SIPPs, AVCs and pension lump sum options

stanspa0 · 14 June 2018 at 2:36PM

I’m 52 and currently considering investing some cash into a SIPP.

I’m currently contributing to a company pension scheme which will pay a defined benefit (i.e. a percentage of final salary) in retirement. I also contribute to an AVC (Additional Voluntary Contribution) scheme arranged by the company which will build up to provide a lump sum at the point I retire. I estimate that the AVC value will be less than 25% of my pension pot (i.e. AVCs + company pension fund) and therefore should be tax-free at the point I retire.

If I choose to invest some of my savings into a SIPP, would I be able to cash it in before I take my company pension and if so would it be treated in isolation from my company pension pot? i.e. would I only be allowed to take 25% of it tax-free? Alternatively, if I took it at the same time as I retired from work, would it be considered part of my pension pot, meaning it could be “added to” my AVCs as part of my 25% tax-free allowance?

Any advice would be greatly appreciated.

saucer · 14 June 2018 at 2:51PM

I am sure other people much more expert than me will be along soon, but in the meantime...

You can take your SIPP at any point you wish after 55. The way the 25% works, as I understand it, is that you can take all of you SIPP, or any proportion of it, and 25% of that amount will be tax free. The rest of the amount withdrawn is subject to tax at your marginal rate. See https://sippclub.com/sipp-fund/
Also see https://www.youinvest.co.uk/pensions-and-retirement/accessing-your-pension/tax-free-cash

Your work-based pension would be considered separately, at least as far as I understand it, and whether the AVC could be taken tax-free as part of the overall 25% pension value will depend on your pension scheme rules. My wife's LGPS AVC is treated this way, but I think it is unusual.

stanspa0 · 14 June 2018 at 2:59PM

Thanks for the quick reply. The AVCs are included in the overall pension value and so can be taken free of tax (subject to them being less than 25%); that's one thing I am sure about! Thanks for the links; I'll have a thorough read through to make sure my understanding is correct before I commit myself to anything I might later regret. Thanks again, much appreciated.

Brynsam · 14 June 2018 at 4:43PM

stanspa0 wrote: »

If I choose to invest some of my savings into a SIPP, would I be able to cash it in before I take my company pension and if so would it be treated in isolation from my company pension pot? i.e. would I only be allowed to take 25% of it tax-free? Alternatively, if I took it at the same time as I retired from work, would it be considered part of my pension pot, meaning it could be “added to” my AVCs as part of my 25% tax-free allowance?

The previous answer did a very good job, but just to confirm...yes, each scheme would be considered separately in terms of tax free lump sum. A defined benefit (DB) scheme doesn't work quite the same way as a defined contribution (DC) scheme such as a SIPP when it comes to lump sums.

You can normally take up to 25% of your DC 'pot' as tax free cash. The rules of your DB scheme will dictate how much tax free cash you can take, up to limits set by HMRC. It would be worth checking with the administrators of your occupational scheme (the DB one!) what that limit is and whether there may be scope to take any further tax free cash, if that's what you want to do, in addition to your AVCs.

stanspa0 · 14 June 2018 at 5:50PM

That's very clear; thank you.

stanspa0 · 14 June 2018 at 6:44PM

As a follow-up to this, do funds accumulating in a SIPP count towards your lifetime allowance?

MK62 · 14 June 2018 at 6:53PM

Yes.
However the LTA isn't as straightforward as it might first appear, so make sure you understand it if you suspect it may be relevant to you....in fact, just make sure you understand it, as it might end up being an issue even if you suspect it won't at the moment.

stanspa0 · 14 June 2018 at 7:09PM

Thanks for the swift response.

I thought that might be the case. It's not an issue for me at the moment, but may be in a few years if I started piling cash into SIPPs. If I find I start sailing a bit close to the wind, it may influence my decision on the possibility of retiring early.
That said, if the LTA continues to increase at CPI every year, I'll have to go some for it to be a major issue! It'd be a nice problem to have though!

LHW99 · 14 June 2018 at 9:39PM

The other thing to remember is that if you take more than the 25% from a DC scheme i.e. some of the taxable cash, then it reduces the anount you can add in future years
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/

stanspa0 · 15 June 2018 at 9:04AM

That's useful to know, thanks. In my particular case, the intention is that I'd only be taking a lump sum at the point I retire, so I don't think I'm likely to be affected.

SIPPs, AVCs and pension lump sum options

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