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13 August 2026
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Ask the experts. Rachel Vahey is here to answer questions on pensions. If you’d like a question considered for a future edition send it in now.
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I wonder if you could lay out the options for my wife. She has a SIPP worth about £110,000, as well as a small occupational pension of about £5,600 a year.
She has seven years before she will receive a full state pension. She also has some cash savings mainly in ISAs, plus a Stocks and shares ISA again mainly in income producing bonds.
Most of her SIPP investments are now in income paying investments of shares/REITs and bonds. She was considering going into drawdown, but we do not really need any lump sums at this stage.
My question is can she go into drawdown and just take income, and as she is not a taxpayer it would be tax free? Or is it better taking the cash free lump sum now and reinvesting in an ISA, as if she waits until later when she is receiving her future state pension she would then be a taxpayer?
John
Rachel Vahey, AJ Bell Head of Public Policy, says:
Before looking at your wife’s choices, it helps to understand the main ways people can take money from their pension.
From age 55, rising to 57 from April 2028, you can usually take up to 25% of your pension as tax-free cash. What happens to the rest is up to you. You could take it as taxable lump sums, move it into drawdown, or use it to buy an annuity, which pays a guaranteed income for life. With drawdown, you keep your pension invested and can choose how much taxable income to take and when.
Not an all-or-nothing decision
It also doesn’t have to be an all-or-nothing decision. You can mix and match the different options. For example, you could use some of the pension to buy an annuity, move some into drawdown and take some as lump sums. You also don’t have to access the whole pension at once. You can take benefits from part of the pot and leave the rest invested for later.
In your wife’s case, there are probably three main routes to think about. If she doesn’t need any tax-free cash now, the simplest option is to leave the SIPP where it is. It can remain invested and may continue to grow, and if it does, the amount available as tax-free cash could also be higher in future.
A second option is to take all her tax-free cash now. Based on a SIPP worth £110,000, this would be around £27,500. She could then reinvest this money in ISAs, where it could continue to grow tax-free. However, because the annual ISA allowance is £20,000, she would need to move the money across over more than one tax year. It is also worth remembering that money held inside a pension already benefits from tax-free growth, so this route may not offer much advantage over simply leaving the pension untouched.
She can move her whole pension pot into drawdown and start taking income, but if she does this without taking tax-free cash first, she loses the chance to take it later.
A third option is to move only part of the SIPP into drawdown and use it to provide income while she is still a non-taxpayer. The personal allowance is currently £12,570. If she already receives £5,600 a year from her occupational pension, she could potentially take a further £6,970 of taxable income from the SIPP without paying income tax, assuming she has no other taxable income. To do this, she could crystallise £9,293 of the pension, taking £2,323 as tax-free cash and £6,970 as drawdown income.
One important point to be aware of is that taking taxable income from a defined contribution pension usually triggers the money purchase annual allowance (MPAA). This would limit future contributions to defined contribution pensions, including tax relief, to £10,000 a year.
It depends what you’re trying to achieve
The best choice depends on what your wife is trying to achieve, as well as factors we don’t know, such as how her occupational pension will increase, how her SIPP performs and what happens to personal allowances in future. If her aim is to maximise tax-free cash, leaving the pension invested may be the most straightforward approach.
On the other hand, taking some drawdown income now could make use of her unused personal allowance while she is still below the tax threshold. It would also reduce the part of the pension that will eventually be taxable. Once her state pension starts in seven years’ time, she is, as you say, likely to become a taxpayer, so using some of that allowance now could reduce the amount of tax paid over her lifetime.
Ultimately, this is a judgement call. It will depend on her wider income, whether her occupational pension increases in value each year, future tax allowances and how her pension investments perform.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
