‘What tax free cash can I take from my retirement fund?’
At the beginning of April 2016 my SIPP had a value of £911,240. In order to release some cash I withdrew my 25% pension commencement lump sum (£227,810), thus leaving £683,430 within the SIPP.
By June 2019, the SIPP had grown to £1,010,000. I will turn 75 in just over five years.
My questions are:
Is any further tax-free cash available for me to take?
Can I take small annual withdrawals to keep below the lifetime allowance test at age 75?
As I mentioned in last week’s column, when you crystallise your fund by committing it to a retirement income route such as drawdown, you are able to take up to 25% tax-free. This is one of the major benefits of pension saving (along with tax relief on the money you pay in and tax-free investment growth).
Unfortunately, because you have crystallised your entire fund you won’t be able to take any more tax-free cash from your SIPP.
There are certain circumstances under which a lifetime allowance test will be carried out. A test was carried out when you first crystallised your SIPP and potentially at other points throughout your life. As an example, when you reach your 75th birthday.
It’s worth noting that when you crystallise your fund, the amount of lifetime allowance used up is calculated as a percentage of the maximum allowance available at that time.
On 1 April 2016 that would have been £1.25m - it was reduced to £1m from 6 April 2016 and linked to Consumer Prices Index inflation. The lifetime allowance currently stands at £1.055m.
Assuming this is the only pension you have crystallised, you will therefore have used up 72.74% of your lifetime allowance.
Based on the current lifetime allowance of £1,055,000, your fund could therefore grow by £286,010 (27.11% of £1,055,000) before the lifetime allowance becomes an issue. The actual amount of growth available when you reach 75 will depend on the level of the lifetime allowance at that point in time.
Any excess above the lifetime allowance left within your SIPP would face a 25% lifetime allowance charge. If you take the excess as a lump sum you will be charged at 55%.
You can make withdrawals from your fund before you reach 75 which would reduce the lifetime allowance charge you pay. These withdrawals would be taxed in the same way as income, however, so you may not actually benefit from a tax perspective.
One other thing you might want to consider is applying for ‘fixed protection 2016’. If you do this, you’ll have 27. of £1,250,000 lifetime allowance available, or £338,875 – although you can only apply for this provided you haven’t contributed to a pension since 6th April 2016.
As always with the lifetime allowance, this is all quite complicated and I would strongly urge you to speak to a financial adviser before making any decisions.