Self-Invested Personal Pensions (SIPPs)

When you start drawing funds from your SIPP, the tax position depends on how you withdraw the money and your total income in that tax year.

 

1. Tax-free lump sum

25% tax-free

In most cases, you can withdraw up to 25% of your SIPP tax-free. This can be:

• Taken as a single lump sum, or

• Drawn gradually over time

Remaining balance taxed as income

Any withdrawals above the tax-free amount are treated as taxable income and taxed at your marginal income tax ratefor that year.

Careful planning is essential to avoid pushing yourself into a higher tax band unnecessarily.

 

2. Options for withdrawing funds from your SIPP

There are several ways to access your SIPP at retirement, each with different tax and planning considerations.

Flexi-access drawdown

• Your pension remains invested

• You withdraw income as and when needed

• Withdrawals (above the tax-free portion) are taxed as income

This offers flexibility, but withdrawals must be managed carefully to avoid depleting the fund too quickly.

 

Annuity purchase

• Your SIPP is used to buy a guaranteed income for life

• Payments are taxable as income

• Provides certainty but little flexibility

 

Uncrystallised Funds Pension Lump Sum (UFPLS)

• Allows you to take lump sums without fully committing to drawdown or an annuity

• Each withdrawal is:

  • 25% tax-free

  • 75% taxed as income

This option can suit those who want occasional access rather than a regular income.

 

3. Income tax on SIPP withdrawals

All taxable pension withdrawals are added to your other income, such as:

• State Pension

• Employment or self-employment income

• Other private pensions

This means withdrawals may push you into a higher tax band.

Current income tax bands (England):

• Personal Allowance (0%): up to £12,570

• Basic rate (20%): £12,571 – £50,270

• Higher rate (40%): £50,271 – £125,140

• Additional rate (45%): over £125,140

Example If you withdraw £40,000 in a tax year (after any tax-free amount) and this takes your total income above £50,270, part of the withdrawal will be taxed at 40%.

Karia Accountants can help you plan withdrawals to manage tax exposure across multiple years.

 

4. Lifetime allowance considerations

Although the Lifetime Allowance tax charge was abolished in April 2023, there remains a cap on the total tax-free lump sum you can take.

• The maximum tax-free lump sum is currently £268,275

• This represents 25% of the former lifetime allowance

Amounts taken above this level will be taxable as income.

 

5. Inheritance tax (IHT) and passing on your SIPP

SIPPs are generally outside your estate for inheritance tax, making them an effective estate planning tool.

If you die before age 75

• Beneficiaries can usually inherit the SIPP tax-free

If you die after age 75

• Beneficiaries pay income tax on withdrawals at their own marginal rate

Ensuring beneficiary nominations are kept up to date is essential.