SIPP drawdown or use savings?

[Hardgrafter]

As my final salary pension plus state pension is about the same as my expenditure, what are the considerations I should be thinking of for large one off payments - to use savings or drawdown my SIPP (UFPLS)? My savings and SIPP are about the same value, and I am 68 yrs.

It appears to me that UFPLS would be income, so attracting tax at 20% or potentially 40% if large enough. As I understand it, before age75 the uncrystallised SIPP would be paid tax free to beneficiaries. After 75, taxed at 55%.
Expenditure out of savings & investments are effectively tax free.

[Alaric]

Expenditure out of savings & investments are effectively tax free.

If you hold assets outside ISAs in equity type assets, Capital Gains Tax comes into consideration as does utilising the annual CGT allowance.

Under similar circumstances I took the view that a compulsory return of capital by way of a takeover was an opportunity to finance a replacement car.

[TUK020]

I am not at your position yet, but trying to plan for it.
A key consideration is to manage your tax rate. One possible strategy is to hoover out the max out of your SIPP each year while still remaining below the 40% tax rate. Any surplus gets stuffed into an ISA. Then, when you need to make a lump payment, you can do this as a tax free transaction from the accumulated funds within the ISA.

[Dod101]

Each year in March (when I have a good idea of my tax rate for the year) I extract the income generated from my SIPP and usually some capital but keep within the basic tax rate band. Depending on my situation, I then use it to fund my ISA for the next year or simply use it as a 'buffer' against unforeseen expenses for the following year. I see no point in just leaving the SIPP to accumulate for the sake of my heirs at a later stage.

The SIPP is usually outside of your estate for IHT though and that is helpful.

Dod

[swill453]

I don't know how large your SIPP is, but if it's large enough you could just use the 25% tax-free element for your purchases. Crystallise it in "chunks" as and when you need the cash.

The rest can remain in the SIPP for the future. UFPLS drawdown has its place, but could be prematurely adding to your tax bill.

Scott.

[Wmnr]

After 75, taxed at 55%.

This is no longer how it works. You can now leave your sipp to your kids and they pay income tax on what they take out of it. So you could minimise your Iht bill by spending your ISA first.

Of course, the rules may change

[Dod101]

I have been trying without any great success to run down my SIPP and yet keeping within the basic rate of tax on income, simply because the rules have changed so often. It is really very difficult to use a SIPP as a long term planning vehicle. I have a friend whose husband died recently and she is apparently able to draw on his SIPP tax free simply because he died before the age of 75. None of the rules seem to make a lot of sense.

Dod

[Chrysalis]

The SIPP rules on inheritance are very favourable. And of course the SIPP grows tax free.
I can't see why you wouldn't use taxable savings in preference to a SIPP - hard to think of a set of circumstances where using the SIPP would be better, unless you are facing lifetime allowance issues and want to start draining the SIPP before it reaches that.
Check out information at Pensionwise to understand the various ways to access the SIPP and the tax implications.

[Chrysalis]

A few further points:
As pointed out above, the beneficiaries of what is left in your SIPP pay tax at their marginal income tax rate if you die after age 75, but have a range of choices about what they can do with the funds (subject to providers restrictions).
The UFPLS is 25% tax free, 75% tax at your marginal rate.
As also pointed out, another option is to go into drawdown in phases, just taking the tax free portion each time and no 'income'.
Questions: do you have a spouse or other dependents? what's your IHT situation? And what form are your 'savings' in? - cash, taxable investments, ISAs? As others have pointed out, worth trying to get as much into ISAs each year as possible.

[goRt]

Whatever you decide to do ALWAYS keep your eye on the LTA test at age 75 - a very nasty special tax charge of 55% for not depleting your pensions (SIPP really) fast enough.