SIPP drawdown

SIPP drawdown is a flexible way to access your pension – you choose how to invest your pot and what income you take and when.

How does SIPP drawdown work?

You can access your self-invested personal pension from age 55, rising to age 57 in April 2028.

Up to 25% can usually be taken as tax-free cash, and the rest is used to provide you with a taxable income. SIPP drawdown is a flexible option that lets you keep the rest of your SIPP invested, ready to pay you an income to suit you. You might see it called ‘flexi-access drawdown’.

The SIPP drawdown rules let you can take as much or as little income as you want – it’s completely up to you. You can take a regular amount or one-off payments. Funds left in your drawdown SIPP can also be passed down to your loved ones when you die.

The value of your SIPP can rise and fall in value, meaning you could get back less than you paid in. If you take too much income or your investments do not perform as expected, then you could run out of funds to support yourself later in life.

Tax on SIPP drawdown

Income you take from your drawdown SIPP is subject to income tax when you receive it.

SIPP drawdown rules mean your pension provider must deduct tax from the income they pay you. You’ll receive a payslip from your pension provider showing the tax codes used and the amount of tax deducted with each payment.

When you receive your first SIPP drawdown payment, it’s likely that an emergency tax code will be used, unless you have a valid P45. This could mean that you overpay tax and will have to claim it back from HMRC directly.

If you withdraw too much income you may find that you have been pushed into a higher income bracket and end up paying tax at higher rates.

You can read more in our pensions and tax guide.

Keep in mind that Scottish taxpayers have different tax rates and bands to the rest of the UK.

Investing in your pension within drawdown

When you go into SIPP drawdown, you’ll need to decide on an investment strategy for your fund. If you're choosing your own investments, our investment ideas could help.

You’ll also be offered the option of Investment Pathways. These pathways match four common goals people have when entering SIPP drawdown with a different AJ Bell fund, managed by our in-house experts. Learn more about investment pathways.

Is going into pension drawdown a good idea?

Drawdown brings great flexibility but there are also risks that you need to consider. If a guaranteed income is important then it may not be the right option for you.

Pension and tax rules are subject to change, and the benefits to you will depend on your personal circumstances.

We’ve summarised the features of SIPP drawdown below.

Benefits of drawdown Risks of drawdown
Pension fund remains invested
Your SIPP remains invested, giving it a chance to keep growing in value.
Investment risk
Your SIPP investments may not do as well as expected and the value of the fund could fall meaning you get back less than you invested.
You're in control
You decide what investments you hold and can manage your portfolio to suit your objectives and needs.
Taking too much income
If you take too much income at a fast rate or your investments do not perform as expected, then you could run out of funds to support yourself later in life.
Flexibility over payments
You choose how much income you want as well as when and how frequently you take it. Withdrawals can be paid on a regular basis, as lump sums or you can choose to take no income at all.
Time to review and manage
You’ll need to be able to manage and regularly review your investment strategy to try and meet your income needs.
Options
You don’t have to move all of your pension pot into drawdown at once. You can move smaller parts into drawdown over time, giving you up to 25% tax free each time. You can use your drawdown (or any pension funds you have yet to access) to buy an annuity in the future.
Emergency tax and potential overpayment
If the income you take puts you into the next tax bracket you may end up paying more tax than you had intended. Keep in mind that your first regular or any one-off income payments are likely to be taxed on an emergency ‘Month 1’ basis meaning you have to reclaim tax back from HMRC directly.
Pension fund passed on in death
Your fund will be available for your beneficiaries when you die. A SIPP isn’t part of your estate, meaning it is usually exempt from inheritance tax. You can read more at SIPPs and death. If you die before age 75, they’ll usually be able to access it free of tax. If you die age 75 or over then your beneficiary(s) will pay income tax as and when they access the money.
Future pension contributions
Taking drawdown income triggers the money purchase annual allowance (MPAA). This will limit the tax benefits of any contributions to your SIPP and any other ‘money purchase’ pensions over £10,000 per year.
Guidance from Pension Wise Pension Wise

Pension Wise is a free, impartial government service that offers guidance to anyone approaching retirement.

If you want to better understand the retirement options available to you, Pension Wise can help.

Learn more about Pension Wise

Can I pay into a SIPP after entering drawdown?

When you start to take a flexible income from a drawdown SIPP, you’ll trigger the money purchase annual allowance (MPAA) of £10,000.

This is the amount that can be paid into your SIPP and other ‘money purchase’ pensions before a tax charge applies.

The reduction isn’t triggered until you take an income payment, so you won’t trigger it if you have taken your 25% tax free lump sum but no SIPP drawdown income yet.

Capped drawdown

Before April 2015, the main SIPP drawdown option was called capped drawdown. This option came with a maximum level of income you could take from your pension each year - the GAD (Government Actuary’s Department) limit. The maximum was reviewed every three years until age 75 and annually after that.

You can only be in capped drawdown if you started taking income from your pension on or before 5 April 2015.

If you’re still using capped drawdown you have two options:

  1. Stay in capped drawdown
  2. Move to flexi-access drawdown
Benefits of switching Drawbacks of switching
  • Withdraw as much as you like
  • No charges for taking income payments
  • No charges for maximum income reviews
  • Once you switch and take an income payment, you’ll be subject to a lower annual allowance of £10,000 for your SIPP and other similar types of pension. Read more about the money purchase annual allowance (MPAA) here.

You can’t reverse the switch, so you’ll need to consider your options carefully.

If you choose to stay in capped drawdown, you’ll keep your review dates and maximum income limits.

Important information: Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser. These articles are for information purposes only and are not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change. Pension rules apply

Open a SIPP

An AJ Bell SIPP gives you complete flexibility on how much you save for retirement, and allows you to decide when and where your pot is invested.

Options at Retirement

You've saved hard for your retirement, but once you get there, what are your options?


ajbell_Charlene_Young's picture
Written by:
Charlene Young

Charlene Young is AJ Bell’s Pensions and Savings Expert. She joined AJ Bell from a wealth management firm where she worked with private clients and small businesses as a financial planner. Charlene holds Chartered Financial Planner status and is an associate member of the Society of Trust and Estate Practitioners (STEP).


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