Do you have a SIPP?
Do you have a SIPP: a self-invested personal pension? If so, you’re probably wondering whether you can use income drawdown with your SIPP fund. The answer is yes, but restrictions do apply. Read on to find out more…
What Is A SIPP Drawdown and How Does It Work?
Some people prefer SIPP pension drawdowns because they’re a more flexible alternative to the usual lifetime or fixed-term annuity. This grants you a greater level of control over when you receive your retirement income and how you receive it.
Pension drawdown is convenient because it means you can leave your savings in your SIPP while still accessing a regular income as well as a tax-free sum of money.
You can start drawing down the funds from your SIPP when you’re over 55 years of age. Whether you’re able to do so depends on your SIPP provider, though. Not every provider offers a drawdown option.
If you discover that your provider does not offer this option, you could switch to another. Make sure they provide flexi access drawdown.
The UK government introduced rules in 2015 that determine how income drawdown can be administered.
SIPP Pension Flexi-Access Drawdown
Flexi by name, flexi by nature! You decide how you access your SIPP pension when you want to draw down from it. There are some limitations to bear in mind, though. For example, you’re only allowed to take up to 25% of your fund as a tax-free lump sum at the start. The rest can be withdrawn whenever.
That means you decide whether you want to receive the cash as a regular income or as individual payments whenever you need them. Income tax could apply to each payment.
What Is the Maximum Income Drawdown I Can Make?
You could actually take out all of your savings at once if you have a flexi-access drawdown plan on your SIPP. This may not be the best financial decision, though. Think about it: it could become a tax liability. 75% of whatever you took out would be subject to income tax at a marginal rate.
Is Income from A SIPP Drawdown Plan Guaranteed for Life?
Your drawdown income will only last for as long as funds remain. When those are gone, the income will end. Lifetime or fixed-term annuity plans are a better option if you seek a guaranteed income for life.
Can My SIPP Pension Savings Lose Value in A Drawdown Account?
Your SIPP savings depend on the assets of your investment fund. If they perform well, the value will rise. If they perform badly, the value will fall. Bear this in mind before you commit to a SIPP pension plan.
Why do people take the risk on a SIPP pension? Because there are more investment options available. That means you can spread your funds over different assets, which mitigates the risk involved, providing a level of security.
How Are SIPP Income Drawdown Withdrawals Treated for Tax Purposes?
Just like other types of pension income, the tax system treats SIPP withdrawals as earned income. This doesn’t apply to the first 25% if you withdraw it straight away, though. This withdrawal is tax free.
What you need to think about is how to manage the remaining 75%. It could become a tax liability. If you are earning money from other sources, SIPP withdrawals could even move you into a higher tax bracket.
Who Is Liable for Pension Drawdown Tax?
You will be liable for pension drawdown tax on every withdrawal, except the 25% you’re entitled to take as a lump sum at the outset. The PAYE system will tax the rest at source.
How Much Can I Drawdown from MY Pension Tax Free?
25% can be taken tax-free, but it has to be taken as a lump sum when you move into drawdown. After that, every withdrawal will be treated as income and taxed accordingly.
What SIPP Income Drawdown Charges Can I Expect?
Be aware of the potential to be charged the following SIPP pension drawdown fees: administration fees, set-up fees, withdrawal fees (for both regular withdrawals taken as income and lump-sum withdrawals), transfer fees, fund management fees, and exit charges.
Speak to A Pensions Expert
If you are considering drawing down from your SIPP pension scheme, it’s advisable to discuss your options with an expert first – like the team at Prosperity Wealth. We will help you construct a plan that suits your circumstances and financial goals.