Taking (further) money from SIPP ... or not

[Steveam]

Hi All,

I'm not sure how this works and would appreciate a steer.

I'll use round figures to illustrate.

I'm aged 67.

My SIPP grew to £1.5 million and I have fixed protection to this level. I took 25% PCLS of £375,000 leaving £1,125,000 in the SIPP. The SIPP has now grown by £50,000 to £1,175,000 (and is likely to grow about £50,000 per year if I leave it and re-invest the dividends).

I'm a higher rate (40%) tax payer and likely to remain so.

Would it be best to take money from the SIPP each year or just leave it there to accumulate? Why? What other considerations should I have?

Best wishes and many thanks in advance.

[Dod101]

That is chunky money by any standard and of course it probably falls outside of the IHT net. Do you know if it does because if so it is a valuable tool in IHT planning? Depends if the managers/trustees have full discretion; I think they usually do. I forget the rules but it would be well worth your while to check on these before doing anything especially if you do not need the money. I do not think there is a definitive answer but taking some advice I think from someone you trust on a fee paying basis would be sensible I think.

And so much depends on your own circumstances.

Dod

[DrBunsenHoneydew]

There will be an issue of the Penalty tax on exceeding the LTA (albeit protected in your case) if at age 75 the un-drawn SIPP balance exceeds the starting amount (i.e. 75% of your LTA). If you don't keep it trimmed to that limit by periodic withdrawals, you'll either get hit with a 25% surcharge on the growth at age 75 or, if you try to withdraw a large wedge the year before you're 75, you'll pay 45% or 60% marginal income tax on some of the excess if it carries your total income above £100k in that fiscal year.

[TUK020]

Inheritance tax, Current tax rate, ISA limits, and other tax free investment avenues (kids ISAs etc).

I suspect that you may want to treat your SIPP income as a 'balancing item' to determine your overall tax rate.
If you are a higher rate payer, and likely to remain so, then you probably want to get max out from your SIPP to stuff into your ISA, while keeping below the next effective tax band (marginal rate of 62% at 100k-123k, as allowances are withdrawn).
So at the end of each year, take from you SIPP the amount to bring your taxable earnings up to 100k. Stuff any surplus into an ISA/kids ISAs etc.

If you are earning more than 100k, and are already into LTA territory, you might be wanting to ask how you can move to a 4 day week.

Moderator Message:
RS: Political point removed

[Steveam]

Thanks to all three of you.

a) The "penalty" tax. If I understand this correctly withdrawing the excess over the LTA (minus the 25%) incurs a tax on the excess of 25% if converted into an income stream or 55% if taken as a lump sum. Is the income stream just added to my taxable income and chargeable to income tax? Is the lump sum taxed further after the 55% is taken? Have I completely misunderstood this?

b) The SIPP is held in "trust" so is outside my estate but I don't have dependants or beneficiaries who need the money so most will go to charity/good causes anyway. Inheritance tax is, therefore, not a major consideration.

c) The "balancing item" approach seems sensible but I'll have to incur the 55% charge on the amount above the LTA (minus the 25%) which seems onerous. I fully fund my ISA already.

Once again, thanks to all three respondents and, as I get a clearer understanding I will then consider taking professional advice. (But my experience of professionals in the finance industry has been very poor).

[DrBunsenHoneydew]

a) Yes - The charge is 55% where any excess is taken as a lump sum or 25% on any excess that is retained within the drawdown plan. The drawdown funds will also be subject to income tax as and when they are taken in the normal way.