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SIPP natural yield drawdown
David Mogg
Posted: 04 May 2017 09:10:13(UTC)
#1

Joined: 03/05/2017(UTC)
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I have asked a number of SIPP providers if their SIPP platform can take the tax off my SIPP dividends and then transfer the taxed dividend to my bank account; to date none of the replies is a simple 'yes' or 'no' and my current SIPP provider, Hargreaves-Lansdown, appears not able to do it.

The purpose of taking the natural yield is so that I can then gift it to my 2 children under the 'normal expenditure out of income' IHT exemption so that no tax will be paid under the 7 year rule should I die. They need the money more than we do. It also establishes an income stream should either my wife or myself have to be looked after in our old age; we are 70 and the natural yield is some £60,000 before tax. We have other sources of income but even with the SIPP dividends we each will only just come into the 40% tax rate, we can live that!

The danger of simply taking money out as drawdown or 25% as tax free cash, is that HMRC will see it as taking capital, not income, so the exemption does not apply and my estate could be landed with a tax bill that I wish to minimise.

So my simple question is 'Does anyone know of a SIPP provider who can take the tax off my SIPP dividends and then transfer the taxed dividend to my bank account'?
jeffian
Posted: 05 May 2017 14:34:19(UTC)
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I don't, David, but I use Hargreaves Lansdown and am also taking the 'natural yield' from my SIPP in drawdown. Given that you know your income stream from dividends, you can simply tell them the gross amount you wish to draw down over whatever period (monthly, quarterly, annually etc) and they will transfer it to your account tax deducted. If you've got your calculations wrong or the income changes, you can simply revise the drawdown instruction.

xcity
Posted: 05 May 2017 16:44:11(UTC)
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Maybe I don't understand, but I thought money taken from a SIPP was income by definition. Which is why income tax has to be paid on it.
jeffian
Posted: 06 May 2017 18:00:58(UTC)
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My understanding is that David is looking for someone to pay out dividends as they arise in his SIPP, tax deducted. I don't know anyone who does this but there is nothing to stop him specifying the amount to be withdrawn and when such periodic payments should be made. He says his SIPP generates dividend income of £60,000/year gross so he could choose to take it as, say, £5k/month or, if he is worried that lumpy dividend payments will result in a shortfall some months, he could simply take it as a single payment at the end of each year. As others have said, the SIPP manager will be provided with your tax code by HMRC and tax will be deducted at source before the payment is made.
1 user thanked jeffian for this post.
dd on 07/05/2017(UTC)
David Mogg
Posted: 06 May 2017 20:58:44(UTC)
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Hi Jeffian, you have confirmed the conclusion I have come to. Thanks.
jeffian
Posted: 07 May 2017 11:45:09(UTC)
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It's pretty much what I do with my SIPP with Hargreaves Lansdowne (though I don't give it to my children, I fritter it away!).
Law Man
Posted: 09 May 2017 14:32:00(UTC)
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This may be a simple concept.
.
Imagine you want to take out an amount equal to dividends earned; say once every 3 months on March 31st, June 30th, etc.
.
On June 30th you look at your on line statement and see that - say - £1000 of dividends has been credited.
.
You send in a draw down request asking for £1,000 gross. Using UPFLS, with basic rate income tax, the tax is £150. Your SIPP nominee transfers £850 to your bank account.
.
Some draw down investors set up a standing request to draw down every month e.g. £350 per month gross. You could do this, although you would have to estimate the expected future dividends, and take a monthly average of this guess.
.
If you wanted the precise £p dividends earned every month, you could do so but with monthly paperwork.
.
Check your SIPP holder does not make a charge for draw downs.
.
John Davenport
Posted: 09 May 2017 16:04:57(UTC)
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Law man,

Have I missed something in my understanding of SIPP Draw down?

I have assumed that taking £1000 gross from my SIPP would result in tax at basic rate of 20% - £200, with a net payment of £800. Am I correct?

Have you made some allowance for a proportion of the personal allowance?

My aim is to become a non tax payer after my imminent retirment, taking just £15,333 - 25% tax free (£3833) plus my personal allowance of £11500 pa. and living off my ISAs, interest and dividends.

I would then modify this if/when I see the actual value of my state pension in a few years time. I will likely take the state pension - both from the point of view that it will die with me, and at the same time maximising my SIPP pot to keep it out of IHT.
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Keith Cobby on 09/05/2017(UTC)
markus
Posted: 09 May 2017 17:44:03(UTC)
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John Davenport;46533 wrote:
Law man,

Have I missed something in my understanding of SIPP Draw down?

I have assumed that taking £1000 gross from my SIPP would result in tax at basic rate of 20% - £200, with a net payment of £800. Am I correct?

Have you made some allowance for a proportion of the personal allowance?

My aim is to become a non tax payer after my imminent retirment, taking just £15,333 - 25% tax free (£3833) plus my personal allowance of £11500 pa. and living off my ISAs, interest and dividends.

I would then modify this if/when I see the actual value of my state pension in a few years time. I will likely take the state pension - both from the point of view that it will die with me, and at the same time maximising my SIPP pot to keep it out of IHT.



the calculations include the 25% tax free chunk (assuming not already taken from pot)

£1000-£250 (tax free) = £750
tax on £750 assumed at 20% =£150

£1000-£150 = £850
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John Davenport on 09/05/2017(UTC)
Misterh
Posted: 10 May 2017 09:39:39(UTC)
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Joined: 22/06/2014(UTC)
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On a seperate point regarding IHT, the seven year rule and normal expenditure out of income are not linked as is implied by the OP.

Section 21 of the Inheritance Tax Act 1984 deals with the normal expenditure out of income exemption.

If a gift (or, more precisely, a ‘disposition’) is exempt, then for IHT purposes it is irrelevant whether or not the donor survives for seven years.

For the exemption to apply, it must be shown that a transfer of value meets three conditions

  • It formed part of the transferor’s normal expenditure
    It was made out of income (taking one year with another), and
    It left the transferor with enough income to maintain his/her normal standard of living


Note that part of a single gift may qualify for the exemption.

It is necessary to consider these three conditions in turn.
Money Spider
Posted: 10 May 2017 18:20:45(UTC)
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- John Davenport

If your goal is to receive maximum tax-free income by making full use of annual allowances, then don't forget that if your total pension income is equal to the personal allowance then you can also use:

1. the 'Savings Allowance' (£1,000)
2. the 'Starting Rate for Savings' (£5,000)
3. the 'Dividend Allowance' (£5,000 for 2017-18)

So, you can receive up to £22,500 tax-free depending upon your asset allocation (Starting Rate for Savings must be interest payments from bank, bond-based UTs/OEICs etc). Most bond-based ITs pay dividends and not interest.

Remember too that PDNs (income from REITs) eats into your personal allowance, or they will be taxed at 20% if you've used up your personal allowance already with your SIPP drawdown. In the latter case it will eat into your 'Starting Rate for Savings'.

Hopefully this makes sense - there is a thread from a few weeks back where Jon Snow and I were 'batting this back and forth'.
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John Davenport on 11/05/2017(UTC)
Mr J
Posted: 10 May 2017 23:04:24(UTC)
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Isn't there also the opportunity to use the annual CGT allowance if you have investments outside SIPP or ISA ?
jeffian
Posted: 10 May 2017 23:46:54(UTC)
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If you read the original post, the question related to "The purpose of taking the natural yield is so that I can then gift it to my 2 children under the 'normal expenditure out of income' IHT exemption so that no tax will be paid under the 7 year rule should I die."

CGT doesn't come into it because capital gains aren't "income" so wouldn't qualify.
Simon Child
Posted: 21 June 2017 18:54:01(UTC)
#15

Joined: 21/06/2017(UTC)
Posts: 3

In the context of withdrawing the "natural yield" like some other commentators I have to bear in mind the possibilities of breaching the Lifetime Allowance.
However perhaps somebody with greater expertise than I have could kindly answer these couple of resultant questions :
I understand that if I crystallise my entire pension funds and move the monies into drawdown (25% cash taken tax free and the remainder remaining invested) then the Lifetime Allowance test will be applied at that point and not again until I am 75 or die.
Crucially I am correct in thinking that the Lifetime Allowance test won't be applied again until either my 75th birthday or upon my death if earlier?
If correct, then the 75% remaining drawdown fund (after withdrawing 25% cash tax free) can be "managed" as it (hopefully) grows to even exceed the Lifetime Allowance in any given year before I die or reach 75 and, if my understanding is correct, the 55% tax charge for exceeding the Lifetime Allowance won't be applied provided that I ensure I withdraw enough each year from my drawdown fund to reduce the remaining fund to less than the 100% of the Lifetime Allowance before or upon my 75th birthday or my death if earlier?
So I might pay 20%, 40% or possibly even 45% tax on income drawn down from the Drawdown Fund but, if correct, I would avoid ever having to suffer a 55% tax charge provided the second time the Lifetime Allowance test was applied (at 75 years of age or upon death) my total funds did not exceed £1,000,000 plus whatever indexation has occurred at the time?
This could be despite my Drawdown Fund perhaps having exceeded the Lifetime Allowance in any of the intervening years between first crystallising the pension fund in its entirety at age 55+ and either death or reaching 75 years of age.
A response would be much appreciated.
Many thanks.

Andrew Smith 259
Posted: 05 July 2017 21:56:30(UTC)
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jeffian;46470 wrote:
It's pretty much what I do with my SIPP with Hargreaves Lansdowne (though I don't give it to my children, I fritter it away!).


Does Hargreaves Lansdowne make any additional charges for doing Income Drawdown payments, on top of the monthly SIPP management fee?

I am still building up my SIPP and I'm still a few years away from switching to Income Drawdown. At present the only charges I pay to HL are the monthly management fee and dealing costs. Just wondering what additional costs Income Drawdown would bring.
PaulSh
Posted: 06 July 2017 11:44:44(UTC)
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There are no charges at HL for drawdown payments. You can set up a monthly, quarterly or annual payment instruction and then change it as often as you like, and/or you can make ad-hoc withdrawals once each month.
3 users thanked PaulSh for this post.
Tim D on 06/07/2017(UTC), Andrew Smith 259 on 06/07/2017(UTC), dd on 14/07/2017(UTC)
David W.
Posted: 12 July 2017 15:06:07(UTC)
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Is there any way to use the 'Dividend Allowance' when withdrawing dividend payments from a SIPP?

Annual (P60) statements from my Aviva Draw-down don't show the amount of dividend income, so any withdrawals just seem to use up my annual allowance, which if I exceed, will be liable for tax.

I read elsewhere that that dividends are tax-free, only when they are within the 'wrapper', which seems to defeat the benefit of a 'Dividend Allowance'?
Money Spider
Posted: 12 July 2017 15:39:14(UTC)
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David W

The simple answer to your question is "No, there isn't".

All income from whatever source (interest, dividends, property income distributions) is received 'tax-free' into your SIPP. Similarly, you do not pay Capital Gains Tax on share sale gains within your SIPP.

When you take money out of your SIPP (i.e. Draw-down) it is treated as income (like a salary) and is taxed at your marginal rate of income tax (i.e. Personal Allowance is tax-free, then 20% income tax to the Higher Rate income tax threshold etc.).

The 'Dividend Allowance' is only relevant to dividends that are received outside of a tax-free wrapper, such as a SIPP or ISA. You will then be able to receive the first £5,000 of dividend income tax-free (for 2017-18) and pay 7.5% dividend tax up to the Higher rate income threshold and then 32.5% thereafter up to the Additional Rate threshold.
2 users thanked Money Spider for this post.
David W. on 12/07/2017(UTC), Tim D on 12/07/2017(UTC)
David W.
Posted: 14 July 2017 11:38:35(UTC)
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I could well be wrong, but I get the impression that it would be possible to get the dividends tax free from a 'Stocks & Shares ISA'? Taken from the Santander site....

Dividend Distributions
Dividend Distributions are paid gross where no Income Tax has been
deducted. If you receive dividend income greater than the Dividend
Allowance, you will have tax to pay at the applicable rate. This would
need to be paid directly to HMRC. Further information is available on
www.gov.uk, search for ‘Dividend Allowance’

I've yet to have some dividends paid, but I get the impression that they will be paid into the 'cash' section, from which it is easy to get them withdrawn into a nominated bank account, and can presumably considered against the 'Dividend Allowance'?

If this is the case, it seems odd that dividend payments are going to be considered differently, as both ISAs and SIPPs are supposed to be tax efficient. Or, is the point that I have already benefitted on the payments into my SIPP, which I haven't on payments into the ISA?
1 user thanked David W. for this post.
dd on 14/07/2017(UTC)
Money Spider
Posted: 14 July 2017 23:14:35(UTC)
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David W

I refer you to the last paragraph in my answer immediately above. Explained more simply:

1. Dividends are always paid gross (without deduction of tax).
2. When you draw money down from a SIPP you pay income tax according to income tax rules. Dividend tax does not apply.
3. When you withdraw money from an ISA you do not pay any tax (an ISA is a TAX-FREE wrapper).
4. If the dividends are received by investments in a taxable 'dealing' account then the first £5,000 (2017-18) will be tax-free (the Dividend Allowance). Anything above £5,000 will attract dividend tax of 7.5% (basic rate taxpayer) etc.

This tells you everything that you need to know.
3 users thanked Money Spider for this post.
David W. on 14/07/2017(UTC), Andrew Smith 259 on 15/07/2017(UTC), Guest on 15/07/2017(UTC)
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