Self-Invested Personal Pensions (SIPPs) are an excellent option for saving for retirement, but understanding SIPP withdrawal rules is crucial to your planning. 

What are the SIPP withdrawal rules?

Here are the key SIPP withdrawal rules you need to be aware of:

  • Minimum SIPP withdrawal age: 55 (rising to 57 in 2028)
  • Tax-free lump sum: 25% of your pension pot can be taken tax-free
  • Taxable income options: Flexi-access drawdown, annuity purchase
  • Frequency of withdrawals: No set limits, can be tailored to individual needs
  • Early withdrawals: Generally not allowed, except in cases of severe illness or disability
  • Inherited SIPPs: Tax treatment depends on the age of the deceased at the time of death (over 75 is taxed)
  • Tax reporting: SIPP drawdown is taxed as income, usually automatically by your SIPP provider

In this guide, we go through everything you need to know about these rules so you can feel confident making your own withdrawal decisions.

However, if you find the information overwhelming or just want peace of mind you’re taking your SIPP in the most tax-efficient way possible, we recommend speaking to a SIPP adviser like ourselves. Book a free, initial consultation with an adviser to see how we could help.

Minimum age for withdrawals

You can’t withdraw from your SIPP until you reach the age of 55 (this is set to increase to 57 in 2028). 

This rule is in place to ensure that your pension savings are preserved for your retirement

The only exception to this rule is if you’re severely or terminally ill and may not be able to withdraw your SIPP funds in your lifetime. 

Tax-free lump sum

Once you’re at retirement age as above, you can take 25% of your pension pot tax-free

This is known as the Pension Commencement Lump Sum (PCLS)

It’s an attractive feature of SIPPs, as it allows you to access a portion of your savings without incurring any tax liabilities.

You can only do this once, not once each tax year. Although you can split your 25% tax free cash up into lots of separate withdrawals over numerous years up to the maximum total of 25%. 

SIPP drawdown rules

The remaining 75% of your pension pot can be used to provide an income, which is usually subject to income tax

You have several options for accessing this money, including:

  • Flexi-access drawdown, which allows you to keep your pension invested while withdrawing as much or as little as you need. You can vary the amount and frequency of your withdrawals, giving you maximum flexibility.
  • Annuity purchase, which allows you to use your pension pot to buy an annuity which provides a guaranteed income for life. The amount you receive will depend on factors such as your age, health, and annuity rates at the time of purchase.

There are also no withdrawal limits on a SIPP, but it’s essential to consider the tax implications and how long your pension pot will last.

Let’s look at some other rules and FAQs around these topics.

Can I take 25% of my pension tax-free every year?

No, you can’t. 

The 25% tax-free withdrawal is a one-time opportunity. 

Once you’ve taken it, any further withdrawals will be subject to income tax. 

It’s important to plan your income withdrawals strategically after your tax-free cash to make the most of your tax-free allowance and avoid unnecessary tax charges.

How often can I withdraw from my SIPP?

Once you’ve reached the age of 55, you can withdraw from your SIPP as often as you like. 

The frequency of your withdrawals is entirely up to you and can be tailored to your needs and financial goals. 

However, it’s crucial to bear in mind that the more you withdraw, the faster your pension pot will deplete

It’s wise to seek professional advice on managing your withdrawals to ensure your money lasts throughout your retirement.

Financial advisers can help you create a sustainable withdrawal strategy based on your predicted expenditure in retirements and any other source of income you may have.

Can I withdraw from my SIPP before 55?

In general, you can’t withdraw from your SIPP before the age of 55. 

Early withdrawals may result in severe tax penalties, as the government aims to discourage people from accessing their pension savings prematurely. But generally speaking, your SIPP provider simply won’t let you withdraw before you’re at retirement age. 

However, there are some exceptions:

  • If you’re unable to work due to a severe illness or disability, you may be able to access your pension early. This is known as “taking benefits on grounds of ill health“. Keep in mind that you’ll need medical evidence to support your claim.
  • Some people may also have a protected pension age lower than 55, depending on their specific pension scheme and when they joined it. This is relatively rare, and you’ll need to check your pension scheme’s rules to see if it applies to you.

It’s essential to think carefully before accessing your pension early, as it may have long-term consequences for your retirement income.

Can I take all my SIPP as a lump sum?

Yes, you can take your entire SIPP as a lump sum once you’re 55, but it could lead to high tax charges

Remember, only 25% of it will be tax-free

The remaining 75% will be treated as income and subject to income tax. So withdrawing your entire pension pot in one go could push you into a higher tax bracket for that year, resulting in a significant tax bill.

Instead, spreading your withdrawals across multiple years is usually more tax-efficient

How do I avoid tax on pension withdrawals?

While it’s sometimes impossible to avoid tax on pension withdrawals completely depending on the size of your pension, you can minimise your tax bill by carefully managing your withdrawals. 

Consider withdrawing smaller amounts each year to stay within your tax-free Personal Allowance. This is the amount of income you can earn each year before paying income tax. For the 2023/2024 tax year, the Personal Allowance is £12,570 (subject to change in future years).

Remember, this will be combined with any other income sources you have, such as a state pension, rental income or part-time employment income, for example, so keep an eye on your total earnings and what bracket you’ll fall into.

Here’s a reminder of the UK income tax brackets:

Income RangeTax RateTax Bracket
Personal Allowance (up to £12,570)0%Tax-Free
£12,571 to £50,27020%Basic Rate
£50,271 to £125,14040%Higher Rate
Over £125,14045%Additional Rate

How do I withdraw from my SIPP?

Withdrawing from your SIPP is usually a straightforward process. You’ll need to contact your SIPP provider and request a withdrawal. 

They’ll guide you through the process, which may involve filling out some forms and providing proof of identity. In today’s world, it can be done online in a matter of minutes. 

Before making any withdrawals, it’s a good idea to speak to a financial advisor

They can help you understand the tax implications of your withdrawal, develop a sustainable withdrawal strategy, and ensure you’re making the most of your pension savings.

Do I have to declare my SIPP on my tax return?

Your SIPP provider will typically deduct any tax due before paying out your withdrawal, so you don’t usually need to declare them on a tax return

But if your SIPP provider doesn’t tax you at source, then you should declare the income. 

In terms of dividends or interest your SIPP investments earn within your SIPP, you don’t need to declare these either. Dividends and interest are tax-free within a SIPP wrapper until you withdraw it, at which point it is taxed like normal income. 

Can I withdraw dividends from my SIPP?

Yes, you can withdraw dividends from your SIPP, but they will be subject to the same tax rules as other withdrawals and only once you reach the age of 55

Dividends earned within your SIPP are tax-free, but once withdrawn, they may be subject to income tax because they’re then classed as an income withdrawal. 

What about an inherited SIPP?

If you inherit a SIPP from a loved one, the withdrawal rules will depend on the age of the deceased and the type of SIPP you inherit. 

In general, if the person who passed away was under 75, you can inherit their SIPP tax-free. 

If they were over 75, any withdrawals you make will be subject to income tax (not inheritance tax)

So for example, if you withdrew £10,000, you’d pay income tax on it in line with your marginal rate which would include any other income you earn that tax year.

 Here are some key points to consider when inheriting a SIPP:

  1. You’ll need to contact the SIPP provider to inform them of the death and arrange for the transfer of ownership to you as the beneficiary.
  2. Generally, you’ll need to start taking withdrawals within two years of the deceased’s death to benefit from tax-free payments (if the deceased was under 75).
  3. Inheriting a pension can be complex, and it’s crucial to seek professional advice to understand your options and the tax implications involved.

FAQs

How much can I withdraw from my SIPP?

There’s no limit to how much you can withdraw from your SIPP once you’ve reached the age of 55.

However, keep in mind that only 25% of your pension pot is tax-free, and the rest is subject to income tax. It’s important to plan your withdrawals carefully to ensure your money lasts throughout your retirement and to minimise your tax liability.

Are withdrawals from a SIPP tax-free?

Only the first 25% of your pension pot can be taken tax-free once you reach the age of 55. The remaining 75% of your withdrawals will be subject to income tax.

Can I leave my SIPP as cash?

Yes, you can leave your SIPP as cash if you don’t want to invest it in stocks, bonds, or other assets.

However, leaving your pension pot as cash may not provide the best returns and could be eroded by inflation over time.

Is there a SIPP early withdrawal penalty?

If you try to withdraw from your SIPP before the age of 55 (except in cases of ill health), you’ll likely face a hefty tax charge.

This is typically 55% of the amount you withdraw, so it’s crucial to avoid early withdrawals if possible.