Flexible drawdown is great but it’s easy to get suckered for huge amounts of tax. Although I originally planned to draw my DC pension under the tax threshold over five years, paying zero tax, there is of course a problem with the best laid plans of mice and men, which is that things change. My original computation was imagining running down the cash saved into the SIPP, and I had invested it conservatively, with a fair lump in gold, some in VWRL and some in cash. Then Brexit happened and lifted the nominal value of the stocks and the gold, by destroying 20% of the real value of the pound. So I get to pay tax anyway where otherwise I might not have.
In more change I am looking to buy a house, raising the cost of the new one before selling the old, and because I am a poverty-stricken bum under the railway arches according to the finance system’s favourite metric, income, nobody will lend me anything. I need to raise that in cash. So I paid more tax, drawing just short of the HRT threshold in a lump sum and then nothing for the rest of the year. It’ll only buy me half a used Lamborghini, perhaps a cut’n’shut.
HMRC, on the other hand, seeing £43k come out have decided I am now working for GS as a teaboy and earning half a million pounds, arrived at by multiplying 43 by 12. Yeah, I wish, guys. What I told Hargreaves Lansdown is to can all monthly payments this year and pay out 43k, whereupon HMRC help themselves to 40% of it. Cheeky barstewards.
I had been warmed up to this by the Telegraph (H/T Monevator). Although that article says this only applies if your pension provider has an emergency code [ref]ie they assume you earn at least the personal allowance elsewhere and tax you at 20% on everything[/ref] this isn’t true in this case. I went through that bunfight year before last as they still had me working for The Firm in 2015, despite the fact I hadn’t earned from there since 2012. But I never did anything with the P45 because I had no new employer to give it to. In fairness to them they did get it sorted out within a month and refunded the excess tax.
So it’s time to do that all over again, via this link. Even if you fill in the form online it’s worth reading the print off and post form first, because the explanation of the form fields is much better on that. In particular I suspect I screwed up because I declared 43k as total amount of income I expect to get. Which is correct, but probably should have been zero, because the next box asks
Details of pension flexibility payments paid as lump sums
and I guess mine might be construed as a lump sum, although it’s not against the law to be paid one’s income annually in advance. But in the end 43k is the total amount of income I expect to get from that source.
They also ask if you are contributing to the pension, and getting savings income and self employment income. In theory if you get all this right they will repay the overpaid tax. Which is over 10k – they helped themselves to £17,734 which is slightly over 40% of the total. Whereas they should have taken (43,000 – 11500)*20%=6300.
Still, on the upside, once I have gone through this I will be able to run this SIPP down tax-free. I only have another 5400 in it. I will add £3600 this year and another 3600 next year, take my £1800 PCLS on the new money, leaving me with 10800 to run out tax-free in 2017/18. Unless, of course, the stock market takes a hissy fit which will probably jack up the price of the gold. If, of course, Brexit is the stupendous success that Barry Blimp tells us it will be I will take a bath on that gold and my ISA, guess that’s the price of being a saboteur and Volksverräter.
There’s a lot to be said for being paid annually early in the tax year from a SIPP
On reflection, although last year I drew from the SIPP on a monthly basis, that’s probably not the smartest way to do it, if you know how much you’ll be drawing that year. Drawing it all at the beginning of the tax year lets me get the money to work for me earlier – Hargreaves Lansdown don’t pay a particularly exciting interest rate on cash in a SIPP, so I may as well pull a large lump sum as soon as I can and get it working for me rather than funding Peter Hargreaves Brexit ambitions. I went monthly because of the warm fuzzy feeling of it being a simulacrum of my old employment income, but what the hell, I coasted for three years on investment income and savings and didn’t overspend.
I should have behaved like a grown up and made this work for me being paid up front, even if I had to fill in a P55 form every April. Ain’t hindsight a marvellous thing? After this one it will never apply to me again, because I have too little left in the SIPP. Unless they pull the same stunt when I take £10k next year, and assume I will be earning £120k.