Can you set up automatic monthly withdrawals from a SIPP?

Hi,

I have just retired and am setting up my pension arrangements, whilst currently living off savings. I have quotes to set up an annuity with half my pot, so that I can get a guaranteed regular monthly income. The rest will remain in a SIPP, and I would also like to get a monthly income from that SIPP. Is it possible to set-up a regular monthly payout from a SIPP (inc 25% tax-free)? I suppose this would be a regular UFPLS? Or am I going to have to draw down a larger amount (say annually) and then set up a monthly payment from that drawdown account? This presumably means I will also get the 25% lump sum annually and will have to manage that over the year separately? I don’t really want to have to move money manually each month – though that is an option while I still have my wits about me!

Thanks.

Pension savers have lots of flexibility about how to take their pension pot, but this flexibility can create its own difficulties, and you are right that you need your wits about you. First, there will be decisions about how to take the 25% tax-free lump sum - all in one go up front, or on a gradual basis? Then you will need to make decisions on the levels of guaranteed versus variable income, and how you generate that income.

You sound like you have done a lot of the difficult decision-making and the fact that you understand the concept of a UFPLS suggests you’re well ahead of the game. For the uninitiated, UFPLS (Uncrystallised Funds Pension Lump Sums) are a way of taking cash lump sums from a pension without buying a product, such as an annuity. Up to 25% of an UFPLS is tax-free, with the rest taxed at an investor’s marginal rate.

Rachel Vahey, Head of Public Policy at AJ Bell, says: “If you do decide to take the whole amount, then you need to have a plan for what to do with the money. If you just take the money out of your pension and put it in a bank account earning little to no interest, its value will likely quickly be eaten away by inflation. Whereas, if left in your pension your tax-free cash entitlement, it could have the opportunity to grow tax-free too.”

On the question of a regular monthly income from the half of the pension pot left in your SIPP, Vahey says you can use the pot to take a series of regular lump sums (the UFPLS). These will be 25% tax free and the rest will be taxed as income. The ability to offer regular lump sum payments varies from SIPP provider to SIPP provider and you will need to check.

Another option, she says, is to set up a regular income using drawdown. With the half of your pension pot remaining in your SIPP, you could choose to take the whole tax-free cash and move the rest to drawdown and set up a regular monthly payment.

“But if you have no immediate need for the tax-free cash, you may want to use it to your advantage to cut down on your income tax bill. You can move only enough money to a drawdown pot that you need, and then withdraw some or all of that full amount. Again, 25% of the amount you’re accessing will be tax-free and the rest taken through drawdown will be taxed as income.”

For example, if you moved £16,760 a year into drawdown, you could take 25% of that - £4,190 - as a tax-free lump sum. The remaining £12,570 would equal the standard personal allowance. So, if this was the only income you take, then the whole amount could be taken tax-free. Some pension providers can set up an arrangement to move money over gradually to a drawdown plan without you having to make a regular request – this is often called ‘drip feed’ or ‘phased’ drawdown.

Just a final thought. This is an important decision and the right structure can help build financial security for life. The pension advice allowance lets you withdraw up to £500 from your pension savings to put towards the cost of advice and this can be money well spent. Alternatively, you can get free advice through the Money Helper website.