SIPP withdrawal rules

Should you opt for an annuity, flexible drawdown or take your whole pot in 1 go? We outline your SIPP withdrawal options.

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If you’ve been religiously and responsibly paying into and managing a self-invested personal pension (SIPP), as you approach retirement you’ll be keen to find out more about SIPP withdrawal rules. After all, the whole point of saving into a SIPP is so you can reap the maximum benefits when you stop or cut down on working.

Here’s what you need to know about when you can get your hands on your pension pot and the different options for doing so.

When am I eligible to withdraw money from my SIPP?

As with almost any defined contribution pension, you can start taking money out of a SIPP when you turn 55.

However, just because you can access your SIPP pot at this point doesn’t mean you have to, or that you necessarily should. If you have enough income from other sources, you may choose to keep your SIPP pension pot invested and growing for as long as you like. Until you reach age 75, you can also continue to make contributions that benefit from tax relief.

Be aware too, that withdrawing money from your SIPP doesn’t have to be linked to your official retirement date. You can retire without taking money from your SIPP. You can also take money from your SIPP before you officially retire, as long as you’ve reached the age of 55.

From 2028, the government plans to raise the age at which you can access money in your SIPP to 57.

Can I withdraw money from my SIPP before 55?

Your provider may allow it. However, you may be hit with hefty penalties for doing so, depending on your motivation.

  • If you just want early access to the money, you’re likely to be charged an early withdrawal penalty by the SIPP provider. In addition, Her Majesty’s Revenue and Customs (HMRC) will charge an eye-watering 55% tax on money you withdraw early.
  • If you have medical grounds for early retirement, most providers will allow early withdrawals free of charge. The normal minimum access age of 55 doesn’t apply. You can withdraw your pension in the same way as those that have turned 55. The specific rules on what determines your need for a medical retirement may vary by provider. Some will let you access your pension if you can’t return to your previous job because of ill health. Others may require that you can’t return to any job, not just the one you were doing. You’ll need to provide supporting medical evidence to access your pension early.

If you’ve been diagnosed with a terminal condition and have less than a year to live, you may be able to take your full pension as a tax-free lump sum rather than the 25% tax-free lump sum usually permitted by HMRC.

How do I go about taking money out of my SIPP?

When you want to take money out of your SIPP, your first step is to consider exactly how you want to withdraw funds. We delve into your withdrawal options below. It’s a good idea to speak to a pension expert to help you choose the best option – or options – for you. There’s free, general guidance available for those approaching retirement. You can also get more tailored advice from a regulated financial adviser.

Once you’ve made your decision, you’ll need to contact your SIPP provider to let it know what you want to do. Getting your hands on the money may take a few weeks too. Get in touch with your provider ahead of time before you’ll need the funds.

What are my SIPP withdrawal options?

As we’ve highlighted above, your first decision as you approach 55 is whether you need the money in your SIPP at all. You may choose to delay taking your pension pot and allow it to grow, tax-free, until you need it.

When you decide to access your pot, you have a few options. You can take out 25% of your pension pot free of tax. The rest is subject to income tax. You can either take that 25% up front, as a single lump sum or stagger the tax-free amount over several withdrawals.

If you take 25% as an upfront tax-free lump sum, your scheme becomes “crystallised”. You then need to decide what to do with the rest of the pot. You can take just one of these approaches or mix and match them.

SIPP withdrawal options if you take the full 25% tax-free lump sum

  • Income drawdown. With this option, you move some or all of the remaining money into an income drawdown plan. It’s also known as pension drawdown or flexi-access drawdown. The money remains invested, giving it the potential for growth, though it also remains subject to investment risk. You can use it to take a regular income or take out amounts as you need them. Pros: Potential for continued investment growth and flexibility to make withdrawals as you need them. Cons: Investments are subject to market volatility and investment charges, plus risk of running out of money if you withdraw too much too soon, or investments perform badly.
  • An annuity. This is an insurance product that lets you exchange your pension savings for a guaranteed income for life (or, if agreed, a fixed period). Your pot will buy you different levels of annuity income with different providers, depending on their rate. People with health problems are likely to be offered a higher rate than those in good health, as insurers assume they’ll have to pay out for a shorter period. Other factors to consider are whether you want your income to rise will inflation and whether you want the annuity to pay an income to your partner after you die. Both of these are likely to mean a lower rate to start with but could work out better in the long run. Pros: Guaranteed income usually for life, plus the potential to provide an income for your partner after you die. There’s also no stock market risk. Cons: It’s an irreversible decision. Once you buy an annuity, you can’t change your mind. There’s also no chance for your money to grow. An annuity may not be the best option if you have a very short life expectancy.
  • Cash in your full pension. If you want, you can close your pension and take the full remaining amount as cash. Not every scheme will offer this option. If it does, the pension provider is likely to apply charges. Plus, if the pot is sizeable, it could push you into a higher-rate income tax bracket than if you withdrew funds more gradually. Pros: It gives you quick access to your money if you need it, such as if you’re in poor health and want to make the most of your time. It also allows you to reinvest your money in a different scheme. If your pot is small, the tax bill may also not be excessive. Cons: Tax will be immediately payable on the full amount, potentially at a high rate. There’s also a chance of running out of money sooner than with other options, especially if you live for longer than you expect.

SIPP withdrawal options if you don’t take 25% tax-free lump sum up front

  • Take your pension as several smaller lump sums. This option is pithily dubbed uncrystallised funds pension lump sum (UFPLS). You leave all the money in your pension pot invested to start with. You then take out smaller lump sums when you need them until your money runs out or you choose another option. The first 25% of each smaller lump sum will be tax-free and the rest will be taxed. Pros: It lets you keep your money invested for longer, with the chance for it to grow. This may also increase the value of each 25% tax-free amount. It also allows you to take varying amounts of money each time. Cons: The pot continues to be exposed to pension risk and there may be scheme charges for each withdrawal and/or limits on the number of withdrawals per year.

Do I pay tax on SIPP withdrawals?

The first 25% of money you take from a SIPP is tax-free. Everything else is subject to income tax. The tax you’ll pay depends on your total income from all sources, including pension, employment and other earnings. As of 2021/2022, everyone has a tax-free personal allowance of £12,570 and pays 20% on income between this and £50,270.

If the money you take out of your SIPP pushes you over this level in a given year, you’ll be a higher-rate taxpayer (40%). Taking the full amount of a pot as cash could even push you into the additional rate tax band, which is 45% for income above £150,000. You’ll want to consider your income tax liability when deciding how to take money out of your SIPP and how much to withdraw each year if you’ve opted for income drawdown or UFPLS.

Can I withdraw money from my SIPP if I’m living overseas?

Yes. However, some providers may not be prepared to transfer your money into an overseas bank account or may levy high charges to do so. You may be better off keeping a UK bank account for pension payments to go into and transfer it overseas yourself using a competitive money transfer service.

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Common SIPP withdrawal mistakes

Zoe Stabler

Finder expert Zoe Stabler answers

Fail to plan, plan to fail. It’s as true when you take money out of your pension as when you were building up your pension in the first place. The pension freedoms of 2015 have opened up our options for accessing the pension pots we’ve built up. But they’ve also placed responsibility firmly on our shoulders for making our money last.

If you want to get the most bang from your buck from your SIPP pension pot, here are 3 mistakes that you should avoid:

  • Making a short-sighted decision on how to access your money. For example, while taking your whole pot in 1 go may be tempting, remember that everything you take that exceeds the 25% tax-free amount is subject to income tax. If your SIPP value is high or combines with other income sources to push your total earnings into a higher tax bracket, you could face a much higher tax bill than if you withdrew funds more gradually.
  • Being “overenthusiastic” with your spending. Even if you don’t take your full pension pot in 1 go (let’s say you opt for flexi-access drawdown), you’ll need to plan withdrawals so that your money survives as long as you do. While ideally leaving your pot invested should see it grow and help it last longer, investments are volatile so you can’t rely on this.
  • Failing to take advantage of free Pension Wise advice. Unless you’re a financial guru that knows everything to know about pensions, it’s a no-brainer to book an appointment with a pension expert as you approach retirement. If nothing else, it can reassure you that you’ve considered all your options and haven’t missed anything.

Can I get help to decide on the best way to use my SIPP pension pot?

Yes. If you’re 50 or over, you can book a free Pension Wise appointment. A pension specialist will help you understand your pension options, your overall financial position and factors to consider when planning for retirement.

If you want more in-depth, tailored advice, you can also choose to speak to a financial adviser. They can help you find the right options and products for your individual needs. They’ll charge for this, but it will require less research on your part and could help you identify options that you might not have considered. Plus, if their advice turns out to be poor, you’ll be able to complain and potentially seek compensation.

Directories that can help you search for a regulated financial adviser based on what you’re looking for include the government’s MoneyHelper website, the Society of Later Life Advisers, the Personal Finance Society, and Unbiased.

Bottom line

Deciding how to withdraw money from your SIPP should never be a snap decision. Unless your pot is puny, the money you’ve saved into your SIPP could be a valuable foundation to your pension income. It’s worth taking your time to research your options, looking at both how to withdraw it and the best providers to do so with and taking advantage of the free guidance available. Think about both your own needs and those of any dependents, such as if you buy an annuity, whether it’s worth buying a joint annuity. If you’re stumped about the best option, paying for regulated financial advice could leave you financially better off in the long run.

Frequently asked questions

This article offers information about investing and the stock market, but is not personal investing advice. The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please get professional advice, for example from a financial adviser.

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