Help with drawdown strategy

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  • Triumph13
    Triumph13 Posts: 1,730
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    Gallygirl wrote: »
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
    It makes no difference what wrapper the investments are in, just take 3% of everything! Anything drawn from outside the pension is tax free, anything from crystallised pensions funds is taxable - but as others have said you can easily stay below your PA. Anything from uncrystallised pension is 25% tax free 75% taxable.
    Investment growth on the other hand is tax free in the pension or the ISA, taxable as either income (dividends) or capital gains if outside waiting to go into the ISA - but the annual allowances should cover that easily enough.
  • Triumph13
    Triumph13 Posts: 1,730
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    Life is much simpler if you just think in terms of total investment earnings rather than dividends. If you think about it, if all your investments were in a fund that returned x% every year and you could either have that as an Inc fund which paid out the dividends or an acc fund that reinvests the dividends, then you end up in exactly the same place. Try an example.
    Fund has a value of £100M. The underlying investments pay a dividend of £3M and so their own values drop by £3M accordingly. The fund now has £97M of investments and £3M of cash . An Inc fund pays out a dividend of £3M to it's investors and so the unit price drops from say £100 to £97. If you held 100 units you now have £300 cash dividend and units worth £9,700. An Acc fund instead uses the £3M of cash to buy more of the underlying investments so it goes back to having £100M of investments. You sell 3% of your holding and you end up with exactly the same £300 of cash and £9,700 of investments.
    If you try and manage everything based on having inc funds and only drawing the dividends then you are landing yourself with a whole heap of unnecessary difficulty because the dividends are sitting in each and every pot and so you have to draw your 3% or whatever from each and every pot, every time. Nightmare.
    If instead you just sell 3% of your acc units each year then all the investments are fungible - you just take your drawings from wherever is most convenient / tax efficient.
  • BLB53
    BLB53 Posts: 1,583 Forumite
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
    I would forget about 'crystallised and uncrystallised' and focus on flexi-drawdown.

    Yr 1 convert £100K to FD, take 25% tax free and put £20K in ISA and then forget about 'income' and just take whatever you need from remaining £75K.

    Repeat yrs 2 & 3.

    You may get more from an article on drawdown by DIY Investor
    http://diyinvestoruk.blogspot.co.uk/2016/08/a-look-at-sustainable-drawdown.html
  • dunstonh
    dunstonh Posts: 116,043
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    Gallygirl wrote: »
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?

    I wouldnt crystallise the whole lot. I would use phased flexi-access drawdown as that seems to be the most efficient method. However, that is only based on the limited info available.

    Forget the dividends. Have them paid into the cash account (assuming you have inc units) Then draw the income on a fixed monthly amount from the cash account at a level that is sustainable from the dividends. This assumes you actually need that level of income.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • "I wouldnt crystallise the whole lot. I would use phased flexi-access drawdown as that seems to be the most efficient method. However, that is only based on the limited info available.

    Forget the dividends. Have them paid into the cash account (assuming you have inc units) Then draw the income on a fixed monthly amount from the cash account at a level that is sustainable from the dividends. This assumes you actually need that level of income."

    So, say I crystallized 100,000. That would give me a tax free lump sum of 25,000 and 75,000 that would say at 3% give me £2250. If my ISA gave me £7000 a year in income, the shortfall for my 15,000 would be £5750 which I could take from the tax free lump sum of 25,000? So this could last me approx 4 years before crystallizing another 100,000. The only thing is the tax free lump sum either sitting earning no interest with interactive investor or I suppose putting it into the ISA.

    When you crystallize part of your SIPP is it in specie? Do I have to choose which funds are transferred or which to sell, transfer over in cash and repurchase funds for the £75000 ?
  • dunstonh
    dunstonh Posts: 116,043
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    o, say I crystallized 100,000. That would give me a tax free lump sum of 25,000 and 75,000 that would say at 3% give me £2250.

    You say you have lump sums elsewhere and dont need the lump sum. So, why would you crystallise £100k?
    That £2250 would be 100% taxable income, subject to personal allowance as you used the 25% as a lump sum.
    If my ISA gave me £7000 a year in income, the shortfall for my 15,000 would be £5750 which I could take from the tax free lump sum of 25,000? So this could last me approx 4 years before crystallizing another 100,000.

    Alternatively, you use phased flexi-access drawdown to pay you the monthly amount you need where 75% is taxable and 25% is tax free. You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to).
    When you crystallize part of your SIPP is it in specie?

    yes. However, your fund is split between the two.
    Do I have to choose which funds are transferred or which to sell, transfer over in cash and repurchase funds for the £75000 ?

    Yes you do. However, the options you have available will vary with providers.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • The 100, 000 was from James' suggestion.

    "Alternatively, you use phased flexi-access drawdown to pay you the monthly amount you need where 75% is taxable and 25% is tax free. You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to)."

    That makes more sense to me. So if I need 8000 from my SIPP per year I would crystallize that amount either monthly or once or twice a year making sure I had enough cash to do so or sell sufficient funds to cover?
  • "You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to"

    Do you mean phased flexi-access doesnt include the lump sum but I can accumulate all of the 25% lump sum allowances for a future date or that purely the lump sum remains invested in the SIPP?
  • dunstonh
    dunstonh Posts: 116,043
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    That makes more sense to me. So if I need 8000 from my SIPP per year I would crystallize that amount either monthly or once or twice a year making sure I had enough cash to do so or sell sufficient funds to cover?

    If you needed £8000 from the SIPP. That is 666pm. You would crystallise £666pm and 75% would be taxable and 25% would be tax free.

    If there was no other income, you could crystallise enough to use up the personal allowance with the 75% chunk. That way you can draw £11,500 tax free under your personal allowance and the 25% part would be on top of that and not taxable. You can then put any excess you dont spend into the S&S ISA.
    Do you mean phased flexi-access doesnt include the lump sum but I can accumulate all of the 25% lump sum allowances for a future date or that purely the lump sum remains invested in the SIPP?
    Phased flexi-access drawdown only crystallises what you draw each month. So, everything left behind is uncrystallised. And that uncrystallised pot has all options open to it in future.

    By far the most common method we use as advisers is phased flexi-access drawdown. Yet most of the consumers we deal with know nothing about that method.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd
    jamesd Posts: 26,103
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    edited 16 September 2017 at 1:32PM
    Phased is just a fancy name for doing it in stages. Doesn't have to be monthly, you can easily do something like crystallising £80k at the start of the year to get £20k for the ISA and 60k in a taxable pension pot. Then you can set up regular payments from that 60k each month to use your remaining personal allowance. Add crystallising some more to get extra income.

    The reason I describe it this way is that it's relatively uncommon for consumer SIPP places to offer the option of taking regular monthly payments of part tax free and part taxable. Not unheard of, I think Standard Life offers this for consumers but their product is unattractive for other reasons.

    So far as the 25% tax free lump sum goes, you must take all of the 25% at the time you crystallise a portion of the pot. If you want to crystallise £100k you mus take 25k tax free lump sum then, if you take just 20k tax free lump sum you lose the ability to take the extra 5k from this chunk later. You aren't forced to take the whole 25%, it's fine to take just 20k tax free lump sum when crystallising 100k, it's just wasteful.
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