Planning Drawdown

GhIFA

Gatser wrote: »

Errrr.... I think so thanks.... but just to check...

I am thinking there must be an "approved" method for apportioning the total investments value between Crystallised(C) & Non Crystallised(NC) "pots"?
Your answer suggests that this is done by allocating in proportion to N:NC.

However... I would argue that following the withdrawal of the £50k TFC we are left with Investments of £350k, split as:
C = £150k and NC £200k (ie 43%:57%)
Therefore any change in Investments value should be allocated 57% to the NC pot.

Am I correct?

I am not an IFA.... just a stubborn accountant! Cheers!!:beer:

No, when making the initial crystallisation you will decide how the funds are transferred from the existing fund - this could be from one particular investment fund (for simplicity am just working on the basis that the plan is invested in funds), or equally across all funds, or any proportion you wish. You then decide how you want to invest the crystallised funds. From this point on, even if held under the same plan number, the Crystallised and Non-Crystallised pots are treated separately. The value of each pot will be entirely dependent on the investment performance of the funds/assets held inside it. The performance of the Non-Crystallised pot has no bearing on the value of the Crystallised funds and vice versa. Even if the Crystallised pot grows by 20%, and the Non-Crystallised pot by 5%, there is no apportioning the additional growth across the pots, they are simply worth what they are worth.

Gatser

GhIFA wrote: »

No, when making the initial crystallisation you will decide how the funds are transferred from the existing fund - this could be from one particular investment fund (for simplicity am just working on the basis that the plan is invested in funds), or equally across all funds, or any proportion you wish. You then decide how you want to invest the crystallised funds. From this point on, even if held under the same plan number, the Crystallised and Non-Crystallised pots are treated separately. The value of each pot will be entirely dependent on the investment performance of the funds/assets held inside it. The performance of the Non-Crystallised pot has no bearing on the value of the Crystallised funds and vice versa. Even if the Crystallised pot grows by 20%, and the Non-Crystallised pot by 5%, there is no apportioning the additional growth across the pots, they are simply worth what they are worth.

Many thanks
Now I DO understand.
So the underlying investments have to relate to the C or NC pots.
I suppose that takes the calculations out of it... simples! :T

System

Thanks Ghifa, that is the first clear statement i have seen that that is how it works.

But a further point:
Each plan is free to make whatever investments you want? It could sell something and buy something else. So the crystalised plan could, for example, "buy" an investment from the uncrystalised plan? And vice versa.

Therefore the proportions of investments within the plans are not fixed, but could be swapped around? A well-performing investment, eg a property, could be switched out crystalised and moved into uncrystalised, to maximise uncrystalised growth?

SippTechie

The statement that each fresh crystallisation goes into a new pot does not apply to all SIPPs.

It is worth asking your pension provider the question as once the pots have been created separately there is only one chance to merge them, and that is once you have reached age 75.

Transferring the different pots from a "multiple" pot provider to a "single" pot provider doesn't merge them as HMRC rules require transferred pots to be ring-fenced.

I work for a "single" pot provider so, if you take benefits from a bit of your SIPP, and then take some from a bit more, the second pot is just added to the first.

There are advantages and disadvantages to both methods, and frustratingly you will often only find out what they are when the Government changes rules.

We opted for the "single" pot method for various reasons, one being that lots of people who transfer to a SIPP do so to bring lots of different pensions together in one place. The last thing we think most want to do is create lots of different pots when they retire.

We have one client who transferred to us from a "multiple" drawdown provider who has 12 different drawdown pots. That means we have to review that person's maximum income 12 times every 3 years. I'm sure they'd rather we could only do that once if only to save on the post they receive!

jamesd

gadgetmind wrote: »

How do drawdown providers track this? Do they keep everything in separate pots (as most (all?) do for crystallised versus uncrystallised) or is it all hypothecated?

They have to track the details for each arrangement, effectively as if they were completely different pension products, even though they may be different pots within the same product. But do note SippTechie's post, and that SippTechie is the expert here.

gadgetmind wrote: »

I guess you also get hit with 3x the GAD calculation fees?

Undoubtedly. Though I suppose there could be some exceptions, maybe some products designed to have say a thousand arrangements to let you take lump sums in pieces. Those might constrain you to the same calculation date for each arrangement to cut costs. Or they might work in the way that SippTechie describes.

gadgetmind wrote: »

What happens if you switch drawdown provider?

They get told the details, just as they have to be told whether a lump sum has been taken or not.

gadgetmind wrote: »

Sorry for all the questions!

No problem, it's fun to share and discuss possible ways to optimise money use.

jamesd

SippTechie, am I right in thinking that to get different GAD calculation dates it is necessary to use different arrangements and presumably also report them individually to customers as different pots within the same overall pension product? I suppose that also means that all of the anniversary dates have to be the same and must do new crystalisations on that anniversary, or can you have crystalisations at different times throughout a year and still have just one GAD ate to track?

I dot suppose there's a way to have the staggered GAD calculation dates to smooth GAD calculation variations with a single pot provider, except perhaps by having more than one pot? I like risk reduction so I may end up choosing to do this just for that reason.

Perhaps you might also clarify something that's been discussed here without a real expert's knowledge: take benefits at 55 under today's rules, is there another test against the GAD limit at age 75 or is the one done at 55 the only one? I see some indication that there may be a second test at 75, with the income withdrawn reducing the value for the test, and if so I'll get to correct some past posts of mine about this.

Thanks for mentioning that you work for a single pot provider. My reading of the HMRC documents left me with the impression that it was mandatory to keep the pots apart if they were crystalised at different times.

SippTechie

jamesd wrote: »

SippTechie, am I right in thinking that to get different GAD calculation dates it is necessary to use different arrangements and presumably also report them individually to customers as different pots within the same overall pension product? I suppose that also means that all of the anniversary dates have to be the same and must do new crystalisations on that anniversary, or can you have crystalisations at different times throughout a year and still have just one GAD ate to track?.

If you are in a pension that creates different pots for each crystallisation then each of those will be a different "arrangement" under the same "scheme".

The anniversary dates of the arrangements in one of these schemes don't have to be the same. They will be based on the date you crystallised each arrangement. Obviously if you choose to crystallise each arrangement on the same date, but in different years, then all the pension years will be the same, it will just be the three year review periods which are different.

jamesd wrote: »

I dot suppose there's a way to have the staggered GAD calculation dates to smooth GAD calculation variations with a single pot provider, except perhaps by having more than one pot? I like risk reduction so I may end up choosing to do this just for that reason.

One of the advantages attributed to multiple arrangement schemes is that variations in the GAD rate and value of your pension don't have such a violent effect on the income available to you.

For example, in a single arrangement scheme, if you come up for a review when gilt yields are low and your pension has dropped in value this will affect your whole scheme. If you are in a multiple arrangement scheme the drop will only affect the arrangement being reviewed, not all of them.

Of course the reverse applies if your fund has grown in value, and you can elect for a single arrangement pension to be reviewed each year if you wish.

jamesd wrote: »

Perhaps you might also clarify something that's been discussed here without a real expert's knowledge: take benefits at 55 under today's rules, is there another test against the GAD limit at age 75 or is the one done at 55 the only one? I see some indication that there may be a second test at 75, with the income withdrawn reducing the value for the test, and if so I'll get to correct some past posts of mine about this.

Yes, there is another test at age 75. The test is on any growth in your drawdown pension pot.

As an example, if you crystallise £200,000 at age 55 you will normally have a tax free lump sum of £50,000 and your drawdown pot will be £150,000. If your drawdown pot has grown from £150,000 to £250,000 by the time you reach age 75 then the additional £100,000 is tested against the lifetime allowance. The same "test on growth" applies if you buy an annuity from a drawdown pot before you reach age 75.

jamesd wrote: »

Thanks for mentioning that you work for a single pot provider. My reading of the HMRC documents left me with the impression that it was mandatory to keep the pots apart if they were crystalised at different times.

Definitely possible to operate single pot. We've been doing it since 1997. The one thing HMRC has consistently told us (I can't guarantee that they have told other providers this and, based on what I know about what some other providers have done, it would appear other provider have been told differently) is that we should apply the single arrangement or the multiple arrangement system to all clients, not pick and choose which one we use to mess around with the edges of the rules - and it is possible to mess around with them.

The only time we create multiple arrangements, and we only do this because the rules force this, is when we receive a transfer of crystallised rights. A transfer of crystallised rights must go into an arrangement which is separate from all other arrangements.

Happy to clarify anything else you like.

peterg1965

I posted this earlier and didn't get a response, maybe SiPPTechie or James could comment?


A question for the IFAs, at the point of crystallisation, how do you and HMRC know what portion of LTA has been used? Is there a formal letter from the pension provider and/or HMRC to say what % has been used?

Then after crystallisation you can continue to grow the remaining 75% pension pot (assuming 25% Tax free taken) to whatever size you can/want and this has no bearing on subsequent pension crystallisation's.

SippTechie

peterg1965 wrote: »

I posted this earlier and didn't get a response, maybe SiPPTechie or James could comment?


A question for the IFAs, at the point of crystallisation, how do you and HMRC know what portion of LTA has been used? Is there a formal letter from the pension provider and/or HMRC to say what % has been used?

Then after crystallisation you can continue to grow the remaining 75% pension pot (assuming 25% Tax free taken) to whatever size you can/want and this has no bearing on subsequent pension crystallisation's.

The first question is fairly straightforward. Your pension provider is obliged to confirm the % of the standard lifetime allowance that you have used up a short time after you take benefits. They then have to send you a statement annually which includes the total % you have crystallised with them (plus the % you crystallised with other providers if those benefits have later been transferred to them). The provider has to report this information to HMRC in only very limited circumstances.

The answer to the second question is that you can continue to grow the drawdown pot, but that the growth will be tested against the lifetime allowance when you reach age 75, or if you buy an annuity before age 75. Once you've gone past age 75 there won't be any further checks against the lifetime allowance, although bear in mind that any lump sums paid after your death are subject to 55% tax once you've reached age 75. So the more your benefits grow, the more money goes to the taxman if a lump sum is paid out to your beneficiaries.