SIPP PCLS, future investment and drawdown strategy

[SciFi]

Hi,

I’m now 55 and can start extracting money from my SIPP. I’m planning my strategy and could do with some sanity checking of my understanding.

I’d like to take some or all of my Pension Commencement Lump Sum (PCLS). But I’m worried that by doing so I will trigger a situation where any future payments into my SIPP are restricted (either the amount I am allowed to invest per year or something related to how it is taxed)

My understanding is that as long as I take a PCLS but not a UFPLS (uncrystallised funds pension lump sum) I won’t trigger triggered a MPAA (money purchase annual allowance), so I can still invest in the SIPP capped at £40k not £10k. However, if I begin drawdown of an income then that will trigger the MPAA.

* Is that correct?

This is my current strategy – Does it look correct?
Working assumptions:

- My SIPP has £100K in it
- My only other income is from my ISA, which is tax free
- The pension annual allowance threshold remains at £40,000. The MPAA is currently £10K. I’ll assume that stays at £10K.

Strategy steps:

- I take £25K PCLS. The remaining £75k is now a crystallised fund. Because I have taken a PCLS not a UFPLS I have not yet triggered a MPAA, so I can still invest in the SIPP capped at £40k not £10k.

- In an ideal world I would now I take £12K of that crystalized fund as income drawdown. (i.e. less than the Personal Allowance of £12,570)
* How would that £12K taxed? Since it is less than my Personal Allowance, do I pay any tax at all?
- However, since I don’t want to trigger a MPAA, I choose not to take any income via drawdown yet.

- In the near future, I gain a lump sum I’d like to invest in my SIPP (Say £50K). I invest £40k of this, receiving £8k tax relief (basic rate 20%). I'll invest the other £10k in another tax year.
* Is that £40k fully crystalized or can I withdraw 25% of it as a tax free lump sum in the future? How would the mix of uncrystallised/crystalized funds to tracked?

- Once I believe I no longer have lump sums to invest (or I need the money) I start taking income via drawdown (e.g. £12k/year) or take lump sums (which would be taxed somehow)

Thanks in advance for the help

Pete

[swill453]

If you don't have any relevant earnings, the maximum you can put in your SIPP is £3600 gross per year. The MPAA and the £40k limit are irrelevant to you.

Scott.

[swill453]

To one of your other questions, if you drawdown £12,570 in one go you are likely to be taxed (unless you take it at the end of the tax year) but you can claim the tax back.

Scott.

[JohnB]

NB, if you take it from HL on the 28th of March, you are still stung with month zero charges, as HMRC/HL expect you to take 11 more payments in the last 8 days of the tax year!

[ursaminortaur]

If you don't have any relevant earnings, the maximum you can put in your SIPP is £3600 gross per year. The MPAA and the £40k limit are irrelevant to you.

Scott.

For 2023/24 the annual allowance is now £60,000 though as Scott says this is irrelevant if you don't have any relevent earnings ( and money taken from a pension is not considered relevant earnings). Avoiding the MPAA is only relevant if you either continue working or resume work at sometime in the future and then want to contribute more than the MPAA limit from your earnings to a DC pension.

[SciFi]

Ah, ok.....of course I'd forgotten that the now £60,000 amount is only irrelevant if I have relevant earnings.

However, it is possible that I may resume work at sometime in the future and then want to contribute more than the MPAA limit from my earnings to my SIPP.

So, if that's the case instead of my using a lump sum, how does my scenario hold up?

Thanks for all input so far

Pete

[swill453]

Ah, ok.....of course I'd forgotten that the now £60,000 amount is only irrelevant if I have relevant earnings.

However, it is possible that I may resume work at sometime in the future and then want to contribute more than the MPAA limit from my earnings to my SIPP.

So, if that's the case instead of my using a lump sum, how does my scenario hold up?

Difficult one. If you don't take your personal allowance in drawdown, then that tax free facility is lost forever.

You'd have to balance that against the likelihood of needing to make contributions above the MPAA in the future.

Scott.

[ursaminortaur]

Ah, ok.....of course I'd forgotten that the now £60,000 amount is only irrelevant if I have relevant earnings.

However, it is possible that I may resume work at sometime in the future and then want to contribute more than the MPAA limit from my earnings to my SIPP.

So, if that's the case instead of my using a lump sum, how does my scenario hold up?

Difficult one. If you don't take your personal allowance in drawdown, then that tax free facility is lost forever.

You'd have to balance that against the likelihood of needing to make contributions above the MPAA in the future.

Scott.

One wheeze would be to limit your future job searches to jobs providing a DB pension ( so mostly in the public sector ). The MPAA only applies to DC pension contributions so you could contribute to the DB pension and also contribute the MPAA limit (£10,000 gross) to a SIPP so long as the combined contributions didn't exceed the AA limit (£60,000 gross).*

* Noting that the DB contribution is calculated as 16 * the yearly increase in value of the DB pension + any accrued lump sum

https://techzone.abrdn.com/public/pensions/guide-pension-annual-allowance#:~:text=The%20input%20amount%20is%20calculated,the%20accrued%20pension%20by%2016.