How can I withdraw money from my SIPP?

Important: This article is for general guidance purposes only and should not be considered investment advice. If you are unsure about the suitability of an investment, please seek out independent advice. When you invest, your capital is at risk. Tax treatment will depend on your individual circumstances and could potentially change in the future.Pension rules apply.

You’ve made regular contributions, chosen your investments and watched the balance in your Self-invested Personal Pension (hopefully) grow to provide you with a comfortable retirement.

It’s now time to access your money. So, how do you go about that?

You can start taking money from your SIPP at age 55 (rising to 57 from 2028), though you don’t have to begin withdrawing cash until you are ready to. Once you decide you’re ready to, there are a few options at your disposal.

These all have their quirks and benefits, so it’s a good idea to familiarise yourself with them to decide which works best for you. If you’re at a loss, you could turn to a resource like the government’s free PensionWise service to better understand your options.

Now, without further ado, let’s run through how you might access the money in your pension pot…

Option 1: Take tax-free cash lump sum

You can take up to 25% of your SIPP’s value as a tax-free lump sum (up to a maximum of £268,275). Once you’ve taken your lump sum, any additional income you take from your SIPP will be taxed as income.

This is known as “flexi-access drawdown”. Many providers require you to take the 25% lump sum in one go, but some allow you to take this figure in slices. This way, you can take as much or as little as you want tax free until you’ve taken the full 25%.

We’ve produced a handy explainer of this process in this video here.

If you only withdraw the tax-free cash when using flexi-access drawdown then you can continue to contribute to your SIPP up to your regular annual allowance. Once you start withdrawing cash that’s taxable, your annual allowance will be reduced to £10,000. Contributions made after the age of 75 won’t be eligible for tax relief.

Option 2: Take a lump sum that’s part-taxed and part tax-free

This process is known as taking an “uncrystallised fund pension lump sum”. You can make a withdrawal like this as often as you like. 25% of it will be tax free, and you’ll pay tax on the other 75% of it.

You can continue contributing to your SIPP after you’ve started to withdraw money in this way, but contributions are capped at £10,000 annually and any made after the age of 75 won’t be eligible for tax relief.

Option 3: Purchase an annuity

You can use all or part of your pension pot to purchase an annuity. This will provide you with regular guaranteed income. The more money from your SIPP you use to purchase an annuity, the higher your income from it will be.

You don’t have to purchase an annuity as soon as you retire (or start working fewer hours). You’ll often be offered a higher rate of income from an annuity the longer you wait to purchase one.

Option 4: Take all your pension pot in one go

When you withdraw your entire pension pot in one go, the first 25% is tax free. You’ll pay tax on the remainder at the income tax rate applicable to you. Of course, taking such a large sum in one go could push you into a higher tax bracket.

Taking your pension pot in one go means none of it will remain invested throughout your retirement. That could have implications for the income you’re able to generate after you’ve stopped working. It’s important, therefore, that you understand how you’re going to manage your finances during retirement if you’re considering this option.

Can I mix and match these options?

It’s possible to use a mixture of some of these options if so desired.

Let’s say you’ve just turned 55 (or 57 after 2028), are still working and you want to pay off the rest of your mortgage. You could use flexi-access drawdown to withdraw a tax-free lump sum for this purpose. You’ll also still be able to take advantage of the full annual allowance if you continue to contribute to your SIPP.

A few years later, you could then use the remaining part of your pension pot to purchase an annuity. Or, if you require another lump sum, you may take this as part-taxed, part tax-free.

Obviously, your personal situation depends a lot on what the best strategy is for you, so it’s important that you are aware of all the ways you can access the money in your pension. This way, you can spend less time worrying about income and more time enjoying life after work.