Please help with my DB pension question!
23 June 2021
Question by Peter
In brief I transferred a DB pension (460k) to a SIPP. On the basis that you could take out 25% (115k) tax free, I withdrew 40k for a purchase I needed to make, believing I would then have 75k to take tax free as and when I wanted to, whether that be next year or 5 years time. Is my thinking correct? I have a statement of Crystallised Funds from the SIPP provider, stating Flexi Access drawdown, value crystallised under BCE1 £120k, amount of commencement lump sum paid 40k. Would be grateful for your help.
Answered by Mike Clarke
Normally when you take part of the available tax free lump sum, your account is then split in two, say ‘post retirement’ and ‘pre retirement’. In your case, if you have taken £40,000 tax free, the SIPP provider would have needed to crystallise £160,000, 25% of this being the £40,000. Think of the remaining £120,000 as ‘post retirement’, if this is invested it may increase/decrease in value depending on how the underlying investments perform. Any future withdrawals from this element of your SIPP is taxable.
If the value of your fund was £460,000 when you took the tax free cash noted above, this meant that you had £300,000 still not touched, so ‘pre retirement’. You will be able to take 25% tax free from this element as you have stated in your question (next year or in 5 years). However, if this part of the SIPP grows to say £350,000 , you will be able to take 25% from the higher amount. The 25% is calculated at the time you take the money, not when the pot was transferred to flexi access drawdown.
I hope that makes sense
Chartered Independent Financial Planner
I’ve been in the industry since 1995, and during that time I have found myself mainly advising business people, the self- employed and high earning public sector employees. I love the motivation and challenge of advising someone who’s circumstances are changing all the time as there’s a greater need for a financial advice.