SIPP: income 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.