The Lemon Fool

I'm 65 and a newbie pensioner and I'm in process of transferring my £350,000 DC pension into a SIPP.

I also have a DB pension that's already kicked in, giving me £9,000 a year and I get my state pension when I reach 66 next January.

I'm planning to take £60,000 tax free lump sum from my SIPP and invest the maximum £20,000 each in mine and my wife's ISAs and have £20,000 as a cash float in an instant access high interest bank account as a rainy day fund.

My fear is that the £60,000 counts as income as far as the tax man is concerned and that my £9,000 DB income will be charged at 40% tax, and that my state pension when it arrives will also be subject to 40% tax from the start.

Is that how it works?

Or is the wadge of money I take out of my SIPP ignored for tax purposes in the same way I think income from ISAs is ignored?

Thanks in advance

The tax free lump sum is not income or taxable in any way, so does not affect your income tax position. It is ignored and not in your tax return

The answer is in the name, tax free lump sum.

mc2fool wrote:The answer is in the name, tax free lump sum.

Except it's actually called the Pension Commencement Lump Sum... But, yes, it is totally free from tax and won't affect the taxation of any other income.

SebsCat wrote:

mc2fool wrote:The answer is in the name, tax free lump sum.

Except it's actually called the Pension Commencement Lump Sum...

Except when commonly referred to by ... ummm, the government:

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. This is limited to a maximum of 25% of your available lifetime allowance. For most individuals, the standard lifetime allowance applies. This is currently £1,073,100.

If you hold lifetime allowance protection, this may increase the amount of tax-free lump sum you can take from your pensions.

The tax-free lump sum doesn’t affect your Personal Allowance.

https://www.gov.uk/tax-on-pension/tax-free

And you will be able to take out a further £27.5k tax free if you so desire.

Dave wrote:I'm 65 and a newbie pensioner and I'm in process of transferring my £350,000 DC pension into a SIPP.

I also have a DB pension that's already kicked in, giving me £9,000 a year and I get my state pension when I reach 66 next January.

I'm planning to take £60,000 tax free lump sum from my SIPP and invest the maximum £20,000 each in mine and my wife's ISAs and have £20,000 as a cash float in an instant access high interest bank account as a rainy day fund.

My fear is that the £60,000 counts as income as far as the tax man is concerned and that my £9,000 DB income will be charged at 40% tax, and that my state pension when it arrives will also be subject to 40% tax from the start.

Is that how it works?

Or is the wadge of money I take out of my SIPP ignored for tax purposes in the same way I think income from ISAs is ignored?

Dave, have you considered an income-oriented approach here?

Your £350k invested into income oriented ITs (say) should be able to provide a natural yield income of 5%, £17500 pa. Using UFPLS you could then draw £4375 (25%) of that tax free, £13125 (75%) taxable. Add that to your DB income and you "earn" £22125 pa, less your personal allowance £12570 that's £1911 of basic rate tax deducted.

So your net income is: £9000 (DB income) + £13125 (DC income) - £1911 (tax) + £4375 (tax free) = £24589 pa, and your DC capital remains untouched for later life or beneficiaries. It would take you, roughly, 20 years to "use up" your tax free lump sum by which time you would be 85.