The Synaptic Guide to SIPPs

Pension Freedoms: using SIPP drawdown to support full flexibility

The client

Jim has recently retired at age 55, he has a small consultancy income of £9,000 a year and has five years to wait until his final salary pension of £25,000 a year comes into payment. He also has Defined Contribution (DC) savings of £200,000 in a personal pension and he plans to use this to top up his consultancy earning to give him £20,000 a year net, bridging the gap until he reaches age 60.

Jim wants to maximise the funds left in his DC pot at age 60 as he plans to use this as a rainy day fund, and keep for inheritance purposes. Before Pension Freedoms it was the norm to use a bank account to do this.

His pension provider tells him that withdrawing all of his DC savings will result in him paying £55,893 income tax in the current tax year – leaving him £144,107 in the bank*.

The solution

There are three options Jim could consider (see table overleaf):

Scenario 1

(Pre Pension Freedoms typical behaviour)

  • Jim takes all of his Tax Free Cash (TFC) up front – £50,000 and deposits it in his bank account
  • The balance of £150,000 is used to provide a regular taxable drawdown income
  • Income tax is payable of £2,250 a year

Scenario 2

(partial use of Pension Freedoms)

  • Monthly payments are made up of 25% TFC so the 75% balance is taxable (this is the UFPLS method)
  • £12,470 (£3,117.65 + £9,352.95) is crystallised each year to give a net payment of £11,000 on top of Jim’s consultancy income
  • Income tax of £1,470.59 is paid each year

Scenario 3

(using the full flexibility available under Pension Freedoms)

  • Jim gets a regular income of £9,000 a year from his tax-free cash entitlement
  • Jim only needs £2,000 a year to reach his £20,000 income target. Jim’s total taxable income is £11,000 (£9,000 consultancy income and £2,000 from his pension fund). This equals the 2016/17 personal allowance so no income tax is payable
  • At 60, Jim receives his final salary pension and stops the drawdown income, leaving the balance invested for rainy day or estate planning purposes

All scenarios assume Jim receives his consultancy income of £9,000 a year

  Scenario 1 Scenario 2 Scenario 3
Tax-free lump sum taken -50,000 £0 £0
Gross pension withdrawal required £13,250 £12,470.60 £2,000
Regular income from Tax-free cash £0 £3,117.65 £9,000
Total Gross income (taxable pension withdrawal + £9k earnnings) £22,250 £18,352.95 £11,000
Personal Allowance -£11,000 -£11,000 -£11,000
Total Taxable income £11,250 £7,352.95 £0
Tax paid (20%) -£2,250 -£l,470.59 £0
Total net income £20,000 £20,000 £20,000
Balance left in pension £136,750 £187,529.40 £189,000

Therefore, by choosing option 3 Jim doesn’t have to pay any income tax, keeps the funds in a tax-exempt environment (CGT, income tax and IHT) and is more likely to meet Jim’s needs compared to some of the less flexible options (annuity, capped drawdown or UFPLS). In addition, there is more left in the DC pot for future use.


  • This case study takes no account of the adviser charge
  • There may be a charge for transferring to a drawdown arrangement
  • Laws and tax rules may change in the future and the information is based on our understanding at February 2016.
  • Investments can go up or down. A drawdown arrangement will need to be reviewed on a regular basis to ensure that the pension fund can sustain the level of income that the customer is taking. Remember, that the fund could run out of money.
  • This is for information purposes only. Every person’s circumstances will be different and require advice. Standard Life accepts no responsibility for advice that may be formulated on the basis of this information. No guarantees are given regarding the effectiveness of any arrangement entered into on the basis of these comments.