AJ Bell pensions expert Tom Selby explains the process
Thursday 16 May 2019 Author: Tom Selby

I understand I can take 25% of my SIPP as a tax-free pension commencement lump sum (I have no scheme specific protection in excess of 25%).

If I chose a flexi-access drawdown option, does the PCLS have to be taken as one payment before any of the remaining 75% potentially taxable pension is withdrawn, or could it be taken in intervals and if so are there any time limits on when it has to be taken by?

I’m hoping to move into part-time work earning approximately £8,500 gross which would mean I would have £4,000 of unused personal allowance. If I was looking to generate a total of £15,000 net income a year, could I designate £4,000 per year from the taxable element of my SIPP and then take £2,500 of tax free cash therefore and pay no income tax for the year?

Peter, aged 57

Tom Selby, AJ Bell senior analyst says:

Most savers in defined contribution pension plans like SIPPs can access 25% of their fund tax-free from age 55.

There are broadly three options for obtaining retirement income: keep your money invested through drawdown; buy a guaranteed income for life (an annuity); or take ad-hoc lump sums where 25% of each chunk is tax-free and the remaining 75% is taxed (referred to in the jargon as ‘UFPLS’).

In drawdown you’ll be entitled to a quarter of your pot tax-free. For example, if you put £100,000 into drawdown you could take 25% without paying any tax. The remaining £75,000 would be taxed in the same way as income when you take it out of your SIPP.

If you don’t want to take all your tax-free cash straight away you can choose to put your pot into drawdown in stages. In the example above, you could put a smaller portion into drawdown – say £10,000 – and receive 25% tax-free each time you do it.

There are no time limits if you do this and if your fund grows you could boost your tax-free cash pile. Equally, if it shrinks in value you’ll get less.

It is possible to take a tax-free income in this manner as you suggest (provided these are your only sources of taxable income).

In your example, you could put £10,000 into drawdown and thus access £2,500 in tax-free cash. You could then draw £4,000 from the taxable portion of the fund (using up your full £12,500 personal allowance) to reach your £15,000 tax-free income target.

Accessing taxable income from your pot will trigger the Money Purchase Annual Allowance (MPAA), reducing the amount you can save tax-free in a pension each year from £40,000 to just £4,000.

You’re likely to be overtaxed initially by HMRC, so you’ll need to fill in a reclaim form to get your money back.


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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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