AJ Bell pension expert Tom Selby explains the rules
Thursday 25 Jul 2019 Author: Tom Selby

My wife is 62 and has a small SIPP of around £32,500 in total and no other pension (of her own). We have other savings in ISAs we want to keep there and a large SIPP of mine we cannot access until I am 55.

We would like to access some of her pension (the tax-free element and around £7,500 to take her near to using her personal allowance for the year).

Can we do this from the existing SIPP and continue to contribute? 

Kevin


Tom Selby – AJ Bell Senior Analyst says:

The short answer is ‘yes’, although there are several important things you need to be aware of. But first let’s look through the available income options.

Assuming your wife doesn’t wish to convert her pension into a guaranteed income stream by buying an annuity, there are two ways she can access her fund: entering drawdown, with 25% of the pot available tax-free; or taking an uncrystallised funds pension lump sum (UFPLS) withdrawal, with 25% of each chunk withdrawn tax-free.

If she commits (or ‘crystallises’) the full £32,500 to drawdown she will be able to access her full 25% tax-free lump sum of £8,125. This will not have any impact on her tax-free personal allowance, meaning she can still receive income of £12,500 in the current tax year without paying a penny to HMRC. However, she will no longer be able to take any more tax-free cash from her pension.

If your wife wants to retain some tax-free cash for the future (and give it the opportunity to grow within her SIPP) she could partially crystallise a portion of her fund in drawdown, with 25% of this portion available tax-free. UFPLS withdrawals can be used in a similar way.

Taxable pension withdrawals (i.e. withdrawals over and above your tax-free lump sum) count as income for tax purposes in the same way as earnings. So for someone with no other taxable income, a £7,500 taxable pension withdrawal would be taxed at 0%, with £5,000 of personal allowance left over.

Whichever route your wife chooses, if she takes taxable income from her SIPP – even if it’s below the personal allowance and so is taxed at 0% – she will trigger the Money Purchase Annual Allowance.

This means that rather than being able to save up to £40,000 a year into a pension tax-free, this will be reduced to just £4,000. She will also lose the ability to ‘carry forward’ unused allowances from previous tax years.

It is worth noting ISAs are more flexible and accessing this money will have no impact on your wife’s pension allowances.


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