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SIPP Drawdown

Including Financial Independence and Retiring Early (FIRE)
Joe45
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SIPP Drawdown

#378142

Postby Joe45 » January 17th, 2021, 7:06 pm

I’ve opened correspondence with my SIPP provider (iWeb) with a view to commencing drawdown from April.

I want to take a regular gross monthly payment of £1,340 which, with the first 25% tax free, will just use up my personal income tax allowance. I would expect to have a bit of cash in my SIPP account available at all times to fund this.

I’ve had my Pensionwise meeting.

I don’t want a tax free lump sum, so I think what I need to do is crystallise the whole lot, then do flexi-access drawdown in the monthly amount I need.

I’m confident that many many retirees do exactly this. Can someone let me know if I am on track? What is the difference between crystallising the whole lot now, and crystallising in lumps of (say) £20,000 a year?

Many thanks.

swill453
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Re: SIPP Drawdown

#378147

Postby swill453 » January 17th, 2021, 7:32 pm

I take a UFPLS of £16,666 per year to use up my personal allowance. 25% tax free, leaving £12,500.

If you crystallize the whole lot, that means, by definition, you withdraw the 25% lump sum. Sounds like you don't want to do that.

Scott.

Joe45
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Re: SIPP Drawdown

#378148

Postby Joe45 » January 17th, 2021, 7:33 pm

On reflection I think I’ll need to use UFPLS and take one payment to cover the whole year.

Joe45
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Re: SIPP Drawdown

#378149

Postby Joe45 » January 17th, 2021, 7:34 pm

swill453 wrote:I take a UFPLS of £16,666 per year to use up my personal allowance. 25% tax free, leaving £12,500.

If you crystallize the whole lot, that means, by definition, you withdraw the 25% lump sum. Sounds like you don't want to do that.

Scott.

Thanks Scott. Our posts crossed!

swill453
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Re: SIPP Drawdown

#378151

Postby swill453 » January 17th, 2021, 7:37 pm

You can do monthly UFPLS withdrawals if you like, and if your provider supports it. It depends on charges, and your own convenience.

Scott.

Joe45
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Re: SIPP Drawdown

#378155

Postby Joe45 » January 17th, 2021, 7:47 pm

I had hoped my provider would offer this but alas, no.

I can live with taking the whole £16,666 in one go, and deal with the emergency tax code palaver.

Out of interest at what point in the tax year do you take your payment?

swill453
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Re: SIPP Drawdown

#378156

Postby swill453 » January 17th, 2021, 7:49 pm

The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

Joe45
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Re: SIPP Drawdown

#378158

Postby Joe45 » January 17th, 2021, 8:09 pm

swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

Thanks a lot Scott. That’s very reassuring. I really thought I was on top of things until I started communicating with my SIPP provider. I don’t know how the average retiree manages to understand it all!

xxd09
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Re: SIPP Drawdown

#378207

Postby xxd09 » January 18th, 2021, 12:17 am

Many years retired
I took the 25% tax free lump sum initially and lived off it for few years
Then took up to slightly under the 40% tax rate as a one-off cash withdrawal every year after 6th April
I keep what used to be a high interest Building Society account with 2 years income/living expenses in it at all times
This BS account is what I top up as required with my Pension withdrawals -acts as a buffer
Feed my current account from the BS account as required -one or twice a month
If extra tax charged by the Pension Provider the reclaim on line with R55 form -refunds arrive within the month
That’s it
xxd09
PS only use a Credit card only if possible for purchases-pay off every month-another buffer in the system

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Re: SIPP Drawdown

#378359

Postby Hariseldon58 » January 18th, 2021, 3:22 pm

Ao option to consider is to take the tax free lump sum and top up ISA's start a further sipp with a gross contribution of £3,600 a year. If done in March you easily get two tax years worth of allowances and perhaps there's a Mrs Joe ?

Joe45
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Re: SIPP Drawdown

#378639

Postby Joe45 » January 19th, 2021, 4:39 pm

Thanks all.

I’m in the fortunate position of having a good sized portfolio divided between me and Mrs 45 into 5 accounts: my SIPP, 2 ISAs and a trading account for the wife, plus a newly opened SIPP for her (she doesn’t earn). I’ve therefore taken advantage of all of the mainstream tax benefits available as far as I know.

In order not to threaten the LTA in the next decade so I plan to allocate most of my bond holdings to my SIPP. Growth assets are in Mrs 45’s trading account so there will some CGT to pay, particularly if Rishi reduces the annual allowance and equalises rates with income tax. However, I think this is a price worth paying.

My latest head scratcher is whether (as xxd09 seems to do) to take a bit more from my SIPP and pay some income tax at 20%. Whist this makes no difference to the LTA question, I suspect that future tax rates will be less favourable so perhaps I should take more now.

The obvious next question though is what to do with it! Nice problem to have I guess. Thankfully I have 2 grown-up daughters who will be happy to help.

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Re: SIPP Drawdown

#378750

Postby xxd09 » January 19th, 2021, 11:49 pm

Wealthy friends of mine who have excess cash having used up all the available wrappers tend to get their kids housed-deposits etc and then if more cash available -make the kids mortgage free
That achieved or as much of it as you can usually uses up most of the spare cash-lucky kids
xxd09

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Re: SIPP Drawdown

#378844

Postby DiviLuvva » January 20th, 2021, 11:09 am

swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

If you take it out in the last week of the tax year you'll pay next to little tax because you'll get all your Personal Allowance for the year on the basis of the cumulative code, provided it's not been allocated to other income.

(I'm with Sippdeal/Youinvest which usually pays within a week of my online request for a lump sum payment.)

swill453
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Re: SIPP Drawdown

#378848

Postby swill453 » January 20th, 2021, 11:16 am

DiviLuvva wrote:
swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

If you take it out in the last week of the tax year you'll pay next to little tax because you'll get all your Personal Allowance for the year on the basis of the cumulative code, provided it's not been allocated to other income.

I agree, but I prefer to get my hands on it 11.5 months earlier :-)

(Seriously, they way I let dividends accumulate, it suits me to take it at the start of the tax year. If I was to change now I'd lose income for a year.)

Scott.

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Re: SIPP Drawdown

#378863

Postby fisher » January 20th, 2021, 11:58 am

DiviLuvva wrote:
swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

If you take it out in the last week of the tax year you'll pay next to little tax because you'll get all your Personal Allowance for the year on the basis of the cumulative code, provided it's not been allocated to other income.

(I'm with Sippdeal/Youinvest which usually pays within a week of my online request for a lump sum payment.)


I'm intending to do exactly this with Youinvest in March this year. How early in March can you do it in order to get all the PA for that payment? I was thinking about requesting it around 10th March in order to ensure it is paid before the end of the tax year, but while still being clear it was the last payment in that tax year.

ursaminortaur
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Re: SIPP Drawdown

#379030

Postby ursaminortaur » January 20th, 2021, 6:20 pm

Joe45 wrote:I’ve opened correspondence with my SIPP provider (iWeb) with a view to commencing drawdown from April.

I want to take a regular gross monthly payment of £1,340 which, with the first 25% tax free, will just use up my personal income tax allowance. I would expect to have a bit of cash in my SIPP account available at all times to fund this.


This is known as UFPLS where the SIPP fund is left uncrystallised and only the amount withdrawn is crystallised with 25% of it being tax free and the other 75% being taxed at your marginal rate.

Joe45 wrote:I’ve had my Pensionwise meeting.

I don’t want a tax free lump sum, so I think what I need to do is crystallise the whole lot, then do flexi-access drawdown in the monthly amount I need.


For a DC pension such as a SIPP it pretty much always makes sense to take the 25% tax free lump sum either bit by bit using UFPLS or in one go by crystallising the pot. With DB pensions the 25% tax free lump sum is generally taken by giving up some annual pension in a process known as commutation. Unfortunately commutation rates (the amount of tax free lump you get for each £1 of annual income given up) are usually pretty terrible. Hence with a DB pension it may well be better to forgo the 25% tax free lump sum unless there are special circumstances such as a reduced life expectancy. Note. Older DB pensions may have a built-in tax free lump sum amount though it would often be less than 25% of the calculated value of the pension so in that case it would be ok to take that lump sum amount but not bother commuting any more to bring it up to the 25% level.

Joe45 wrote:I’m confident that many many retirees do exactly this. Can someone let me know if I am on track? What is the difference between crystallising the whole lot now, and crystallising in lumps of (say) £20,000 a year?

Many thanks.


Crystallising a pot in pieces is possible but you would need to check with your SIPP provider as not all offer it as an option - it is usually referred to as phased crystallisation. Some providers may also treat such a partially crystallised pot as though it were multiple pots and apply charges to each pot thus increasing your charges. This option was more popular before the introduction of UFPLS.

UFPLS is generally a good way to go unless you are getting close to the LTA limit. This is because each time you take a UFPLS drawdown an LTA test is carried out using up a percentage of your LTA limit and finally at age 75 a final LTA test is carried out against anything left uncrystallised.
This means that all the growth which occurs in the pot up until age 75 is captured by these tests. This if your pot would achieve enough growth to exceed the LTA limit by the time you are 75 it might be better to crystallise the pot instead. If instead of using UFPLS you crystallised the pot and used flexible drawdown then there would be a test when the pot was crystallised and then another at age 75. However crucially the test at age 75 would only look at growth since crystallisatioin which was still in the pot at age 75 and there are no LTA tests on amounts drawndown in the meantime. Thus you can avoid exceeding the LTA limit by crystallising early and then making sure that you have drawn down any growth which occurred before you reach the age of 75. How close to the LTA limit your pot would need to be for this to be a concern depends upon how many years you have to go before reaching 75 and the amount of growth that occurs - since the LTA limit is now rising with CPI this is less of a worry than it was but it is something to consider if your pot is already about £700,000 or so.

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Re: SIPP Drawdown

#379058

Postby Joe45 » January 20th, 2021, 7:11 pm

xxd09 wrote:Wealthy friends of mine who have excess cash having used up all the available wrappers tend to get their kids housed-deposits etc and then if more cash available -make the kids mortgage free
That achieved or as much of it as you can usually uses up most of the spare cash-lucky kids
xxd09

This is on the agenda. I’ve promised both of them a hefty slug next time they move house, which will probably be within 5 years.

Joe45
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Re: SIPP Drawdown

#379059

Postby Joe45 » January 20th, 2021, 7:13 pm

DiviLuvva wrote:
swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

If you take it out in the last week of the tax year you'll pay next to little tax because you'll get all your Personal Allowance for the year on the basis of the cumulative code, provided it's not been allocated to other income.

(I'm with Sippdeal/Youinvest which usually pays within a week of my online request for a lump sum payment.)

Neat idea, thanks. I think I’ll try this as I’m happy to await the year end.

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Re: SIPP Drawdown

#379063

Postby Joe45 » January 20th, 2021, 7:19 pm

ursaminortaur wrote:
Joe45 wrote:I’ve opened correspondence with my SIPP provider (iWeb) with a view to commencing drawdown from April.

I want to take a regular gross monthly payment of £1,340 which, with the first 25% tax free, will just use up my personal income tax allowance. I would expect to have a bit of cash in my SIPP account available at all times to fund this.


This is known as UFPLS where the SIPP fund is left uncrystallised and only the amount withdrawn is crystallised with 25% of it being tax free and the other 75% being taxed at your marginal rate.

Joe45 wrote:I’ve had my Pensionwise meeting.

I don’t want a tax free lump sum, so I think what I need to do is crystallise the whole lot, then do flexi-access drawdown in the monthly amount I need.


For a DC pension such as a SIPP it pretty much always makes sense to take the 25% tax free lump sum either bit by bit using UFPLS or in one go by crystallising the pot. With DB pensions the 25% tax free lump sum is generally taken by giving up some annual pension in a process known as commutation. Unfortunately commutation rates (the amount of tax free lump you get for each £1 of annual income given up) are usually pretty terrible. Hence with a DB pension it may well be better to forgo the 25% tax free lump sum unless there are special circumstances such as a reduced life expectancy. Note. Older DB pensions may have a built-in tax free lump sum amount though it would often be less than 25% of the calculated value of the pension so in that case it would be ok to take that lump sum amount but not bother commuting any more to bring it up to the 25% level.

Joe45 wrote:I’m confident that many many retirees do exactly this. Can someone let me know if I am on track? What is the difference between crystallising the whole lot now, and crystallising in lumps of (say) £20,000 a year?

Many thanks.


Crystallising a pot in pieces is possible but you would need to check with your SIPP provider as not all offer it as an option - it is usually referred to as phased crystallisation. Some providers may also treat such a partially crystallised pot as though it were multiple pots and apply charges to each pot thus increasing your charges. This option was more popular before the introduction of UFPLS.

UFPLS is generally a good way to go unless you are getting close to the LTA limit. This is because each time you take a UFPLS drawdown an LTA test is carried out using up a percentage of your LTA limit and finally at age 75 a final LTA test is carried out against anything left uncrystallised.
This means that all the growth which occurs in the pot up until age 75 is captured by these tests. This if your pot would achieve enough growth to exceed the LTA limit by the time you are 75 it might be better to crystallise the pot instead. If instead of using UFPLS you crystallised the pot and used flexible drawdown then there would be a test when the pot was crystallised and then another at age 75. However crucially the test at age 75 would only look at growth since crystallisatioin which was still in the pot at age 75 and there are no LTA tests on amounts drawndown in the meantime. Thus you can avoid exceeding the LTA limit by crystallising early and then making sure that you have drawn down any growth which occurred before you reach the age of 75. How close to the LTA limit your pot would need to be for this to be a concern depends upon how many years you have to go before reaching 75 and the amount of growth that occurs - since the LTA limit is now rising with CPI this is less of a worry than it was but it is something to consider if your pot is already about £700,000 or so.

Thank you for such a lengthy and detailed response. My SIPP is just north of £800k and I’m 59. Some crude modelling suggests it will challenge the LTA within a few years even though I’ve used it to hold most of my bond allocation. Having recently retired I have plenty of spare time to carry out research.

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Re: SIPP Drawdown

#379201

Postby DiviLuvva » January 21st, 2021, 8:38 am

fisher wrote:
DiviLuvva wrote:
swill453 wrote:The request usually goes in on 6th April! The excess tax is easily reclaimed by filling in an online P55.

Scott.

If you take it out in the last week of the tax year you'll pay next to little tax because you'll get all your Personal Allowance for the year on the basis of the cumulative code, provided it's not been allocated to other income.

(I'm with Sippdeal/Youinvest which usually pays within a week of my online request for a lump sum payment.)


I'm intending to do exactly this with Youinvest in March this year. How early in March can you do it in order to get all the PA for that payment? I was thinking about requesting it around 10th March in order to ensure it is paid before the end of the tax year, but while still being clear it was the last payment in that tax year.


You can't specify the date of "extraction" when you request a lump sum payment online.

As I said, however, Youinvest makes the payment within a week of the request. So if you make the online request on say Thursday 25th April 2021 you get the payment made the next week and so use essentially all your PA except for perhaps a weeks worth.

(They seem to use a cumulative Tax Code where you are assigned your PA on a cumulative weekly basis; so a request made in the last week of the tax year means most or all of your PA is available if not used already.)


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