Costs when moving to income drawdown

jamesd

SeniorSam wrote: »

when some crystallasation has taken place, can I still select and control which funds are used in both pot 'A' and pot 'B'.

Yes, you retain total control of both with no change in the investments you're able to use.

There is one change in this area, but not about investments directly. Before crystallisation you can transfer pieces of a pot. After crystallisation you can only transfer the crystallised pot as a whole, not a part of it.

One workaround that some pension schemes allow is keeping more than one crystallised pot - different "arrangements" within the same overall pension scheme. Multiple pots can also be useful for getting GAD valuations on less than the whole pot at once, so the effects of market value or rule changes is reduced.

There are some cost considerations but you have enough money to consider three to five pots without them becoming small enough for it to hurt on cost grounds.

SeniorSam

Thanks Jamesd,
I didn't appreciate that change following crystalisation. Is tha a new rule or has it been there some time?.

Amazing that others have not mentioned this as I feel it is a very important point. In other words, if I were to start off with £100k, taking the 25% TFC, or less) and say 5% of the remainder, then the next traunch would need to be the total remainder of pot 'A' and not just part of it again? If so, what is the process to avoid that?

Sam

jamesd

The rule has been there for some time and was made less strict by allowing the lump sum to be taken after 75 from April 2011. Before that you'd needed to take the lump sum before you reached 75 or not at all because the whole of any uncrystallised pot became crystallised at 75.

Before this government's other changes, from age 75 you also used drawdown with something called an Alternately Secured Pension and that had different limits on how much income could be taken, including a requirement to take at least a certain amount of income.

This stuff is generally making things better, it's just a fair bit of change to keep track of and keep up with.

SeniorSam wrote: »

In other words, if I were to start off with £100k, taking the 25% TFC, or less) and say 5% of the remainder, then the next traunch would need to be the total remainder of pot 'A' and not just part of it again? If so, what is the process to avoid that?

I'm not quite certain of what you mean with that description so I'll give an example instead of replying directly:

Start with £400,000 at age 73 for convenient numbers.

Age 73: take benefits from £100,000, £25,000 lump sum, £75,000 in a crystallised pot B1, £300,000 in uncrystallised pot A.

Age 74: take benefits from another £100,000, £25,000 lump sum, £75,000 into a crystallised pot B2, £200,000 in uncrystallised pot A.

Age 76: taken benefits from another £100,000, £25,000 lump sum, £75,000 into a crystallised pot B3, £100,000 in uncrystallised pot A.

Age 84: take benefits from another £40,000, £10,000 lump sum, £30,000 into a crystallised pot B4, £60,000 in an uncrystallised pot A.

Now, pots B1, B2, B3 and B4 may or may or may not exist. A pension scheme can choose how this is handled. Some can choose to have the pots kept apart, others can choose to have them always combined into a single B pot. Hargreaves Lansdown uses the single pot approach.

A reason why you might want more than one crystallised pot is to have GAD calculations at different times. Say there's a 40% market drop. You would suffer a 40% drop in GAD limit if you got a full calculation at that time. Do three pots 16 months apart and using different arrangements (the different B pots) and you'd have three different GAD calculation dates so you'd only see a drop of 13%, not the whole 40%, because only one pot would be affected. The annual GAD calculations from age 75 limit this but I mentioned 16 months instead of 12 because after 75 that still leaves say three calculations 4 months apart so they probably won't all be at the worst possible time.

The workaround for one pension scheme not allowing more than one B pot is to transfer part of the uncrystallised A pot to another scheme, then crystallise there. You can then transfer back to the original pension scheme and the law requires it to preserve the different GAD calculation date. So you could say do the age 74 part above by transferring to a different scheme, crystallising then transferring back to HL, who would be obliged to keep it apart with different GAD calculation date even though they don't do that normally.