SIPP drawdown - cost prohibitive on a small pot?

[thekingisdead]

I'm currently in the process of helping my mum plan her retirement income (<2years away).

She has about £20k PA guaranteed from state & various DB pensions, a decent sum in cash (which have to purchase an income through funds/property, tbc) and about £40k across a couple of zombie MP schemes (no longer being contributed to)

I manage my own SIPP, but hadn't considered the extra fee's for a SIPP in the drawdown phase (not being there myself yet!)

Using some very rough figures, £40k (based on a 3.5% yield) will provide an extra £1400 pa income.

With most SIPP providers charging ~£120 per annum on top of standard fee's for drawdown, this will knock off 8.5% off any potential income, which is quite significant.

Would it be better to take out the 25% tax free, and then draw down the capital as income (excepting a 20% bill) and transfer the fund into her ISA where the income can be drawn tax free?

Could someone with experience of drawdown SIPP's confirm if my logic is correct/incorrect? Or anything else I haven't considered.

thanks.

[LeoSayer]

In that situation, it would be best to withdraw the full 25% tax free and then withdraw as much from the remainder as is possible whilst avoiding higher rate tax.

Flexi-access drawdown it's called, I think.

[JulianPH]

thekingisdead said:

I'm currently in the process of helping my mum plan her retirement income (<2years away).

She has about £20k PA guaranteed from state & various DB pensions, a decent sum in cash (which have to purchase an income through funds/property, tbc) and about £40k across a couple of zombie MP schemes (no longer being contributed to)

I manage my own SIPP, but hadn't considered the extra fee's for a SIPP in the drawdown phase (not being there myself yet!)

Using some very rough figures, £40k (based on a 3.5% yield) will provide an extra £1400 pa income.

With most SIPP providers charging ~£120 per annum on top of standard fee's for drawdown, this will knock off 8.5% off any potential income, which is quite significant.

Would it be better to take out the 25% tax free, and then draw down the capital as income (excepting a 20% bill) and transfer the fund into her ISA where the income can be drawn tax free?

Could someone with experience of drawdown SIPP's confirm if my logic is correct/incorrect? Or anything else I haven't considered.

thanks.

LeoSayer is quite right.

Your mother can (and probably should) withdraw the tax free cash £10,000 and then take a further £10,000 using lump sum using flexible drawdown (providing this doesn't put her earnings in the higher rate in that tax year.

In the following tax year (assuming £20,000 of earnings) she can then draw down the balance and place this in an ISA.

She will then have paid only one years fees to clear the money out and get it into an ISA (minus the £6,000 income tax on withdrawals, of course).

[thekingisdead]

thanks both.

She's actually not earned anything in this tax year, and may not for the remainder of the tax year.
Am I correct to think after the 25% lump sum, she could withdraw a further 11,500 (the personal tax allowance) without paying further tax (accepting she may be taxed at source & re-claim the difference via a tax return).

[JulianPH]

thekingisdead said:

thanks both.

She's actually not earned anything in this tax year, and may not for the remainder of the tax year.
Am I correct to think after the 25% lump sum, she could withdraw a further 11,500 (the personal tax allowance) without paying further tax (accepting she may be taxed at source & re-claim the difference via a tax return).

You would be 100% correct in saying that if she withdrew an amount (after the tax free cash - which is not included) that was within her personal tax allowance (and constituted her entire taxable income during the tax year) then there would be no tax to pay on this.

On the basis she does not have any other earnings (whatsoever) and is aged 55 or older with no income whatsoever (which really should not be the case as she would be entitled to benefits) then she could take the entire amount out tax free over 3 tax years (2 years + 1 day in calendar years).

This would reduce her SIPP fees massively beyond your original projections. Of course, there are SIPP providers that do not levy such fees if you invest your money in their funds, so the fee issue becomes somewhat redundant there.

[thekingisdead]

Thanks Julian. She has a maintenance income from soon to be ex husband, but this is short term. I’d have thought benefits would be off the table due to savings (comfortably 6 figures) but will look into it. She may take some work between now and her DB pensions coming thru (July 2019) - which would of course wipe out her personal allowance.
I’m bringing her round to the idea that, sensibly invested, her savings can provide an income quite quickly (and are the long term answer to a hopefully 25+ yr retirement)

[JulianPH]

thekingisdead said:

Thanks Julian. She has a maintenance income from soon to be ex husband, but this is short term. I’d have thought benefits would be off the table due to savings (comfortably 6 figures) but will look into it. She may take some work between now and her DB pensions coming thru (July 2019) - which would of course wipe out her personal allowance.
I’m bringing her round to the idea that, sensibly invested, her savings can provide an income quite quickly (and are the long term answer to a hopefully 25+ yr retirement)

No problem. She can clear that money out of the DC pension fund pretty quickly without paying much in fees or tax, but if she really has no current income (other than maintenance) then there are a host of non-meand tested benefits also available to her.

I feel like a hypocrite in saying this (as I believe all benefits should be means tested) but they are available and perhaps should be explored.

If she is not comfortable in doing so then getting the money out of the DC pension and into an ISA is a no brainer.