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SIPP Tax Charge at age 75

morestout
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SIPP Tax Charge at age 75

#447268

Postby morestout » October 2nd, 2021, 4:09 pm

Hi,
I am 68 and based on the numbers today and my understanding I will face a 55% tax charge at age 75 on the excess that my SIPP has over the limit at that time.
I presume one answer is to increase my current level of drawdown even if it might take me partially into the higher tax bracket. Is it that simple or, ignoring the vagaries of future investment returns, are there complications with regard to limits, timing etc.
thanks

TedSwippet
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Re: SIPP Tax Charge at age 75

#447281

Postby TedSwippet » October 2nd, 2021, 4:41 pm

morestout wrote: I am 68 and based on the numbers today and my understanding I will face a 55% tax charge at age 75 on the excess that my SIPP has over the limit at that time.
I presume one answer is to increase my current level of drawdown even if it might take me partially into the higher tax bracket. Is it that simple or, ignoring the vagaries of future investment returns, are there complications with regard to limits, timing etc.

It can indeed actually be that simple. A bit more in this article:

Bernadette Lewis: Drawdown and the second lifetime allowance test - Retirement Planner
These rules encourage drawdown members to take income. Taking withdrawals of at least the equivalent of any growth means there will be no increase in value – and no LTA charge at age 75.

As there are no limits on drawdown income, a charge at the second LTA test is largely optional. Where a drawdown member’s total funds are likely to exceed the LTA, they can either take withdrawals subject to income tax, or face the 25% LTA charge at age 75 plus income tax on later withdrawals.

The former is usually more favourable. As withdrawing a large lump sum just before age 75 could trigger high rates of income tax, the key is to take income over the years in as tax-efficient a way as possible. Inheritance tax (IHT) planning considerations may, however, mean paying any charge at age 75 is preferable to taking income.

ursaminortaur
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Re: SIPP Tax Charge at age 75

#447288

Postby ursaminortaur » October 2nd, 2021, 5:19 pm

TedSwippet wrote:
morestout wrote: I am 68 and based on the numbers today and my understanding I will face a 55% tax charge at age 75 on the excess that my SIPP has over the limit at that time.
I presume one answer is to increase my current level of drawdown even if it might take me partially into the higher tax bracket. Is it that simple or, ignoring the vagaries of future investment returns, are there complications with regard to limits, timing etc.

It can indeed actually be that simple. A bit more in this article:

Bernadette Lewis: Drawdown and the second lifetime allowance test - Retirement Planner
These rules encourage drawdown members to take income. Taking withdrawals of at least the equivalent of any growth means there will be no increase in value – and no LTA charge at age 75.

As there are no limits on drawdown income, a charge at the second LTA test is largely optional. Where a drawdown member’s total funds are likely to exceed the LTA, they can either take withdrawals subject to income tax, or face the 25% LTA charge at age 75 plus income tax on later withdrawals.

The former is usually more favourable. As withdrawing a large lump sum just before age 75 could trigger high rates of income tax, the key is to take income over the years in as tax-efficient a way as possible. Inheritance tax (IHT) planning considerations may, however, mean paying any charge at age 75 is preferable to taking income.


Just make sure you are using flexible drawdown ie that you crystallised your SIPP. If you use UFPLS drawdown then every drawdown results in an LTA test and the final test at age 75 on whatever remains uncrystallised means that all of the growth both drawn out via UFPLS and remaining in the uncrystallised pot is captured in those LTA tests. Whereas if you have crystallised the pot then drawdowns do not result in further LTA tests so you can safely withdraw the growth without it increasing the amount of LTA you have used and since the final age 75 test on crystallised pots is just on the growth remaining in the pot it can be rendered toothless.

TUK020
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Re: SIPP Tax Charge at age 75

#447398

Postby TUK020 » October 3rd, 2021, 8:58 am

morestout wrote:Hi,
I am 68 and based on the numbers today and my understanding I will face a 55% tax charge at age 75 on the excess that my SIPP has over the limit at that time.
I presume one answer is to increase my current level of drawdown even if it might take me partially into the higher tax bracket. Is it that simple or, ignoring the vagaries of future investment returns, are there complications with regard to limits, timing etc.
thanks

At the very least you could consider drawing down the max amount in the Basic Rate band, even if you do not need the income. Any surplus can then be put into an ISA.

morestout
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Re: SIPP Tax Charge at age 75

#449129

Postby morestout » October 10th, 2021, 3:37 pm

Thank you to those who have responded.
Unless I end up in a care home, it is unlikely that I will need to more substantially draw on my SIPP where I currently take out enough to keep me as a standard rate tax payer. Baring a market collapse I may well therefore end up over the LTA at age 75 and remain so until my death. In which case, having paid the 25% at age 75, does the value of the SIPP at my death pass in line with my instructions (ie to my children) without any further taxes or charges.

ursaminortaur
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Re: SIPP Tax Charge at age 75

#449146

Postby ursaminortaur » October 10th, 2021, 5:46 pm

morestout wrote:Thank you to those who have responded.
Unless I end up in a care home, it is unlikely that I will need to more substantially draw on my SIPP where I currently take out enough to keep me as a standard rate tax payer. Baring a market collapse I may well therefore end up over the LTA at age 75 and remain so until my death. In which case, having paid the 25% at age 75, does the value of the SIPP at my death pass in line with my instructions (ie to my children) without any further taxes or charges.


There are no more LTA test or charges after age 75. However if you die after 75 then your beneficiaries will be subject to tax at their marginal rate when they withdraw money from their inherited pension whereas if you had died before age 75 they would have had tax free access.


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