what to do?

[Dave]

I took £51,000 out of my SIPP earlier this month, believing incorrectly that I was taking it all out as my tax free 25% allowance.

I cocked it up and was actually taking it out under UFPLS so only 25% was tax free, the rest taxed.

I'm getting £750 a month from a private pension. And my state pension kicks in on my 66th birthday next January.

That makes my income for this year altogether £62,000ish of which £12,750 is tax free income from my SIPP.

My question is will I be paying a big dollop of 40% tax on that £62,000 or just a small dollop of 40% tax on £62,000 minus the £12,750 tax free income which amounts to £47,250.

I ask the question because I can reverse the £51,000 UFPLS payment according to my SIPP provider, but I'd have to take the £51,000 out of my ISA which is of course already tax protected, and I've used up most of the money i took out of my SIPP putting it into mine and my wife's ISAs.

If I'm only paying 40% tax on the £47,250 - it might be better to take the hit and leave my ISA alone.

Thanks in advance for any thoughts you have about this financial headache of mine.

Hope I've explained it properly!

[swill453]

If I'm only paying 40% tax on the £47,250 - it might be better to take the hit and leave my ISA alone.

If your total taxable income for the year is £47,250 and you live in England or Wales then you shouldn't pay 40% on any of it. The 40% rate starts at £50,271.

Because your income is "lumpy" they may take 40% off some initially, but it should sort itself out and you'll get it back automatically.

Scott.

[mc2fool]

Well, by your figures you'll have £9,000 from the private pension and £2,000 from the state pension, which together are less that the £12,570 personal allowance, so if that's it, income wise, and you got the whole £51000 as your tax free 25% allowance then you won't pay any tax at all.

OTOH if you end up with £62,000ish of which £12,750 is tax free income from the SIPP for a net of £47,250 then you will pay basic rate tax on £47,250 - £12,570 = £34,680 * 20% = £6,936.

Now, you've said they'll let you reverse the £51,000 UFPLS payment but (presumably) having got it reversed you will then withdraw it again taking it all out as your tax free 25% allowance, as you intended in the first place.

So, if you don't want to disturb your ISAs then the obvious thing to do is to find the £51K from somewhere else for just the short period (a few days?) that the pay-in and re-withdraw will take. Maybe you have some other savings a/cs that you can "raid" for the period and then replenish afterwards, or maybe you just borrow £51K for the few days. Unless you go to a loan shark with burly mates it'll cost a heck of a lot less than £6,936!

Alternatively, are your ISAs "flexible" ones? If so, you could temporarily raid those for the £51K and put it back when you get it again. There'll be trading costs of course but, again, unlikely to be anywhere near £6,936 (unless you're invested in really wide-spread stuff).

[swill453]

Now, you've said they'll let you reverse the £51,000 UFPLS payment but (presumably) having got it reversed you will then withdraw it again taking it all out as your tax free 25% allowance, as you intended in the first place.

I don't really see the point of jumping through hoops to get the UFPLS reversed. If the OP is in receipt of the state pension then pretty much all the taxable drawdown from the SIPP will end up being taxed at least at basic rate sooner or later, so no real disadvantage to taking the hit this year.

Scott.

[Dave]

Hi peeps

Thanks for cutting to the chase and providing me with that info so quickly.

It illustrates how superbly useful this forum is.

I don't know anything about flexible ISAs but mine isn't one - I get the £20,000 allowance and that's it.

So I'm probably going to take the tax hit.

Thanks again.

[mc2fool]

Now, you've said they'll let you reverse the £51,000 UFPLS payment but (presumably) having got it reversed you will then withdraw it again taking it all out as your tax free 25% allowance, as you intended in the first place.

I don't really see the point of jumping through hoops to get the UFPLS reversed. If the OP is in receipt of the state pension then pretty much all the taxable drawdown from the SIPP will end up being taxed at least at basic rate sooner or later, so no real disadvantage to taking the hit this year.

Yes, it's a timing/cash flow matter which may or may not be important, depending on circumstances, but you could say the same about the initial intention, and (presumably!) the OP wanted to take the £51,000 as totally tax free this year for a reason......

[Dave]

Yep,

I wanted to have some spare cash for a rainy day in a quick access high interest account and to fill up mine and my wife's ISA allocation for this year.

That was the original plan.

Still not sure whether I can take out some more cash from my SIPP under the tax free crystallisation process. I'm asking my provider about that.

But obviously not taking any more SIPP money out under UFPLS this financial year as I don't wish to pay 40% tax on my income.

I've retired work now so I'm trying to preserve and invest what I've got as wisely as I can.

Thanks again for everyone's advice.

Best

[swill453]

Still not sure whether I can take out some more cash from my SIPP under the tax free crystallisation process. I'm asking my provider about that.

It seems from what you've said so far that the only withdrawals you've made from the SIPP so far have been using the UFPLS process.

If that's the case, then the remaining fund is entirely uncrystallised.

Should you so wish, you can crystallise all of it at any time, taking 25% of the value tax free, leaving the remaining 75% where it is for future (taxable) drawdown.

Scott.