SIPP Withdrawal Amount Options

Julezy101

https://forums.moneysavingexpert.com/discussion/comment/82169615#Comment_82169615

The whole idea of this is to transfer as much of my SIPP into my ISA before age 67. So 20k a year which obviously means no more tax to pay on withdrawals from the ISA. Based on my need of 20k per year I will have more than enough to live on. I could probably increase that. I've been tracking my expenses for years now and 20k is quite a bit more than I currently spend.

There is one issue which would completely mess this plan up as I am (and have been) considering moving abroad in the future (not sure when?) which will mean my ISA will be taxed and there wouldn't be any point in doing this!

Sorry, to answer your question

Option 1 leaves approx 380k - so 57k tax to pay to empty it.

Option 2 leaves approx 80k - so 12k tax to pay to empty it.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82169748#Comment_82169748

Still not sure you're following the point I'm making!

If both options entail making full use of your personal tax allowance every year then everything else in (the 75% taxable portion of) your SIPP will be taxed at 20%, regardless of when the withdrawals are made, assuming they're all calibrated to avoid going into higher rate tax.

Therefore the only way you could pay more tax with one option over the other is if the net amount withdrawn is also higher.

Of course, there could be other variables, such as what the money is invested in within the pension versus the ISA, but if these affect the outcome then they need to be stated and built into the modelling in order to make a valid like-for-like comparison…

DRS1

There is one issue which would completely mess this plan up as I am (and have been) considering moving abroad in the future (not sure when?) which will mean my ISA will be taxed and there wouldn't be any point in doing this!

But there might well be another reason for draining some of the SIPP before you go abroad. Wherever you go may well not recognise the tax free lump sum element of a UK pension.

Julezy101

@eskbanker

Here's the figures I've calculated (ignoring inflation)

	Option 1
Age		4% Growth		Withdrawal £	Leaves	Tax Paid
58	330000	13200	343200	16760	326440	0
59	326440	13058	339498	16760	322738	0
60	322738	12910	335647	6093	329554	0
61	329554	13182	342736	6093	336643	0
62	336643	13466	350109	6093	344016	0
63	344016	13761	357777	6093	351684	0
64	351684	14067	365751	6093	359658	0
65	359658	14386	374044	6093	367951	0
66	367951	14718	382669	6093	376576	0
67	376576	15063	391639	6093	385546	0
	Option 2
Age		4% Growth		Withdrawal £	Leaves	Tax Paid
58	330000	13200	343200	41000	302200	3500
59	302200	12088	314288	41000	273288	3500
60	273288	10932	284220	33000	251220	3500
61	251220	10049	261268	33000	228268	3500
62	228268	9131	237399	33000	204399	3500
63	204399	8176	212575	33000	179575	3500
64	179575	7183	186758	33000	153758	3500
65	153758	6150	159908	33000	126908	3500
66	126908	5076	131985	33000	98985	3500
67	98985	3959	102944	33000	69944	3500
						35000

QrizB

You're missing the columns that show how much money you have in your SSISA or GIA under each option, and how that increases by 4% pa just like your SIPP does.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82170081#Comment_82170081

My point is that this is a very selective representation and that by focusing solely on the tax deducted, you're ignoring the actual net return of money from the SIPP.

Taking your figures:

Option 1 withdraws £82,246 over those ten years, but leaves £385,546 in the SIPP, which, at an effective tax rate of 15% (75% taxable at 20%) on withdrawal, generates another £327,714 of net return, for a total of just under £410K.

Option 2 withdraws a net £311K (£346K gross less £35K tax), and the £69,944 residual balance generates £59,452 net for a total return of just over £370K.

This is still only part of the story though, as the different phasings will result in different growth in the ISA, which (without crunching the numbers) would probably level the two options up again by the time the SIPP has been fully depleted - essentially the two options are 'tax then grow' versus 'grow then tax', and, if both the tax rates and the growth rates are the same across the two options, should achieve the same outcome by virtue of multiplication and division being associative…

Triumph13

Or to spell it out even more simply:

£10k left in pension grows say 10% to £11k. You then withdraw it paying 15% tax of £1,650 leaving £9,350 to put in your ISA.

£10k withdrawn now with 15% tax is £8,500 to put in your ISA. Leave it to grow by the same 10% and you have exactly the same £9,350 in your ISA.

The only way it can make a difference, assuming you invest in the same things, is if tax rates change over time.

Drawing late is a bet that taxes stay the same or go down. Drawing early is a bet that taxes stay the same or go up. I know which way I'd lean.

If you are planning to move abroad though, then you need to thoroughly investigate the relative tax treatments of ISA and SIPP. Something that probably warrants professional advice.

Shadyocuk

how did you get to your tax paid figures in option 2 ??

Should it not be 3636 for years 1 and 2 and then 4036 for years 3 onwards, but it may be worse as I would assume your DB will increase each year and at present the £12,570 is not set to rise till April 2031, though that could change.

Julezy101

https://forums.moneysavingexpert.com/discussion/comment/82170152#Comment_82170152

Yes I've ignored that (for now) as my question is whether there is a difference in tax paid for different withdrawal amounts from my SIPP before age 67.

Julezy101

https://forums.moneysavingexpert.com/discussion/comment/82170321#Comment_82170321

For years 1 and 2 it should be 40,289 withdrawal - 25% tax free leaves 30,217. Take off PA leaves 17,647. 20% tax on that is £3,529

Yes I have forgotten about my DB pension increasing each year though