Should I access my SIPPs which are nearly at £1m?

09 February 2022

Question by Frances

My SIPPs are almost at the lifetime limit, at £1m, but with no protection. I am 61, work a little (self employed), but also have a large ISA so do not expect to need to access the SIPPs for 5-10+ years. Should I access the SIPPs anyway to take cash out (and put into the ISA) to reduce any potential charge at 75? Or leave it to grow in the SIPPs wrapper?

Answered by Adam Holt

Hello Frances,

With the lifetime allowance (LTA) being frozen for 5 years, this is a topic of conversation that I have had with many of my clients lately. With some the outcome has been to take the money out of pensions, while with others it has been to keep it in. It really does depend on your own personal circumstances as there are a lot of variables in play. I don’t know your personal financial situation so I can’t comment specific to you, but I can expand upon some key points to consider.

One of the big positives of pensions is that they are considered outside of your estate for inheritance tax purposes. Therefore, they are an effective tool of passing down wealth through the generations. If you pass away before 75, then whomever you nominate as your beneficiary gets the pot totally tax free, after 75, and they will be paying tax at their marginal rate.

You will get tested against the LTA at 3 possible points; crystallising pension funds (taking tax free cash), age 75 or death. If you are keeping the monies inside the pension pot then the tax paid is 25% of the value above the LTA, whereas inheritance tax (IHT) is 40%.

One thing to note is that if an individual was to take all of the tax free cash and leave the remaining taxable part untouched, then any growth within the taxable part is then tested against the LTA at age 75. If we assume the pension pot remains invested and continues to grow, then in order to truly remove a potential LTA issue you would need to be spending at least the growth within the taxable part of the pension pot as well as the tax free cash. This would then bring more money into your estate and potentially exacerbate any potential IHT problems. Again, I don’t know your personal situation, so I don’t know whether IHT planning is a relevant topic for you, but if it is then it may be worth keeping it in the pension pot for this sole reason.

There are also certain types of investments that you can do within your ISA that can also take them out of your estate after a 2 year period and therefore also not applicable for IHT.

You mention not needing to access the pensions for 5-10+ years, is that because your income from work will cover you until that point or because you intend to access capital from the ISA solely beforehand? If it’s the latter then perhaps using a combination of both ISA & pension income could be a tax efficient solution. This way you are utilising your tax free personal allowance via the taxable part of the pension pot along with the tax free income from the ISA and gradually using the LTA allowance.

I appreciate that information is not specific to your circumstances, but I hope it provides you with some insight. I think utilising some cash flow planning tools could really help you look at the ‘what if’ scenarios like this one and explore what could happen if you were to take different options.


Answered by

Adam Holt

Independent Financial Adviser

I’m an Independent Financial Adviser who splits time between my office in London and working from home in Kent.