Costs when moving to income drawdown

SeniorSam

With a pension fund in excess of £300k in a Sipp, that was transferred to a provider, and that provider is not asked for advice and funds are chosen by the client to minimise costs, what changes are ongoing when the client decides to go into income drawdown?

I know that the fund is moved to a drawdown account and in this instance, not all of the 25% TFC will be taken, but a modest drawdown of say £12,000 per annum drawn, on which part will be tax free from the undrawn TFC.

Charges are made to manage the account ( even though the funds are selected by the client), but what other charges may then be incurred on a regular basis?

Finally, if the Sipp fund were to be moved to another provider for the purpose of taking drawdown, where the ongoing charges are far less than the present provider, would this movement involve a charge, or loss in the fund value?

Many thanks

Sam

dunstonh

Many providers charge extra for drawdown due to the extra work involved.
Some providers will charge on transfers. Others will not (mostly not nowadays).

In both cases, you would need to refer to the providers in question as there is no single answer that fits all of them.

srcandas

HL quote £75 per GAD calc and a one off £25. There's a £10 charge to change withdrawal amount. It's more for flexible drawdown. All these are plus VAT.

Can't believe they vary greatly between suppliers and in any case who knows what the future holds.

Seems many of the cheap suppliers that people have raved about recently have within months changed their terms, their fans turning into hungry wolves snapping at their heals

ps. If you're thinking of changing supplier do keep an eye out for incentives. :beer:

SeniorSam

Thanks for the information dunstonh and srcandas. The Sipp fund in question is presently with HL but it was my understanding that companies like Cavendish have lower charges than most, particularly where no advice or fund management is required. Can you say if this is so, or would the charges at HL be as competitive, or thereabouts?

Sam

dunstonh

Cavendish offers a limited selection of providers commission free. However, it is mainly personal pensions. HL's SIPP is more advanced than the options offered by Cavendish. The charges would largely depend on how you invest. For example, an internal fund on one of the PPPs with a decent investment amount could be a lot cheaper than HL. Equally HL could be lower than the others depending on what investment options you use with them. Personal pensions that offer drawdown "tend" to be cheaper on drawdown charges than SIPPs. However, it really comes back to how you want to invest as that will be the primary cost.

jamesd

It depends on the specific investments. In general HL tends to be quite expensive for larger pension pots but might be competitive for smaller ones.

Cavendish isn't commission free (there's still platform commission even though Cavendish itself might not receive any) and may well not be the lowest cost choice for a pension pot of £300,000. If you won't be changing investments much you should investigate fee based places with no commission.

Stochasticity

SeniorSam wrote: »

I know that the fund is moved to a drawdown account and in this instance, not all of the 25% TFC will be taken, but a modest drawdown of say £12,000 per annum drawn, on which part will be tax free from the undrawn TFC.

The TFC is use it or lose it. You won't get any income tax-free for not taking the TFC initially. Some of the income may be tax-free for falling within your personal allowance, however.

Charges are made to manage the account ( even though the funds are selected by the client), but what other charges may then be incurred on a regular basis?

The charges for drawdown are notionally to cover the cost of calculating and making payment of benefits, i.e. GAD calculations, administration, payroll, tax reporting etc. You have a lot of flexibility in terms of the amount of income you take and when you take it, and the pension provider has associated responsibilities (and risks).

Finally, if the Sipp fund were to be moved to another provider for the purpose of taking drawdown, where the ongoing charges are far less than the present provider, would this movement involve a charge, or loss in the fund value?

Depends on the terms of both the ceding and receiving providers, whether they charge to transfer in-specie, and whether they charge to transfer as cash. If you transfer as cash, you will be out of the market for a period, during which markets may rise, to your cost.

jamesd

Take care if planning to do staged drawdown. You don't have to take 25% tax free cash, you could take 1% or less or anything in between. Unless you are very clear about your instructions you might find that your instructions have caused the provider to deliver you 6.25% from all of the pot instead of 25% from say a quarter of it. Which would lose you the chance to take the rest of the tax free lump sum later.

SeniorSam

Thanks all.

I'm not clear on this TFC item. It was my understanding that if I choose not to take all the TFC initially (25%), but only take ,say £30,000, then the balance of the 25% can be taken in stages later on, or all at once later on.

If there is an element of tax free cash remaining in the pot and I take drawdown, would not part of that drawdown relate to the TFC part and therefore be exempt from income tax. Possibly reducing the TFC amount yet to be taken?

As to investment, I have had the pot in Invesco Perpetual High Income, Distribution and Corporate Bond funds, which have done well and would continue with those funds in drawdown. Sipp presently with HL but thinking about Cavendish as I have several other investments with them.

Sam

jamesd

You do it in stages by taking 25% of part of the pot in the first stage, then more later.

If you're doing staged drawdown to use part of the TFC for income you'd take benefits from say £10,000 in year 1, £2,500 tax free, £7,500 to provide income at say 5%, so say £375 each year. Of that in the first year just £375 would be taxable. Total income 2500+375*.8 = 2800.

In year 2 to give about the same net income you'd take benefits from say 9000. £2250 TFC, 6750 to add to the existing 7500 so total of 14250 generating taxable income at 5% of £712.50. Total income 2375 + 731.25 *0.8 = 2820.

Similar in year 3, take benefits from less because the taxable portion is going to be higher still.

SeniorSam

Thanks Jamesd,
So if I take £30k TFC to start and then have an income drawdown each year of say £10k, does mean that all of the £10k is taxable, even though there is still TFC capability within the Sipp?

Sam