Sipp tfc clarification

SeniorSam

Can someone please confirm, or otherwise, the TFC position with a SIPP.

If I do not need an income from my SIPP, can I still take all or part of the 25% TFC without crystalysing the SIPP, therefore leaving the main pension sum payable tax free to my spouse on my death?

I had some information a while ago that suggested this could be done and crystalasation was not needed to take the tax free cash.

Sam

jem16

SeniorSam wrote: »

Can someone please confirm, or otherwise, the TFC position with a SIPP.

If I do not need an income from my SIPP, can I still take all or part of the 25% TFC without crystalysing the SIPP, therefore leaving the main pension sum payable tax free to my spouse on my death?

No as soon as you take benefits from the SIPP you have crystallised it. What could be done is phased drawdown where you only crystallise part of it.

Remember though that it can still be passed tax free to your wife providing she uses it as a pension.

I had some information a while ago that suggested this could be done and crystalasation was not needed to take the tax free cash.

Sam

What information would that be?

SeniorSam

Thanks jem16,

the information was given in March by Daniel Elkington, as follows - From Daniel Elkington
If you don't need the income then you could re-invest some into another pension. This is tax-neutral and will build up another PCLS (pension commencement lump sum). I'm not saying you should do this, but it is an option.

There are two things here, uncrystallised funds and crystallised fund.

Before you take an income from your pension (or hit age 75) your money is uncrystallised, which means that you can still take a pcls from it and if you die the benefits may be free from tax, lifetime allowance considerations notwithstanding.

when you take an income you crystallise part of the fund, which means if you die then you will pay 55% income tax on the benefits (very basically).

Be VERY careful when choosing a provider as some will crystallise the whole lot up front and !!!!!! the beneficiaries.

Some providers will crystallise on a monthly basis to ensure that any unused income does not affect the death benefits.

It seems like you don't want an adviser, but this is really complicated stuff and a few pages of feedback on an online forum are extremely unlikely to provide you with the answers you need.

I mentioned that at age 75 all your benefits are automatically crystallised. The intention is that you probably should annuitise at some point in the future.

You could always look at a third way product such as an investment linked annuity and simply take the minimum income allowed, which would allow that minimum to grow. You'd lose control of where it is invested but also lose the hassle of having to deal with fluctuations in the markets.

Additionally, in order to get drawdown to work you need to be investing in a high risk manner. You need the growth to be roughly 4% above your income level over a year to ensure a rising level of income that keeps up with inflation. For you this would be about 8% a year, which means a high level of equity content (60-70%) which would mean a high level of volatility which may affect your income in particularly bad years.

Sorry for the long winded answer but there are a tonne of issues with drawdown and unless you know what you are doing, I probably wouldn't.

You could annuitise enough money to produce enough income to access flexible (uncapped) drawdown, meaning you could access your funds whenever you like?

In terms of the original question - costs don't matter that much, cheap providers and incentives are generally offered over a short term. It's better to find a provider who is cost effective rather than just cheap.

................... I took that as TFC being available if income was not needed, however, perhaps I misunderstood.

Sam

jem16

SeniorSam wrote: »

................... I took that as TFC being available if income was not needed, however, perhaps I misunderstood.

Sam

Unfortunately you have misunderstood. However Daniel really should have made it clearer that taking "benefits" as opposed to "income" is what crystallises the pension.

jamesd

As jem16 wrote, taking a lump sum or income will change the death benefits. What you can do is take the income and pay it in to another pension. That new pension won't have had benefits taken from it so it can still pay out uncrystalised death benefits.

SeniorSam wrote: »

If I do not need an income from my SIPP, can I still take all or part of the 25% TFC without crystalysing the SIPP, therefore leaving the main pension sum payable tax free to my spouse on my death?

After taking the lump sum, 100% of the remaining 75% can be paid into the pension pot of a spouse with no tax charge. What changes after taking benefits/crystalising is the ability to get 100% with no tax paid outside a pension to anyone. After crystalising only the spouse (or some very limited dependents) can get it untaxed and only into a pension pot.

If your interest is your spouse getting the lump sum to care for her while she is alive, that's usually more than good enough. Even with capped drawdown she'd be able to take out 20-25% of the pension pot each year at age 85 or older, depending on the exact GAD calculation. Annual GAD limit calculations will reduce the money value of the 25% unless growth is more than 25% but this can drain the pension into non-pension savings and investments at a fairly high rate if desired.

SeniorSam

Thanks jamesd, always nice to hear from you with such helpful comments when I ask for help.

Just to clarify this, with my Sipp of say £300k, I could therefore take my £75k tax free lump sum and the remaining £225k could be paid( as one lump sum, or as the drawdown income) into a pension for my wife? No restrictions or limitations on that?

Following on from that, after that was done, were she to die first, her pension pot could be paid to me tax free if not crystalised?

Sam

jem16

SeniorSam wrote: »

Just to clarify this, with my Sipp of say £300k, I could therefore take my £75k tax free lump sum and the remaining £225k could be paid into a pension for my wife? No restrictions or limitations on that?

After your death, yes. Not before. Which is what I said in Post 2.

Your wife will inherit your pension pot which she can then continue to draw an income from with no tax penalties.

Following on from that, were she to die first, her pension pot could be paid to me tax free if not crystalised?

Yes.

SeniorSam

Thanks jem 16,

Thought that may have been to good to be true. I knew my wife can inherit the total pot, uncrystalised, or take a pension, which would be taxed in the normal way, or, after crystalisation, take the lump sum less 55%.

Learning all the time, but may now decide to take the full TFC and a modest £10k pa and leave the remainder top grow.

Sam

jamesd

You could take the lump sum and after your death 100% of the £225k could go into a pension pot for your wife from which she can take an income in any way she wants. She could also choose to pay the 55% tax charge to take it as a lump sum outside a pension.

Yes, her pot follows the same rules as yours, so can be paid to you untaxed as a lump sum outside a pension if it's uncrystalised.

If you want the lump sums I suggest that you both take them and maximum capped drawdown income. Then pay that income into fresh pension contributions if you want the pension tax relief, subject to the contribution limits for that.

Alternatively, if it's appropriate for your risk tolerance, you can get 30% income tax relief on VCT contributions that has to be repaid if they are sold within five years. You can wait five years, sell and get another 30% tax relief by reinvesting. the tax relief is no more than your actual income tax paid in the year of the contribution. No CGT and income is tax free. These are subject to inheritance tax. If you want unrestricted capital access then taking pension income and paying it into VCTs is one possible way to go, since it'll achieve that and deliver tax benefits that are better even than pension contributions.

jem16

SeniorSam wrote: »

or, after crystalisation, take the lump sum less 55%.

Or after crystallisation choose to take an income from with no 55% tax. The 55% tax is only applicable for lump sum payments.

SeniorSam

THanks again.

The VCT's are above the risk level we like, so would not go that route.
Think the max TFC is appropriate, as we can max ISA's for this year and again in the new tax year, so that will move £46,080 in similar funds and use some in possibly a Bond in similar funds again. I can increase the drawdown later if needed, but want to retain basic rate taxation.

Sam