What to do with SIPP in retirement?

[Darka]

Longish post..

My wife is approaching retirement in 2.5 years and I am struggling with the decision of what to do with her SIPP; and eventually my own.
The SIPP's both form part of our 'retirement income' portfolio, including investments in a HYP strategy some and Investment Trusts.

I think my better options are:

1) Take the 25% tax free up front, then take the rest as yearly payments (to reduce charges) with some of that still being tax free as we'll mostly be under the personal allowance (most investments are in ISA's).

The idea would be to move the money from the SIPP to ISA's as soon as possible to empty the SIPP, minimising tax.

2) Use UFPLS and take annual payments to stay under the personal allowance, with 25% of each payment tax free - again this would be to empty the SIPP and move the money over time to ISA's, to be reinvested to produce income.

1+ 2 are very similar but I think 2 would produce slightly more dividend income and less payable tax.

or, 3) Withdraw (annually) only the natural yield using UFPLS, leaving both SIPP's alone otherwise and use the resultant income to live on along with income from ISAs and a small DB pension that she has.

We have no children or anyone to leave the money to apart from the odd charity should any money be left over after we are both dead.

I think the problem comes down that I can't decide on whether to live off only the natural income until we die, leaving what could be lots of capital.... or do some kind of controlled spending of capital as well as income so that we don't leave too much behind - obviously we can't predict when we'll die so the aim would be to leave some capital/income in case we live longer than expected but not to die leaving lots behind.

Whatever I do, it must be as simple as possible so that in the event of me dying first, it would be easy (preferably automatic) so that my wife could deal with it (she has no interest in finance).

I was wondering what those of you that have retired have done, or for those yet to retire what are you planning.

regards,
Darka

[ursaminortaur]

Longish post..

My wife is approaching retirement in 2.5 years and I am struggling with the decision of what to do with her SIPP; and eventually my own.
The SIPP's both form part of our 'retirement income' portfolio, including investments in a HYP strategy some and Investment Trusts.

I think my better options are:

1) Take the 25% tax free up front, then take the rest as yearly payments (to reduce charges) with some of that still being tax free as we'll mostly be under the personal allowance (most investments are in ISA's).

The idea would be to move the money from the SIPP to ISA's as soon as possible to empty the SIPP, minimising tax.

2) Use UFPLS and take annual payments to stay under the personal allowance, with 25% of each payment tax free - again this would be to empty the SIPP and move the money over time to ISA's, to be reinvested to produce income.

1+ 2 are very similar but I think 2 would produce slightly more dividend income and less payable tax.

or, 3) Withdraw (annually) only the natural yield using UFPLS, leaving both SIPP's alone otherwise and use the resultant income to live on along with income from ISAs and a small DB pension that she has.

We have no children or anyone to leave the money to apart from the odd charity should any money be left over after we are both dead.

I think the problem comes down that I can't decide on whether to live off only the natural income until we die, leaving what could be lots of capital.... or do some kind of controlled spending of capital as well as income so that we don't leave too much behind - obviously we can't predict when we'll die so the aim would be to leave some capital/income in case we live longer than expected but not to die leaving lots behind.

Whatever I do, it must be as simple as possible so that in the event of me dying first, it would be easy (preferably automatic) so that my wife could deal with it (she has no interest in finance).

I was wondering what those of you that have retired have done, or for those yet to retire what are you planning.

regards,
Darka

Flexi-access drawdown (ie taking the 25% tax free lump sum) is better if

1) You have an immediate need for the 25% tax free lump sum
or
2) Your pensions are fairly close to the LTA limit. This is because once crystallised you can drawdown the growth occurring over the years without it affecting how much of the LTA you have used up. In contrast with UFPLS each time you take a UFPLS payment a new LTA calculation is done and hence ongoing growth is counted against your LTA limit and at 75 anything still unused is also tested against the LTA limit capturing any growth which occurred which hasn't been drawn down. For someone entering drawdown at 55 with a reasonable amount of growth then this might affect them if their pension pot(s) comprised around about three-quarters of the LTA. (When the LTA was £1 million I did a calculatuion suggesting anything above £600,000 was at risk but the LTA is now supposed to increase with CPI so that should increase the amount by a bit)
or
3) You are worried that a future government will remove or restrict the tax free lump sum. There are often scare stories about this but it hasn't happened so far.


If the above don't apply then UFPLS may be slightly better in that some of the growth occurring over the years will be able to be extracted tax free.

As to your wife not wanting to deal with investments (or even yourself not wanting to or not being able to as you get older) - One advantage of the SIPP, since you have no overriding need to provide for beneficiaries, is that anything left in them provided it was still a reasonable amount could be used to buy an annuity at some point. Interest rates are likely to return to the higher rates we saw in the past within the next decade if not sooner and annuity rates will increase along with them. Also rates will be higher the older you are.

(Of course cash outside of a tax wrapper could also be used to buy an annuity if you wished but it probably wouldn't be a good idea to do that with money or investments protected in an ISA).

[JohnB]

ISA's could have tax raids as well as SIPPs. On the "bit of everything" principle you could run down the SIPP until its annuity-like return (natural yield and conservative return of capital) matched the difference between your personal allowances and state pensions, so it was tax free. If the difference was £5k, that would £120kish. Such small SIPP sums aren't likely to be raided.

[Darka]

Thank you, some good advice and will have a think about it.

I like the running it down to the point where any income would then fall within the personal allowance.

Also, the annuity option might be useful one day.

[Chrysalis]

A few questions, which you have likely already considered:
how much money do you actually need to take from the SIPPs?
Does that look like a sustainable percentage?
how important is tax minimisation to you?
do you have any guaranteed income sources? (state pension, DB pension)

There are so many permutations there is no simple answer.
Things to consider:
-annuitizing enough to provide a guaranteed income floor. Then you can be fairly relaxed about withdrawals from your SIPPs.
-writing an actual plan in consultation with your wife about what she should do if she is left by herself. If she truly has no interest in finance, and you have plenty of resources and no heirs, then an annuity would be a pretty straightforward option.