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SIPP Drawdown

Including Financial Independence and Retiring Early (FIRE)
r21442
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Re: SIPP Drawdown

#387326

Postby r21442 » February 16th, 2021, 11:39 pm

Ursa, OK, I've re-read it all multiple times and I think I understand better now but my head is still bursting.

One question that is still not clear, in my case of having FP16 what is the LTA I will be tested at when 75 - the £1.25m or the prevalent rate at the time or the higher of the two?

We wanted choice, we have choice, possibly too much choice? I'm a smart guy, have worked with numbers and investment all my life and am struggling. Something as fundamental as a pension ought not to be so complex.

genou
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Re: SIPP Drawdown

#387330

Postby genou » February 17th, 2021, 12:16 am

r21442 wrote:One question that is still not clear, in my case of having FP16 what is the LTA I will be tested at when 75 - the £1.25m or the prevalent rate at the time or the higher of the two?


The higher of the two. Which will likely be the rate at the time. In this case, inflation is your friend.

ursaminortaur
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Re: SIPP Drawdown

#387436

Postby ursaminortaur » February 17th, 2021, 11:59 am

genou wrote:
r21442 wrote:One question that is still not clear, in my case of having FP16 what is the LTA I will be tested at when 75 - the £1.25m or the prevalent rate at the time or the higher of the two?


The higher of the two. Which will likely be the rate at the time. In this case, inflation is your friend.


Yes from 2017 the LTA limit has been increasing with CPI. However there is, of course, no guarantee that a future government will not scrap that increase or as they have in the past just cut the LTA limit. Previous cuts happened under the Coalition and Conservative governments so it isn't just a future Labour government who might make such a cut.

r21442
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Re: SIPP Drawdown

#387569

Postby r21442 » February 17th, 2021, 8:42 pm

genou wrote:The higher of the two. Which will likely be the rate at the time. In this case, inflation is your friend.


Not so sure? I'll then need growth to maintain income and my DB pension has a price index cap of 5% iirc? Not sure I can trust our gov with debt to inflate away to keep it below that? And in any case who'd bet on the same pensions regime being in place in 20 years in any case? Anyway, don't start me on politics :lol:

hiriskpaul
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Re: SIPP Drawdown

#387603

Postby hiriskpaul » February 18th, 2021, 1:10 am

ursaminortaur wrote:
r21442 wrote:Genou, I don't share your certainty that my wife will breach her LTA by next year retirement? Currently £958k pot and only putting in £10kpa. No idea where equities are heading or our fund selection but you are correct in that there's decent chance it might be close? You are rightly saying taxed growth is better than no growth. Ursa saying that no growth would avoid the 75 LTA issue I guess with the implicit assumption that low growth investments will also be lower risk and so maybe make life less financially stressful? Guess I'll have a while to ponder that one!


No, I'm definitely NOT saying go for no growth or low growth investments. What I am saying is that you can avoid breaching the LTA limit at age 75 by using drawdown to remove the growth from the crystallised pot before age 75. You will have to pay tax on the larger drawdown withdrawals but that will be less than the LTA excess charge you would have if you left the money in the pension pot and breached the LTA limit.

What you do with the extra money this will give you outside the pension is upto you. However if you want to minimise your IHT estate then one option since pension payments are income would be to regularly give it to your kids as gifts out of surplus income during your lifetime.

Not necessarily!

Paying an LTA charge of 25% and subsequently drawing down at 20% income tax gives an identical result to drawing down at 40% income tax and not paying the LTA charge. But the calculations may favour paying the LTA once inheritance tax is taken into consideration. eg Paying a 25% LTA charge, leaving the SIPP to a beneficiary and the beneficiary drawing at 20% means 60% in the hands of the beneficiary. Drawing at 40%, not paying the LTA, paying 40% IHT leaves just 36% in the hands of the beneficiary. IOW, SIPPs can be very effective vehicles for passing on assets to beneficiaries, even when the LTA is paid. As r21442 is intending to leave something to his offspring and will likely end up paying IHT on his and his wife's estate, I would suggest some careful thought before going all out to avoid the LTA charge if that means a higher IHT bill is likely. Sorry r21442, but throwing IHT considerations in has just made things a whole lot more difficult for you!

We have stopped drawing from our SIPPs since I realised we were simply increasing the amount heading for IHT, even though that means a higher LTA charge. There can be no hard and fast rules as to the right thing to do though as it depends so much on personal circumstances, preferences and considerations of what might happen to tax and pension rules in the future.

ursaminortaur
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Re: SIPP Drawdown

#387674

Postby ursaminortaur » February 18th, 2021, 11:04 am

hiriskpaul wrote:
ursaminortaur wrote:
r21442 wrote:Genou, I don't share your certainty that my wife will breach her LTA by next year retirement? Currently £958k pot and only putting in £10kpa. No idea where equities are heading or our fund selection but you are correct in that there's decent chance it might be close? You are rightly saying taxed growth is better than no growth. Ursa saying that no growth would avoid the 75 LTA issue I guess with the implicit assumption that low growth investments will also be lower risk and so maybe make life less financially stressful? Guess I'll have a while to ponder that one!


No, I'm definitely NOT saying go for no growth or low growth investments. What I am saying is that you can avoid breaching the LTA limit at age 75 by using drawdown to remove the growth from the crystallised pot before age 75. You will have to pay tax on the larger drawdown withdrawals but that will be less than the LTA excess charge you would have if you left the money in the pension pot and breached the LTA limit.

What you do with the extra money this will give you outside the pension is upto you. However if you want to minimise your IHT estate then one option since pension payments are income would be to regularly give it to your kids as gifts out of surplus income during your lifetime.

Not necessarily!

Paying an LTA charge of 25% and subsequently drawing down at 20% income tax gives an identical result to drawing down at 40% income tax and not paying the LTA charge. But the calculations may favour paying the LTA once inheritance tax is taken into consideration. eg Paying a 25% LTA charge, leaving the SIPP to a beneficiary and the beneficiary drawing at 20% means 60% in the hands of the beneficiary. Drawing at 40%, not paying the LTA, paying 40% IHT leaves just 36% in the hands of the beneficiary. IOW, SIPPs can be very effective vehicles for passing on assets to beneficiaries, even when the LTA is paid. As r21442 is intending to leave something to his offspring and will likely end up paying IHT on his and his wife's estate, I would suggest some careful thought before going all out to avoid the LTA charge if that means a higher IHT bill is likely. Sorry r21442, but throwing IHT considerations in has just made things a whole lot more difficult for you!

We have stopped drawing from our SIPPs since I realised we were simply increasing the amount heading for IHT, even though that means a higher LTA charge. There can be no hard and fast rules as to the right thing to do though as it depends so much on personal circumstances, preferences and considerations of what might happen to tax and pension rules in the future.


Yes I was simplifying by assuming that the extra growth being drawn down to avoid the LTA limit would be drawn down over a number of years so as to avoid moving into a different tax bracket. As to the beneficiaries what tax they paid on the pension they received would depend upon their own tax position when they came to drawing the inherited pension.

However as I said using gifts out of surplus income during your lifetime helps in that since the series of gifts would escape IHT and with current UK legislation gifts themselves are tax free (that might have changed if Corbyn had been elected as it was reported that he was looking at getting rid of IHT but replacing it with a tax on gifts).

r21442
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Re: SIPP Drawdown

#387835

Postby r21442 » February 18th, 2021, 8:03 pm

IHT? Yeah will need to think about it! The house in the canaries thing was just just an idea seeing as we intended to buy it anyway so why not cut out another transaction later? I have no doubt we’ll want to help our kids and others and clearly they’ll likely inherit way more than most so being tax efficient at the point of death is less of a concern. Hopefully a long time away and so many potential tax changes, govs to have to react to. More worrying is the short term post-covid economy and how this gov and the next choose to address the debt. An international problem to be fair. Nothing was ever easy.

r21442
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Re: SIPP Drawdown

#394587

Postby r21442 » March 11th, 2021, 12:17 pm

Good timing - IC have done another article which reads clearer to me than the ones previously posted. Hope it helps someone else as it has me!
https://www.investorschronicle.co.uk/ma ... allowance/

Joe45
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Re: SIPP Drawdown

#396100

Postby Joe45 » March 16th, 2021, 11:45 am

Seeing as I started this thread, I thought I'd report on my decision. Thanks again for the helpful insight from several contributors.

The recent budget has changed things in that, with no annual indexing of the LTA, I expect to exceed it in a few years. Having drawn up a spreadsheet to model likely future scenarios (not easy as there are so many unknowns) I concluded that I’d be better off taking the maximum possible 25% tax free cash and moving the rest into drawdown.

I can make use of my and Mrs 45’s ISAs, and her income tax allowance plus two CGT allowances. This keeps tax to an acceptable level.

The big drawback of this approach is that the 25% lump is now in my estate and so potentially subject to IHT. I’ll need to spend it or give it to the children!

Did the forms yesterday. I’m now officially a pensioner.

xxd09
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Re: SIPP Drawdown

#396120

Postby xxd09 » March 16th, 2021, 12:21 pm

Back in the day I put my 25% tax free drawdown into a “high interest “ Building Society Account-used it for living expenses for a few years while my SIPP and ISA grew away untouched
Would still do it this way
xxd09

bots33
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Re: SIPP Drawdown

#400903

Postby bots33 » April 1st, 2021, 5:03 pm

Hi there, I'd recommend talking to the Pension Wise Service - it's a free govt run service that goes through 6 options and explains them really well. I never realised that unless you leave the SIPP as is, then the underlying product changes to a pension product, not an investment product (as I understand it), even though the SIPP wrapper still shows. It took a while to understand this, but the lady was very thorough in going through the options and the impact on death benefits, what was protected from inheritance tax, guarantees etc. and the hour passed in no time.

The lady I talked to noted you can withdraw £500 from your pension pot for IFA advice (once every tax year, up to a limit of three).

https://www.pensionwise.gov.uk/en

Regards

bots

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Re: SIPP Drawdown

#401039

Postby Joe45 » April 2nd, 2021, 10:41 am

bots33 wrote:Hi there, I'd recommend talking to the Pension Wise Service - it's a free govt run service that goes through 6 options and explains them really well. I never realised that unless you leave the SIPP as is, then the underlying product changes to a pension product, not an investment product (as I understand it), even though the SIPP wrapper still shows. It took a while to understand this, but the lady was very thorough in going through the options and the impact on death benefits, what was protected from inheritance tax, guarantees etc. and the hour passed in no time.

The lady I talked to noted you can withdraw £500 from your pension pot for IFA advice (once every tax year, up to a limit of three).

https://www.pensionwise.gov.uk/en

Regards

bots

I had my PensionWise appointment by phone. It was actually a box that iWeb needed me to tick before proceeding with drawdown. I agree it was helpful, although I confess it still took me several weeks to get my head around the options (largely thanks to contributors to this forum).

baldchap
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Re: SIPP Drawdown

#401601

Postby baldchap » April 4th, 2021, 11:33 am

xxd09 wrote:Back in the day I put my 25% tax free drawdown into a “high interest “ Building Society Account-used it for living expenses for a few years while my SIPP and ISA grew away untouched
Would still do it this way
xxd09

I had similar thoughts, although I would hope to still work (and contribute?), and divert the lump sum to ISA's over several years.
However, is there not a requirement to start drawing down within 6 months of triggering, and if so what is the lowest amount you could withdraw annually?

xxd09
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Re: SIPP Drawdown

#401615

Postby xxd09 » April 4th, 2021, 12:22 pm

No requirement to withdraw anything after 25% tax free amount taken when I did it many years ago
I don’t think anything has changed as far as I know
If you are still working leave SIPP and ISA to grow in their tax free environment
They will be there when needed hopefully worth even more!
xxd09

Steveam
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Re: SIPP Drawdown

#401634

Postby Steveam » April 4th, 2021, 2:17 pm

I took the 25% PCLS a few years ago but have not taken anything since (I will start taking a modest amount from later this month). I took the 25% “early” as I became increasingly concerned that it might be abolished or at least limited. Given the current state of the government finances it wouldn’t surprise me if it were limited in some way.

Best wishes,

Steve

baldchap
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Re: SIPP Drawdown

#401644

Postby baldchap » April 4th, 2021, 2:38 pm

Steveam wrote:I took the 25% PCLS a few years ago but have not taken anything since (I will start taking a modest amount from later this month). I took the 25% “early” as I became increasingly concerned that it might be abolished or at least limited. Given the current state of the government finances it wouldn’t surprise me if it were limited in some way.

Entirely my thinking Steve.
I should just beat the change to 57. I don't trust the Govt (of any colour) not to fiddle adversely.

r21442
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Re: SIPP Drawdown

#562551

Postby r21442 » January 19th, 2023, 8:51 am

Long time. I returned to this thread because it was very useful to me at the time. Like the OP I'm just updating where I'm at.

The better half decided that cold turkey full retirement was not for her! Relinquished her partnership but moved to 3 days per week consultancy, 2 year contract. Salary about a third of partnership but still receiving partnership profit share in arrears until April. She took on a paid NED and a new charity NED. WIll possibly renew the contract. She brought in millions of pounds of work in a booming industry that needs done and she's ace at her game. Company is getting a great deal. Weird she swapped roles with her junior who is now her boss! Hey ho. Good news is it tides us over a bit until kids are done uni and hopefully markets recovered somewhat.

We sold the house £1.65m - yay. Long story. Renting locally until moving to a nearby penthouse that should see us out. Unfortunately, paid more than we were really looking to do £1.15m plus about £100k Scottish property tax which doesn't leave us so much for Lanzarote. Had hoped the recession would impact prices there but no signs so far. Cash in NS&I with interest covering the rental cost.

Since last post investments all over the shop. ISAs holding up. Pension no short-term LTA risk but with delaying crystallisation that could return though it is tough to see markets racing any time soon? Frozen LTA makes it still a big consideration more for her.

Our new challenge is her income 23/24 landing in the dreaded 60% tax zone £100-125k or just above so we will possibly re-start pension contributions to avoid?

Anyway, thanks again to all help in this thread. Now much more confident. Need to do some budgeting now to see if we can use some 25% tax free allowance to help fund Lanzarote!


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