When investing in a SIPP you get tax relief. How much depends on whether you are a basic or higher rate tax payer. For this post, I am focussing on basic rate payer.
My understanding is that when you go to withdraw money from a SIPP when you hit (soon to be) 57 years old... you can withdraw 25% tax free, and the remaining 75% you need to pay tax on. For this reason, it's recommended to not withdraw in one lump sum because this may push you over the limit for a basic rate tax payer in the year you withdraw, which I understand.
What I need some clarity on is do you have to pay tax on the 75% of your pension pot, regardless of how many years you stagger the payments? Or is it 25% tax free each year?
If the former, this essentially means most of the tax relief given is undone. For a basic rate taxpayer the essential relief (in crude terms) would be... 0.2 * 0.75 = 0.15 = 15%. Meaning if you had a pension and withdrawed on the most favourable terms vs didn't have a pension and just paid 15% on income tax throughout your life you would be pretty much in a similar position financially?
I hope I'm mistaken on that because if tax obligation is 75% of the pot it seems to make SIPP pensions less appealing, as although you do get tax relief initially you eventually have to pay tax on most of your pension.
It seems investing in a LISA would be more strategically better because you get an additional 5% on top of the 20% relief, plus can withdraw the full amount once you reach 60 without having to pay any tax on it...
Am I misunderstanding anything here?