Can you explain how to withdraw from my SIPP to minimise tax?

26 October 2021

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Question by David

I have a SIPP, am aged 62, have the flexibility to retire could at any time, and am within sight of the lifetime limit of £1.079M. I am aware of the punitive 55% tax that I might incur if I make suboptimal decisions about how to realise the pension pot. Can you explain how to withdraw over the next few decades to minimise tax burden? I have a few other sources of income, so my pension tactics can be decided and driven entirely by considerations of tax efficiency.

Answered by Boring Money

Hi David,

If you are approaching the lifetime allowance then you are correct that you MAY be taxed at 55% or potentially 25% depending on how you access the money that is over the lifetime allowance.

You are only liable for this tax when:

  1. You access money above and beyond the lifetime allowance which is £1,073,100. So you have £1,073,100 there to play with before you would pay any lifetime allowance charge. Or;

  2. You reach 75. At this point there will be a lifetime allowance test. By the sounds of your current situation it is likely that by the time you hit 75 (with another 13 years of investment growth) you will be over the allowance. Moving money out of your pension will not avoid this test.

  3. This might be unlikely but depending on the value of your pensions in 2016 you could be applicable to apply for a lifetime allowance protection giving you a higher lifetime allowance. This is unlikely but not impossible.

What can you do about it?

I will pre-face this by saying that the answer to this question is entirely dependent on your current situation.

Some options:

Leave it alone
You said that you have other sources of income so it may be the case that it is in fact the better decision to leave your pension pot alone. This is because it is in an inheritance tax free area. Depending on your other assets and whether inheritance tax is an issue this may be an excellent way to leave money to your children/grandchildren/whoever you want.

By withdrawing money from your pension you are moving it into your estate. So if you were to pass away this could potentially be liable for 40% inheritance tax.

Withdraw maximum tax-free cash
You could withdraw the maximum tax-free cash available. This is likely to be either 25% of your fund value or 25% of the lifetime allowance (whichever is lowest). If you were over the lifetime allowance this would mean withdrawing £268,275. This would be tax-free and would remove money from your pension.

This does not avoid the lifetime allowance "test" at age 75 but what it does do is remove money from the pension so it can't grow further.

Over 13 years if that £268,275 were to grow at 4% per year it would be an extra £446,697.60 in your pension by the time you reach 75. That is a difference of £178,422.60 that would be taxable.

There are other options that you could potentially look at but I must stress again that this is entirely dependent on your situation. You should not make these decisions without getting advice from someone who knows your entire situation. This is a lot of money so any mistakes is likely to cost you a lot of money.

If you have any questions about the above then please drop me a message.

Luke James

Independent Financial Adviser

Answered by

Boring Money