Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to MrFahrenheit,SalvorHardin,Anonymous,johnhemming,Anonymous, for Donating to support the site

Should we drawdown our SIPPs?

genou
Lemon Slice
Posts: 470
Joined: November 4th, 2016, 1:12 pm
Has thanked: 54 times
Been thanked: 151 times

Re: Should we drawdown our SIPPs?

#315738

Postby genou » June 6th, 2020, 10:29 am

hiriskpaul wrote:We fully crystallised a few years ago


But if you have no uncrystallised funds, there is nothing to test / charge at 75.

TedSwippet
Lemon Slice
Posts: 404
Joined: November 4th, 2016, 12:57 pm
Has thanked: 68 times
Been thanked: 150 times

Re: Should we drawdown our SIPPs?

#315752

Postby TedSwippet » June 6th, 2020, 11:13 am

genou wrote:But if you have no uncrystallised funds, there is nothing to test / charge at 75.

https://www.gov.uk/hmrc-internal-manual ... 0#IDADZNKB
BCE 5A: age 75 having previously designated funds as drawdown pension
It may happen that a member has earlier designated funds as available to provide a drawdown pension or flexi-access drawdown pension and reaches age 75:

- without either having taken a lifetime annuity (in which case BCE 4 would have occurred), or
- without having taken a scheme pension (in which case BCE 2 would have occurred), or
- when a lifetime annuity or scheme pension has been taken, but only by application of part of the drawdown pension fund or flexi-access drawdown fund. So part of the drawdown pension fund or flexi-access drawdown fund is still in place when the member reaches age 75.

genou
Lemon Slice
Posts: 470
Joined: November 4th, 2016, 1:12 pm
Has thanked: 54 times
Been thanked: 151 times

Re: Should we drawdown our SIPPs?

#315760

Postby genou » June 6th, 2020, 11:29 am

TedSwippet wrote:
genou wrote:But if you have no uncrystallised funds, there is nothing to test / charge at 75.

https://www.gov.uk/hmrc-internal-manual ... 0#IDADZNKB
BCE 5A: age 75 having previously designated funds as drawdown pension
It may happen that a member has earlier designated funds as available to provide a drawdown pension or flexi-access drawdown pension and reaches age 75:

- without either having taken a lifetime annuity (in which case BCE 4 would have occurred), or
- without having taken a scheme pension (in which case BCE 2 would have occurred), or
- when a lifetime annuity or scheme pension has been taken, but only by application of part of the drawdown pension fund or flexi-access drawdown fund. So part of the drawdown pension fund or flexi-access drawdown fund is still in place when the member reaches age 75.



My bad. Always go to the horses mouth. I made the error of following Google to a pruadvisor page, which reckoned only uncrystallised funds were tested at 75.

BrummieDave
Lemon Slice
Posts: 821
Joined: November 6th, 2016, 7:29 pm
Has thanked: 205 times
Been thanked: 375 times

Re: Should we drawdown our SIPPs?

#315814

Postby BrummieDave » June 6th, 2020, 2:09 pm

Two points I'd make:

You never pay IHT, your dependents do. Worth thinking about this IMHO, as it's your money to spend as you see fit whilst you're alive.

Don't view IHT as some kind of failure, and necessarily bad. It's a gift to the ultimate charity effectively, paying for the schools, hospitals and benefits of future generations.

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#315929

Postby hiriskpaul » June 6th, 2020, 9:56 pm

BrummieDave wrote:Two points I'd make:

You never pay IHT, your dependents do. Worth thinking about this IMHO, as it's your money to spend as you see fit whilst you're alive.

Don't view IHT as some kind of failure, and necessarily bad. It's a gift to the ultimate charity effectively, paying for the schools, hospitals and benefits of future generations.

All very true. However, this is about tax efficiency. I fully expect the HMRC to take a cut before my beneficiaries do, but would prefer to minimise HMRC's cut where I can, just as we all use ISAs to minimise income tax and CGT. I feel a greater duty to my heirs than I do the "Ultimate charity" and will do what I can to boost the share going to the former. I am not going to jump through any expensive, complicated, illegal or borderline legal hoops to do this, but if it is a simple matter of drawing down ISAs before SIPPs, why wouldn't I?

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#315930

Postby hiriskpaul » June 6th, 2020, 9:57 pm

I have been doing some more thinking about this and for someone likely to be paying IHT on their estate, it will always make financial sense to exhaust unsheltered investments and ISAs first, before moving onto SIPPs. That applies even for those not likely to end up with with a charge at 75 (BCE 5a). More so in fact and the calculation is much simpler - draw £100 from a SIPP at basic rate and you have £80 more in your estate to be taxed at 40% when you die. Leave it in and your beneficiaries get that £80 free of IHT, assuming they pay basic rate tax on the £100.

The only circumstance I can think of which is neutral are where someone's estate will not be liable to IHT either way. I am sure there must be some, but I have not thought of any scenarios in which it is best not to exhaust non-SIPP assets first.

A couple of things put me off draining non-SIPP assets first. The first is the all eggs in one basket issue and a future chancellor moving the goal posts. The 25% charge might become 40%, or there might be a charge introduced on death, 40% say to bring SIPPs into line with inheritance tax, NI/Income tax merged so that basic rate tax goes up substantially, etc. The second issue is that investments outside of SIPPs just seem more available than those inside, although this may be more of a psychological issue than a real financial one. Should it be needed quickly, a large amount of capital can be raised by selling investments in an ISA without tax considerations, but higher rate and additional rate tax may need to be paid to get at assets in a SIPP. I guess this relates back to TUK020's comments - helping children get on the property ladder.

Am I wrong? When would it make sense to draw down the SIPP before exhausting non-SIPP investments?

kempiejon
Lemon Quarter
Posts: 1604
Joined: November 5th, 2016, 10:30 am
Has thanked: 5 times
Been thanked: 415 times

Re: Should we drawdown our SIPPs?

#315941

Postby kempiejon » June 6th, 2020, 11:02 pm

hiriskpaul wrote:Am I wrong? When would it make sense to draw down the SIPP before exhausting non-SIPP investments?


If you die over 75 and the recipient(s) would pay tax at the highest rate?
My IHT and SIPP knowledge might be flaky but if the donor dies over 75 the recipient pays at their marginal rate so with IHT at 40% (above the threshold) the highest tax rate is at 45% additional rate. Similarly if below the threshold the recipient pays no IHT on ISA etc yet any SIPP is at the marginal rate again.

xxd09
2 Lemon pips
Posts: 140
Joined: November 19th, 2016, 2:44 pm
Been thanked: 71 times

Re: Should we drawdown our SIPPs?

#315948

Postby xxd09 » June 6th, 2020, 11:47 pm

You first duty is to yourself and your wife once your kids are provided for
My children are all married -in jobs and don’t need my money
I have told them if any money is left -it’s theirs but don’t count on it
One thing that could cause a hole in your boat is care home fees
At £40-50000 pa per person-a portfolio could soon be depleted by a couple needing care
xxd09

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#315965

Postby hiriskpaul » June 7th, 2020, 1:02 am

kempiejon wrote:
hiriskpaul wrote:Am I wrong? When would it make sense to draw down the SIPP before exhausting non-SIPP investments?


If you die over 75 and the recipient(s) would pay tax at the highest rate?
My IHT and SIPP knowledge might be flaky but if the donor dies over 75 the recipient pays at their marginal rate so with IHT at 40% (above the threshold) the highest tax rate is at 45% additional rate. Similarly if below the threshold the recipient pays no IHT on ISA etc yet any SIPP is at the marginal rate again.

If you die over or under 75, IHT at 40% is paid on the estate, but there are allowances. Nil rate band of £325k, resident nil rate band up to £175k (depending on size of estate). Unused NRB and RNRB can pass to spouse/civil partner if not used on first death. BUT SIPPs/DC pensions are NOT part of the estate so are not subject to IHT. Pensions have trustees who decide which beneficiaries get the residual pension pots, usual according to letters of wishes of the deceased. Tax on these inherited pensions are taxed on the person who draws them. It is taxed as income, along with the beneficiaries other income. It could be drawn by a beneficiary over many years within the personal allowance, in which case no tax would be paid.

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#315966

Postby hiriskpaul » June 7th, 2020, 1:13 am

xxd09 wrote:You first duty is to yourself and your wife once your kids are provided for
My children are all married -in jobs and don’t need my money
I have told them if any money is left -it’s theirs but don’t count on it
One thing that could cause a hole in your boat is care home fees
At £40-50000 pa per person-a portfolio could soon be depleted by a couple needing care
xxd09

I believe that when being assessed for care, if someone have an ISA, or other investments, most of this has to be exhausted before local authority picks up the bill. But if someone has a SIPP they are not obliged to draw and spend it all on care. Instead the SIPP is considered to be providing an income and only that income is considered. Another potential benefit of the SIPP over the ISA.

TUK020
Lemon Quarter
Posts: 1040
Joined: November 5th, 2016, 7:41 am
Has thanked: 263 times
Been thanked: 567 times

Re: Should we drawdown our SIPPs?

#315986

Postby TUK020 » June 7th, 2020, 8:27 am

hiriskpaul wrote:If you die over or under 75, IHT at 40% is paid on the estate, but there are allowances. Nil rate band of £325k, resident nil rate band up to £175k (depending on size of estate). Unused NRB and RNRB can pass to spouse/civil partner if not used on first death. BUT SIPPs/DC pensions are NOT part of the estate so are not subject to IHT. Pensions have trustees who decide which beneficiaries get the residual pension pots, usual according to letters of wishes of the deceased. Tax on these inherited pensions are taxed on the person who draws them. It is taxed as income, along with the beneficiaries other income. It could be drawn by a beneficiary over many years within the personal allowance, in which case no tax would be paid.


hiriskpaul,
something for you to investigate:
Set up trusts for your offspring. Set these as beneficiaries of your pension assets in the event of your death.
Then offspring tax is only payable when money withdrawn from the trust (I think).
However, offspring can borrow money from the trust (with trustees agreement) for the purposes of property purchase. This has 2 big benefits - postponing tax payable, while still able to use the money - and in the event of marriage/divorce, the trust loan is due back to the trust, rather than part of the marital home to split.
Complicated and expensive arrangements, but sounds like you have a big enough pot to make it worthwhile
tuk020

Chrysalis
Lemon Slice
Posts: 714
Joined: November 4th, 2016, 10:58 am
Has thanked: 193 times
Been thanked: 181 times

Re: Should we drawdown our SIPPs?

#316115

Postby Chrysalis » June 7th, 2020, 4:19 pm

hiriskpaul wrote:
xxd09 wrote:You first duty is to yourself and your wife once your kids are provided for
My children are all married -in jobs and don’t need my money
I have told them if any money is left -it’s theirs but don’t count on it
One thing that could cause a hole in your boat is care home fees
At £40-50000 pa per person-a portfolio could soon be depleted by a couple needing care
xxd09

I believe that when being assessed for care, if someone have an ISA, or other investments, most of this has to be exhausted before local authority picks up the bill. But if someone has a SIPP they are not obliged to draw and spend it all on care. Instead the SIPP is considered to be providing an income and only that income is considered. Another potential benefit of the SIPP over the ISA.

Yes but surely you don’t anticipate being able to receive local authority care? And would you want to?

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#316128

Postby hiriskpaul » June 7th, 2020, 5:01 pm

Chrysalis wrote:
hiriskpaul wrote:
xxd09 wrote:You first duty is to yourself and your wife once your kids are provided for
My children are all married -in jobs and don’t need my money
I have told them if any money is left -it’s theirs but don’t count on it
One thing that could cause a hole in your boat is care home fees
At £40-50000 pa per person-a portfolio could soon be depleted by a couple needing care
xxd09

I believe that when being assessed for care, if someone have an ISA, or other investments, most of this has to be exhausted before local authority picks up the bill. But if someone has a SIPP they are not obliged to draw and spend it all on care. Instead the SIPP is considered to be providing an income and only that income is considered. Another potential benefit of the SIPP over the ISA.

Yes but surely you don’t anticipate being able to receive local authority care? And would you want to?

No, just stating what the rules seem to be. If we ever need care we will pay for it.

hiriskpaul
Lemon Quarter
Posts: 1978
Joined: November 4th, 2016, 1:04 pm
Has thanked: 95 times
Been thanked: 471 times

Re: Should we drawdown our SIPPs?

#316162

Postby hiriskpaul » June 7th, 2020, 6:29 pm

TUK020 wrote:
hiriskpaul wrote:If you die over or under 75, IHT at 40% is paid on the estate, but there are allowances. Nil rate band of £325k, resident nil rate band up to £175k (depending on size of estate). Unused NRB and RNRB can pass to spouse/civil partner if not used on first death. BUT SIPPs/DC pensions are NOT part of the estate so are not subject to IHT. Pensions have trustees who decide which beneficiaries get the residual pension pots, usual according to letters of wishes of the deceased. Tax on these inherited pensions are taxed on the person who draws them. It is taxed as income, along with the beneficiaries other income. It could be drawn by a beneficiary over many years within the personal allowance, in which case no tax would be paid.


hiriskpaul,
something for you to investigate:
Set up trusts for your offspring. Set these as beneficiaries of your pension assets in the event of your death.
Then offspring tax is only payable when money withdrawn from the trust (I think).
However, offspring can borrow money from the trust (with trustees agreement) for the purposes of property purchase. This has 2 big benefits - postponing tax payable, while still able to use the money - and in the event of marriage/divorce, the trust loan is due back to the trust, rather than part of the marital home to split.
Complicated and expensive arrangements, but sounds like you have a big enough pot to make it worthwhile
tuk020

Trusts add extra complications and there are special rules for this sort of thing. eg SBTs:

https://www.pruadviser.co.uk/knowledge- ... sts-facts/

Moosehoosenew
Posts: 8
Joined: December 16th, 2019, 8:59 am

Re: Should we drawdown our SIPPs?

#316952

Postby Moosehoosenew » June 9th, 2020, 9:50 pm

My accountants are suggesting family investment companies as an option.

In the meantime, I am trying to beat the 7 year rule by offloading right now.


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 4 guests