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  1. #1

    Understanding the 25% SIPP tax free process

    My wife will, in about a years time, be retiring and starting to take money from her SIPP.

    It will probably make sense for her to withdraw the tax free money in several tranches. However, I am unclear exactly how this works in practice.

    Say, for the sake of illustration her SIPP is worth 400,000. She decides to take 10% out (40,000) tax free, leaving 360,000 in her SIPP. A year later she decides to take out 15% (to give a total of 25%), but by that time her SIPP has grown to 380,000. Is the 15% she can take 15% of 360,000 (54,000) or 15% of 380,000 (57,000)?

    I have kept the illustration above fairly simple, but in practice she is likely to take her tax free money in several tranches.

  2. #2
    In theory, yes. But she needs to check that her pension provider has the IT system to be able to cope with the transaction.

    So make a phone call on Monday.

  3. #3

  4. #4
    The reason for not taking the full tax free amount in one go would be to stay below the income tax threshold for several years in a row.

  5. #5
    The 25% tax free lump sum doesn't count towards your wifes income in the year she takes the lump sum.

    It is paid to her as a lump sum that does not need to be declared to HMRC and she can do whatever she wants with it, including investing it into an ISA so she can have some tax free income on top of her pension income.

    As I suggested, talk to the SIPP administrator.

    These things are complicated, we make assumptions based on half facts, newspaper articles, friends comments and drivel from online forums, I know what I said above is correct but I sure as heck wouldn't rely on my word if it was my missus and her SIPP.

  6. #6
    25% of her SIPP is likely to generate far more than can be invested in an ISA in one year.

  7. #7
    However, the older IT systems at many pension companies were built years ago, way before the "new" rules came in, so would struggle to accommodate the transaction(s).

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