SIPP: Income drawdown
Pension income drawdown allows you to choose how and when you take money from your pension pot.
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 lump sum (usually up to 25%) out of your pension pot, while the remaining funds remain invested in your pension. This means your pension could continue to grow in value.
It is an alternative to an annuity. 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 move your pension into drawdown
Income drawdown allows you to be flexible, and take control of how your pension income is managed. You can withdraw up to 25% of your SIPP tax-free, whilst keeping the rest invested by moving your SIPP into drawdown.
Pension Drawdown Rules
- how does pension drawdown work?
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 Whatever percentage you choose to withdraw as a tax-free sum, the rest may be withdrawn later as taxable income.
- 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.
- To take a lump sum without moving your SIPP into FAD, you can take an uncrystallised fund pension lump sum (UFPLS), 25% of which is tax-free and 75% subject to income tax (e.g. of £10,000, £2,500 will be tax-free).
More about pension drawdown
How much income can I take from my pension pot?
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.
How is drawdown income taxed?
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.
What is Month 1 tax?
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.
What is the lifetime allowance?
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.
What is tax relief and the money purchase annual allowance?
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.
What happens if you die?
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.
Can I still pay into my pension if I am in drawdown?
You can still pay £4,000 into your pension each tax year once you have begun to receive pension income.
Do I have to move my whole pension into drawdown?
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.
How will my drawdown income be taxed?
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.
How old do I need to be to apply for pension drawdown?
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?
✔ 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.
- 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
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.
Lump Sums or 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.
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 30 September 2020 and pay no SIPP fee until April 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