What are the SIPP withdrawal rules?


You’ve been paying into your self-invested personal pension (SIPP) for a number of years. But what are the ins and outs of accessing your money? Here’s a quick guide to SIPP withdrawal rules, along with the key points to consider.

When can you withdraw from your SIPP?

You are eligible to withdraw from your SIPP from the age of 55 onwards, but please note that reaching the eligible age to withdraw from your SIPP doesn’t mean you have to. You may prefer to leave your entire pot intact and growing for a few more years in the tax-advantaged environment of your pension. Another point to remember is that you do not need to retire to withdraw from your pension, and you do not need to withdraw from your SIPP when you do retire. That decision is up to you; it doesn’t automatically trigger when a specific event happens.

Can you withdraw funds from your SIPP before the age of 55?

If you do, you are likely to lose a considerable amount of money. Most SIPP providers will not allow you to withdraw funds before the age of 55, and if they do, they will likely charge you a hefty fee for doing so. HMRC will then tax the funds withdrawn at 55%. In short: any attempt to withdraw your SIPP pension early will be difficult and very costly.

How does SIPP withdrawal work?

You have a lot of flexibility once you are eligible to access your SIPP fund. In simple terms, you can choose to:

  • withdraw the entire fund in one lump sum
  • take regular drawdown payments that act as a monthly or annual income
  • combine an upfront lump sum with regular drawdown payments

There are pros and cons for each type of withdrawal. Choosing what’s best for you depends on the nuances of your particular financial circumstances and retirement ambitions.

How is your SIPP withdrawal taxed?

You can withdraw 25% of your SIPP fund tax-free. You might choose to do that as an upfront tax-free lump sum. Or you could have the first 25% of each drawdown payment paid tax-free. Either way, you will pay tax on 75% of your fund when it is withdrawn. This will be in the form of income tax, payable at your marginal rate. Your fund is not liable for National Insurance contributions.

Beware withdrawing your entire fund at once

It may be tempting to withdraw your whole SIPP fund at once. But doing so can be costly. Remember: 75% of your pot will be liable for income tax. Depending on the size of your fund, it’s likely that withdrawing a large sum in one go will push you over the threshold at a higher rate – or even additional rate – tax. That could see you paying 45% income tax on your withdrawals. Everybody’s financial situation is different, but in most cases, it’s more financially prudent to draw smaller payments from your fund over a longer period to reduce your tax liabilities.

Income drawdown vs annuity

Income drawdown is when, instead of using your pot to buy a lifetime income (annuity) from an insurer, you take money directly from your SIPP fund. The rest of your pot remains invested and can continue to grow, which can be beneficial for your savings.
There are two types of income drawdown:

  • Capped – where there are limits on how much you can take out of your SIPP fund each year
  • Uncapped – you have the freedom to withdraw as much as you like. This is a relatively new method of drawdown and is now the most popular choice.

What can you do with your money?

Whatever you wish! It’s yours to use as you see fit – whether you want to spend it, invest it or a combination of the two.

Want some advice?

It goes without saying that you want your SIPP to work as hard as possible to secure your financial future. As experts in finance and retirement planning, we can make it happen – using our expert understanding of SIPP withdrawal rules to maximise your fund and retirement income. Here are a few words about what you can expect from our service.

Nothing in this article construes, or is intended to construe, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of pension planning, to ensure any recommendations made will be suitable for your needs and circumstances.

James Priday

This article was written by James Priday

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