Don’t Make This SIPP Fund Withdrawal Mistake

Don’t Make This SIPP Fund Withdrawal Mistake
Sharm El Sheikh Egypt by Julian Cohen. Why?

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.

SIPP fund

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 full 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

SIPP fund

Withdraw Your SIPP Fund Over Five Years

SIPP fund

Withdraw Your SIPP Fund Over Ten Years

SIPP fund

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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