Can you, or anybody else familiar with PAYE, tell me at what specific day number each month the next 1/12 slice of personal allowance becomes available if on a cumulative tax code? Is it from the 6th of the month (as it must be for the first month of April), the 1st of the month for subsequent months, or something else entirely? This would be useful to know to ensure that SIPP payments are timed correctly to remain within the cumulative personal allowance and ensure payments are received tax-free.
⇒ If on a SIPP payroll with a cumulative tax code, would each month's payment from the SIPP automatically have that calendar month's slice of personal allowance available? When does ii run its SIPP payroll each month?
Again, I'll stressI've not been on PAYE or a payroll for decades, so have no recent experience of them!

2. That makes sense about the upfront small payment being a one-time-only step when making the first ever payment from a pension. I'll look into the cumulative code aspect further, since our withdrawal plan will depend in this being setup correctly. Can any else add something to this? I've seen various references to this here, but I haven't got the details clear yet…

3. The unsheltered assets - being various forms of cash & cash-like - arises from a former property sale and is the residual of what hasn't yet been placed into sheltered accounts; it's all earmarked for a home renovation project, so won't be around beyond the short/medium term, hence once it's gone our SIPP payments will be topped-up to our target incomes using the ISA withdrawals. In the meantime, and until the unsheltered stuff is all spent, we'll keep using annual allowances to shelter what we can.

Thanks again for your input!

DRS1

I assume a tax month starts on the 6th and finishes on the 5th of the next month. I don't know about payroll dates for ii but I imagine they could tell you what the date is for regular payments (or if you can specify a date) and the cut off date for processing of individual payments in a particular month. I know they did a page for the year end 25/6 saying when certain things had to happen to stay inside the tax year

Tax Year End deadlines 2025/26 - ii

That may or may not indicate when you have to do things in the normal course.