Sipp tfc clarification

dunstonh

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.

So, you are going to take money out of a tax free investment which will make the death benefits taxable to put the money into another tax free investment that has identical investment options with the surplus invested in taxable investments.

Why?

SeniorSam

Hi dunstonh,

I'm still thinking and calculating. We are both 72, so at age 75, I understand that the death benefits will change.

I have an income of about £7500, which will soon cease, leaving a shortfall and we have already been nibbling into our ISA savings for holidays etc. My thoughts were that crystalising at least £150k, would give the chance to use this year's ISA allowances (£11,520 each) and have some surplus to use for other needs.

Initially drawing say 5% (or £5,000pa) from the drawdown pot to allow for continued growth. We could then draw a little from our other ISA's (£100k) to top up until I crystalise the remainder of the pot.

Needing some income and some capital, would you suggest another route?

Sam

jamesd

Yes, at age 75 the uncrystalised lump sup payment outside a pension pot is subject to the 55% tax charge.

Is she also close to paying higher rate income tax? If not, are there assets producing taxable income that can be given to her to shift some income from your tax to her tax?

If you take a higher lump sum than strictly needed, draw on that capital or other capital not inside a tax wrapper instead of taking income out of ISAs. This effectively moves that capital into the ISA beyond the annual limit - instead of taking out the income it ends up in the ISA.

Leaving the money inside the pension pot instead of drawing the maximum income from whatever portion you crystalise doesn't seem like a good idea. Why draw on capital outside a pension to leave money in a pension where it's less accessible and harder to inherit? Maybe inheritance tax concerns after the second death? Or are you expecting your taxable income to decrease in the future for some other reason? If it's not going to decrease you might as well pay the income tax now and leave other money in tax wrappers.

One thing that you could do is crystalise in stages over two or three years so that the lump sum money ends up going into ISAs as it's released from the pension pot. That eliminates the tax wrapper disadvantage that was bothering dunstonh.

SeniorSam

Thanks Jamesd,
Crystalising in stages was what I had planned. £150k first and from the £37,500 TFC, maximising both our ISA allowances of £11520 and the other cash for planned projects/holidays. Taking say £5,000 pa on a quarterly basis from the remaining crystalised sum (£112,500) so allowing for continued growth. Then crystalise the balance of the SIPP by age 75 to maximise ISA's again.

Dunstonh, seems to imply this would not be good, or am I missing something.

I have state pension of £1213.88 pm plus small occupational pension of £88.64 pm, so have a way to go on basic tax and my wife is a non taxpayer with only a state pension of 637.08 pm.

The SIPP pot has grown by about 7-8% for the last few years and should continue at that level.

Sam

dunstonh

Dunstonh, seems to imply this would not be good, or am I missing something.

I am on guard with it. There isnt enough to say either way.

However, generically and in isolation of facts about your circumstances, what you are doing is taking a tax free investment and making it mostly taxable. Generically, that is a bad move unless there is justification otherwise.

Considering a phased approach is one possibility. Only crystallising the barest minimum and have the income as annual in advance. So, you can treat the lump sum and income payment as capital to put in the S&S ISA. However, no more beyond the ISA. That would leave the rest of the uncrystallised pension tax free. You could repeat next year and the year after until forced at age 75 to crystallise. That assumes forced crystallisation still exists then. There is pressure on the Govt to increase the age. Whether it happens in the next 3 years is unknown (i suspect not) but it does keep your options open and in the event of an earlier untimely death, the uncrystallised part of the fund would pay out more than the crystallised fund.

SeniorSam

Thanks dunstonh.

I have mentioned that I will soon need additional income, as well as capital for continued high quality holidays. The capital from the pension in TFC form helps the latter and drawdown of £5000 pa helps meet the income shortfall.

Taking the drawdown annually in advance would remove the £5000 in one payment, rather than over four, quarterly. I would have thought the later was more efficient allowing a slower deflation. Can you please clarify the benefits of drawdown annually in advance ?
Sam

dunstonh

I have mentioned that I will soon need additional income, as well as capital for continued high quality holidays.

But you also said you were increasing your ISA and an amount above that. So, that would indicate you dont really need the income (or all of it).

Can you please clarify the benefits of drawdown annually in advance ?

Instead of taking enough tax free cash to fill the ISA, you could use some of the income (paid in advance) plus some of the TFC to fill the ISA. Therefore allowing you to crystallise less of the pension.

jamesd

Do you anticipate that your additional income needs will reach or exceed the GAD limit on pension drawdown income?

The reason I'm asking is that if you anticipate this, it may be worth crystalising more now so you can take maximum drawdown income from the whole pot as soon as possible and reduce the speed of drawing on non-pension assets.

SeniorSam

Hi James
Present joint income is just over £30,775, but am using some savings for holidays, which are occasionally expensive cruises. About £8,400 will soon drop off that income and that is what needs to be replaced eventually, which would be within GAD rates this first tranch, but felt it initially wise to only draw £5000 and catch up from further crystalisation after the initial £150k, within the next 2 years.

I wanted enough cash to maximise S&S ISA's for us both this tax year and possibly again next year from the next tranch.
Sam

jamesd

Given that joint income I'd be inclined to crystalise enough pension pot so that you can fully use your basic rate income tax band with the GAD-limited pension income. That's because your other income is coming out of tax wrappers and it makes more sense to leave that there and take the income from the pension.

It's true that this might leave some of the lump sum outside a tax wrapper for a year or two but that's not going to be significant, you can just put the growth part of your investments outside the tax wrappers and pay it in later, using your CGT allowance to shield you from CGT.

Say you want £40,080 just to use two people's ISA limits from the lump sum. That implies leaving £138,240 in the crystalised pot to provide drawdown income. A GAD limit calculator using the 3% gilt rate in effect for August 2013 and age 72 gives a 125% GAD limit of 7.4% (use bottom part of the calculator on the next page). That's £10,299.76 a year. With joint income of just over £30,755 it seems unlikely that you would have any higher rate income tax to pay. I don't see any inefficiencies in doing this much: all of the money ends up in a tax wrapper and the income is taxed at basic rate.

If you need more than that income then increasing the crystalisation amount to get the extra income and avoid taking money that is currently in a different tax wrapper out of it (or taking income out of one instead of accumulating it inside) seems sensible. If you keep the income level below your higher rate income tax level, anyway. So a bit of lump sum might be outside a tax wrapper for a while but that's not a big deal given the use of growth investments and CGT allowance.

So initial tuning is something like: crystalise as much as possible of the pension pot so that you take yourself just to the edge of higher rate income tax when taking maximum 7.4% income from it. Put the maximum amount of lump sum in ISAs and accept some of it using the CGT allowance for 20 months or so, until the 2015/16 ISA allowance becomes available.

After that tuning, do you still need more income, or are you taking any income at all from money that is in ISA tax wrapper already? What sort of amount?