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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

AJ Bell expert Tom Selby has the answer  
Thursday 06 Dec 2018 Author: Tom Selby

Lindsay, no address given

I am approaching retirement (age 62) but still working as a freelance IT contractor. I am thinking of taking my tax-free 25% lump sum from my SIPP early next year, to go towards the purchase of a home for retirement in France.

However I may continue working for a year or two beyond that point, so I’d like to continue putting as much as possible into my SIPP as an efficient withdrawal of funds from my limited company. After retirement I will go into flexible drawdown from the remaining SIPP funds.

On what basis can I take my 25% out of the SIPP without a large tax deduction? And how much can I contribute in the subsequent or remaining tax year(s) if I keep working?

The tax-free lump sum is one of the main features of pensions – alongside the upfront bonus of tax relief – that makes them stand out from other tax-incentivised financial products.

Because you are saving in a SIPP and over age 55, there should be no restrictions or tax charges should you choose to take your 25% lump sum.

Furthermore, provided you don’t take any taxable income from your fund (i.e. make any withdrawals over and above your 25% tax-free chunk) you will be able to continue contributing up to £40,000 a year into your SIPP (inclusive of basic-rate tax relief).

If you haven’t used all of your annual allowance in any of the previous three tax years you can also boost your current tax year’s allowance via ‘carry forward’. Used to its maximum, ‘carry forward’ could increase your annual allowance for the current tax year by £120,000 to £160,000.

However, if you did take even just £1 of taxable income from your SIPP your ability to continue saving in a tax-incentivised environment would be severely restricted by the Money Purchase Annual Allowance, or MPAA.

This was introduced in 2015 to prevent people ‘recycling’ their pensions to get extra tax-free cash and means that, if you take taxable income flexibly from your pension, your annual allowance will be slashed from £40,000 to just £4,000.

To put that into perspective, that means a maximum total monthly contribution – including tax relief – of just over £330.

You will also lose the ability to carry forward any unused allowances from previous tax years into your SIPP.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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