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SIPP - income drawdown

ii SIPP

SIPP: income drawdown

Take up to 25% of your SIPP tax-free, and the remainder as taxable income when you need it.

COVID-19 - current market conditions

Making decisions about your SIPP based on short term circumstances - especially at a time of market volatility - can have significant long-term consequences for your financial wellbeing and retirement.

If you access your SIPP benefits now, you might miss out on any increases in value in the future if markets recover. You will receive only the current value of your SIPP investments (which might have fallen recently), and this may be taxable.

If you would like to explore the risks and options in more detail we recommend that you seek the advice of a suitably qualified financial adviser.

What is drawdown?

Income drawdown is a way of funding your retirement. It allows you to take a tax-free lump sum (up to 25%) out of your pension pot, and the rest as taxable income when you need it.

It can used as an alternative to an annuity, or in combination. Annuities provide a guaranteed income for life but are much less flexible than drawdown, and there will be nothing left when you die.

How to enter drawdown with your ii SIPP

Flexi-access drawdown

To enter flexi-access drawdown, start by downloading and completing a Taking Pension Benefits form. Return this to us by secure message from your online account.
 

Capped drawdown

This is only available if you have already moved into capped drawdown. You can have a mix of capped and flexi-access drawdown funds in your SIPP.

If you would like to access capped drawdown funds in an existing SIPP, you will need to download and complete a Taking Pension Benefits form.

 

SIPP drawdown rules

You can begin to drawdown your pension from age 55 (57 from 2028). Whatever percentage you choose to withdraw as a tax-free sum, the rest may be withdrawn later as taxable income.

 Drawdown options

  • If you want to take your full tax-free lump sum (25%) in one go, you can move your full SIPP into Flexi-Access Drawdown (FAD), where it will remain invested. 
  • If you want to take only a portion of your tax-free allowance at one time, you can move part of your SIPP into FAD (e.g. to receive £10,000 tax-free, you would move £40,000 to FAD). You can then receive further tax-free payments later. 

More about pension drawdown

One of the advantages of a Self Invested Personal Pension is that you can choose how much income you want to withdraw, after you have taken your tax-free lump sum and moved your SIPP into income drawdown.

You can choose to make regular withdrawals or take larger sums as and when you need them. You could also buy an annuity, which will provide you with a guaranteed income in retirement.

As with any other pension, any income you take will be subject to income tax (not including the initial tax-free lump sum). This may include higher-rate tax if you go over the threshold in the tax year. 

After you have taken your tax-free lump sum, any subsequent withdrawals are subject to income tax. The tax bands are the same as income from a job. This tax year, the rules are:

  • If you have no income from any other sources, the first £12,500 is tax-free.
  • 20% on the next £37,500 above this.
  • 40% on everything above £50,000 (£12,500 + £37,500)
  • 45% on everything above £150,000.

When you begin to take taxable income from your SIPP,  you may be charged a "month 1" tax, also known as emergency tax. This means your personal allowance, basic tax allowance and higher rate tax band will all decrease to one twelfth of their normal level. Often, you will be able to claim this money back from HMRC but it can significantly decrease your income in the first month. Within a few weeks once a correct code is generated and passed to your pension scheme, overpayment of tax may be corrected in future payments, alternatively you can claim this back direct from HMRC.

The lifetime allowance is the limit you can save in your SIPP over your lifetime. This tax year, the allowance has been raised to £1,073,100. Any savings above this limit will be subject to tax at 25% plus income tax if it is used as income, or 55% if it is taken as a lump sum.

After you start taking money from your SIPP, you are still allowed to make contributions to your pension, but the amount you can pay in and claim tax relief on reduces. This is known as the Money Purchase Annual Allowance. 

If the pension-holder dies before the age of 75, the fund can be passed, free from tax, to any beneficiary as a lump sum or an income drawdown pension. If the funds are uncrystallised, they can also be passed on as an annuity. If the pension-holder is over 75, then the fund will be passed on at the marginal tax rate, or paid into a trust as a lump sum, minus a 45% tax charge. 

You can still pay £4,000 into your pension each tax year once you have begun to receive pension income.

You do not have to move your whole pension into drawdown. You can choose to move it into drawdown gradually, leaving the rest invested.

Alternatively, you could move part of your pension into drawdown and use the rest for something else – such as buying an annuity, which provides a guaranteed income for life.

When you first move into drawdown, you can take up to 25% as a tax-free cash lump sum.

Subsequent drawdown withdrawals are treated as normal income, and are subject to income tax. Your drawdown income will be taxed at source by your provider using a PAYE system.

You must be at least 55 years old to apply for pension drawdown. From 2028, the age changes to 57.

As long as you are over 55, you do not have to be retired to begin receiving drawdown income. You can use it to supplement your income if you wish to go into semi-retirement.

What are the pros and cons of income drawdown?

Benefits:

✔ Flexibility: Unlike an annuity, you can change the amount you receive to suit your circumstances.

✔ Estate Planning: Pass on any remaining pension fund to your beneficiaries without inheritance tax.

✔ Increased Control: You decide the returns you want to target, the risks you're willing to accept and the investments you want to pick

✔ Tax Efficiency: Managing the amount of tax free sum you receive, and choosing when to go into drawdown, can help to minimise your tax exposure.

Risks:

  • Investment Issues: Your pension pot remains invested after it is placed into income drawdown. Therefore its value could reduce if the market dips.
  • Tax Implications: After you have taken your first income from your SIPP, the annual contribution allowance drops to £4,000. This prevents you from topping up your pension pot with larger sums even if you have the funds available. 
  • Management Issues: The value of your pension pot will be affected by the success of your investments, and the charges you pay. This means you must manage your SIPP carefully, or pay for help from a suitable financial adviser. 

How can Pension Wise help?

Everyone with a Defined Contribution pension scheme is entitled to access free, impartial guidance on their pension options, including a face-to-face or telephone appointment, provided by Pension Wise, a guidance service backed by Government. Visit Pension Wise

Drawdown alternatives

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Annuities

An annuity product which you can buy with some or all of your pension pot. It will provide you with a fixed income for life or for a set period. 

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Lump sums (UFPLS)

Most pensions will give you the option of taking some or all of your pot as a lump sum. Normally you will have to pay income tax on anything above the first 25% of the total value of your pension pot. 

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No income option

You may decide to leave your pension pot untouched on retirement. It will then continue to grow, tax-free, meaning that you will potentially have more income if you decide to access it at a future date. 

 

Open a SIPP by 31 December and pay no SIPP fee until July 2021.

This means your service plan fee of £9.99 covers you for all of your investment accounts. Following the offer period, the ii SIPP fee is only £10 a month more, and could save thousands compared to other pension providers who charge a percentage fee.  Terms apply

open a SIPP   transfer your pension

The ii SIPP is aimed at clients who have sufficient knowledge and experience of investing to make their own investment decisions and want to actively manage their investments. A SIPP is not suitable for every investor. Other types of pensions may be more appropriate. The value of investments made within a SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (age 57 from 2028). Prior to making any decision about the suitability of a SIPP, or transferring any existing pension plan(s) into a SIPP we recommend that you seek the advice of a suitably qualified financial adviser. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.