Drawdown from a SIPP: The options available to clients, and issues we often see

This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.

Looking back over our articles, we noticed that we cover a lot of different scenarios for bespoke SIPPs such as:

However, there is one area we don’t seem to touch upon that often: how to draw benefits in retirement!

Given the tax advantages of SIPPs and the multitude of planning opportunities they offer, especially in the bespoke space, it is easy to forget that the primary reason pensions exist in the first place is to provide clients with money to live off in retirement.

Amongst the many responsibilities IPM has as a SIPP provider, one that we feel most keenly is that our clients receive money from their SIPP when expected. We all have financial responsibilities, such as direct debits coming out of our accounts. Therefore, if benefits from a SIPP are being used to fund any of these, the money needs to be in there.

Given our content is written and intended for financial advisers and other financial services professionals, we are assuming that most readers will have a good understanding of the options available when drawing benefits from a SIPP.

What we thought may be useful is to go through not just the different options there are for taking benefits, but the different scenarios and issues we see. This includes the process for going through each option, what can trip people up, why certain options may or may not suit certain clients.

Flexi-access drawdown

Probably most people’s go-to phrase when thinking about drawing benefits from a SIPP is flexi-access drawdown. This is usually split into two distinct elements:

A tax-free element known as the pension commencement lump sum (PCLS). This is usually restricted to 25% of the fund value, or the amount of benefits being taken, and…
Income, which is taxable in line with a client’s tax code. This is withdrawn from the balance of the SIPP after the PCLS has been taken.

To take benefits under flexi-access drawdown from an IPM SIPP, in the first instance a client would need to complete a benefit payment request (BPR) form. This can be done by downloading and returning a PDF version of the form, or can be completed by electronic signature via Docusign.

Upon receipt of a completed BPR form, IPM will carry out a relevant benefit crystallisation event (RBCE). Firstly, we must value the SIPP to calculate the amount of benefits due. We will do this together with the appointed Investment Administrator to the SIPP, which most often is the financial adviser. Most SIPP investments are easy to value. However, there are some which cause additional thought:

Commercial property – While obtaining a property valuation is straightforward enough, this can take time and additional costs as it will need to be provided by a RICS surveyor. Thought should be given as to when the client wishes to receive the benefits and when the surveyor is instructed to carry out the valuation.
Non-standard assets / illiquid assets – A bit of a catchall, and in our experience not all non-standard assets are illiquid, but if there is an asset within a SIPP that is suspended, or only produces valuations on specific dates, this needs to be considered.
Some bonds can be trickier to obtain a value for.

Once the values have been obtained, IPM will need to carry out some calculations to ensure that any PCLS paid is within the limits set by HMRC. Up until April 2024, the Lifetime Allowance (LTA) restricted the value of the lump sum that an individual can receive. This has now been replaced by the Lump Sum Allowance (LSA), which is set at £268,275 and applies to all pensions from which an individual has withdrawn a lump sum. If any previous RBCEs have taken place, either in the IPM SIPP or elsewhere, the LSA usage from these must be taken into account.

If an individual had previously applied for protection from the LTA either in the form of primary, enhanced, fixed, or individual protection, these are still valid and will be considered in the calculations.

The next matter to consider: is there sufficient liquidity in the SIPP to make the payment(s)?

If an individual has unitised investments on a platform, it is a simple case of liquidating sufficient investments to generate the cash needed to make payment. But what if the SIPP is made up mostly of commercial property? What if there is a NS&I one-year fixed bond in the SIPP that doesn’t mature for several months? The make-up of the assets in the SIPP needs to be considered before recommending any benefit withdrawal from the SIPP.

As you would expect, we take the security of paying money out of the SIPP seriously. But what do advisers need to consider here as part of the process of paying benefits?

If this is the first time we are paying benefits to an individual, we will want to see evidence of the bank account we are making payment to. This is usually a copy of a statement from the account concerned, certified by the adviser, showing the account name, number, sort code, IBAN if appropriate, and ideally the client’s home address.

Once these processes are completed, we will then make the PCLS payment to the client. If there is a request to take income too, we will set this up at the same time.

You may be aware that IPM can pay benefits in EUR or USD from our SIPPs. On the basis that the investments in the SIPP are run in that currency, we can pay out PCLS, income, or both in euros or US dollars. This may be beneficial for clients with UK pension benefits who live outside the UK.

Where we’re making non-GBP payments, there are additional considerations, such as additional costs from both IPM and the bank for making non-GBP payments, and it may take a little longer for the money to reach the recipient’s account.

Just taking income

It may be that an individual has no PCLS available or just wishes to utilise the element of the SIPP already in drawdown, thus removing the need for a RBCE. Regardless, we have many people that approach us to take income from their SIPP, either as an ad-hoc lump sum or to set up regular payments.

If not covered on our BPR form, an income request form can be completed and sent in to request payment.

Like other forms of income, benefit payments from a SIPP that are not PCLS are taxable. These payments are run through a payroll system, like that operated by an employer.

If this is the first amount of income someone has taken from their SIPP, IPM must apply an emergency tax code. The only party that can tell us to apply an alternative tax code is HMRC, and HMRC will only become aware that IPM is making payments to an individual once the first payment has been made; at this point we would expect to receive a tax code notification informing us which tax code we can apply in the future.

This can cause an issue for people who are taking large sums as income. Emergency tax does not have a single fixed rate. Instead, it’s applied on a non-cumulative basis using the usual tax rates (20%, 40%, and 45%).

This is why if someone is planning to take a large amount of income in the future, for the first payment it may be an idea to request a smaller amount. This will then trigger HMRC to provide IPM with the correct tax code, which we can apply to the larger income payment. This may be particularly handy for those individuals who are not tax resident in the UK, on NT tax codes.

If it has been some time since the last payment from the SIPP, or the bank account details differ from those we have on file, we will ask for an up-to-date certified bank statement.

Like PCLS payments, it is important to ensure there is sufficient monies in the SIPP trustee bank account to make payment. Where IPM is being asked to make a regular income payment, it may be worth setting up a regular payment to be made by the investment house looking after the SIPP’s assets to make the necessary encashment in the middle of the month, ahead of income being paid to the client towards the end.

We issue payslips for all income payments taken from the SIPP. These are delivered to the client’s secure messaging facility via IPM’s online access, with a copy to the adviser, unless hard copies have been requested.

Finally, don’t forget that once a client has flexibly taken income from a SIPP, the Money Purchase Annual Allowance (MPAA) will apply going forward.

Capped drawdown

Unlike flexi-access drawdown where there is no limit on the amount of income that can be drawn, as the name suggests, with capped drawdown there is an upper limit on the amount of income a client can withdraw in a 12-month period.

Capped drawdown is a legacy feature of SIPPs. It has not been possible to set up a new capped drawdown arrangement since April 2015. However, where an individual had one in place before this date, this can continue.

Some key points to consider for clients that have capped drawdown:

As mentioned, there is an upper limit of income which can be withdrawn in a 12-month period. This is calculated by the SIPP provider and is valid for three years.
After three years, this upper limit must be re-calculated. The impact of this is:
- The SIPP will need to be valued; consideration should be given to assets such as property.
- If the client has been withdrawing an amount closer to the upper limit, the maximum amount that can be withdrawn after the review is likely to go down.
- SIPP providers will likely charge to carry out the review. For IPM, we charge £150 + VAT.
If a client exceeds the maximum limit, even unknowingly, the capped drawdown plan will automatically convert to flexi-access.

Uncrystallised funds pension lump sum (UFPLS)

Introduced in April 2015, UFPLS is another option for people wishing to draw benefits from the uncrystallised portion of their SIPP. As the name suggests, it is a lump sum payment. But in this instance the payment is a mixture of both tax-free and taxable.

For example, an individual has a fully uncrystallised SIPP and requests a £50,000 UFPLS payment. IPM would pay out 25% of this amount as a tax-free lump sum, in this instance £12,500. The balance, £37,500 on this occasion, would be paid as taxable income.

As the full requested amount has been paid out from the SIPP as benefits, the remainder of the SIPP remains fully uncrystallised.

With UFPLS payments, it is important to note the following:

This is still an RBCE. Therefore, the SIPP needs to be valued accordingly, with all the caveats we have previously mentioned.
Liquidity will still need to be considered.
If IPM does not have a tax code on file, the taxable part of a UFPLS payment will be taxed on an emergency tax code.
As the UFPLS includes a taxable payment, it will trigger the MPAA.

We see far fewer requests for UFPLS payments than we do the traditional flexi-access drawdown route. However, people who do not wish to place some of the SIPP into drawdown, and thus avoid an annual drawdown fee, may be attracted to UFPLS. In addition, we have clients that receive regular rental income from their property who may then take a number of UFPLS payments throughout a year.

Drawdown from a SIPP: The options available to clients, and issues we often see

Flexi-access drawdown

Just taking income

Capped drawdown

Uncrystallised funds pension lump sum (UFPLS)

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