If you’re planning to draw a sizeable sum from your SIPP fund, you may be shocked to discover it’s much the same as making pension contributions for more than ten years, for absolutely nothing!
There’s No Doubt Getting Your Hands On Your SIPP Fund Sounds Like An Attractive Proposition, But If You Grab Hold Of It Too Quickly, You Could Pay A Huge Amount Of Unnecessary Income Tax
Many people face paying tens of thousands of pounds in income tax.
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Institute for Fiscal Studies
Cashing In Your SIPP Fund Might Cost You A Small Fortune
It's April 2015, and the dawn of the new pension freedoms has arrived. According to the National Employment Savings Trust, more than one in 10 of us plans to raid our pension pots.
Roughly half of those who withdraw their whole fund intend to spend it all. That could make perfect sense if you have high cost debt to repay, or your life expectancy is significantly reduced and you want to enjoy your remaining time with a lavish spending spree.
The other half intends to reinvest the money in such a way as to create an income. This is exactly what the Taxman wants, as it’s likely to raise billions for the Treasury.
It could prove to be a costly mistake.
You Could Pay A Surprising Amount Of Income Tax On SIPP Fund Withdrawals
As you build your SIPP fund, your contributions receive tax relief. But when you take the money out, your withdrawals are taxed as income at your marginal rate. Thankfully, the first 25 per cent of your withdrawals are free of tax. Beyond that, income is taxed on the following scale for the 2015/2016 tax year.
Once Income Tax is factored in, taking your SIPP fund in one go starts to look much less attractive compared with spreading your withdrawals over a number of years. Here are three examples, based on the fact the average sized Evolution SIPP for SIPPclub members is just over £250,000. The withdrawals are taken alongside a full State Pension.
Withdraw Your SIPP Fund In One Go
Withdraw Your SIPP Fund Over Five Years
Withdraw Your SIPP Fund Over Ten Years
For the purposes of illustration only, the tables assume all rates and fund values remain unchanged. They assume the maximum basic State Pension of £113.10 per week for people retiring before 6 April 2016.
Think Twice Before You Withdraw Your SIPP In One Go
For most people, it’s unlikely to be the right solution to pull out your whole SIPP fund immediately. After all, if you’ve spent your working life saving for a comfortable retirement, it makes no sense at all to throw away up to a third of your SIPP fund in tax.
It’s effectively the same as making pension contributions for more than ten years, for absolutely nothing!
Among many reasons not to draw out your SIPP fund in one go, here are four that spring to mind:
You could pay almost three times as much Income Tax.
You’re removing your money from a tax privileged area in your SIPP to one where it’s exposed to all sorts of taxes.
Having the cash in your name rather than sheltered in your SIPP fund may affect your entitlement to State Benefits.
If you live to a ripe old age, you could face a pretty bleak retirement if you’ve spent your SIPP fund too early.
Take Your Time. It Could Save You A Fortune In Tax!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
Please read our full Terms which includes criteria for SIPPclub membership.