income drawdown possibilities

plonkee

Is the following possible with a SIPP fund of £100K assuming (for the sake of argument) 5% growth

@55 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £72K to grow
fund grows to £75K
@56 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £47K to grow
fund grows to approx £50K
@57 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £22K to grow
fund grows to £23K
@58 take £23K of fund, £5750 as tax-free lump sum, move £17,250 into income drawdown

Unsurprisingly, I'm thinking that the £7K could be invested in an ISA each year.

dunstonh

By doing that though you are reducing the death benefit and increasing the assets in your estate. So, you need to weigh up the pros and cons.

Cook_County

I had thought I had read that taking the maximum lum-sum (25%) at age 55 followed by taking the maximum unsecured pensions each following year until age 75 that much of the unfavourable annuity issue at age 75 could be resolved.

I agree that the income tax issues between age 55 and 75 would need to be addressed plus death benefits if these are of concern; but to follow the OPs question, is this realistic and how much of the hypothetical £100K would be left by age 75???

EdInvestor

All perfectly possible, it's called "phased drawdown".

How much of the hypothetical £100K would be left by age 75???

Depends what it's invested in and what charges you are paying.It could easily be worth more than when you started: after all the GAD income limits aren't that high.

plonkee

I'm not thinking that any of the money either in drawdown or taken as a lump sum is actually spent, more thinking about whether this strategy is allowed. All the money would be invested sensibly to produce an income upon retirement and if necessary converted into an annuity at 75.

Related to this (at least in my mind) can you contribute to a pension whilst part of it is in drawdown?

EdInvestor

plonkee wrote: »

I'm not thinking that any of the money either in drawdown or taken as a lump sum is actually spent, more thinking about whether this strategy is allowed.

Yes it's certainly allowed and is followed by plenty of drawdowners already - though many people would take the full 25% lump sum at the start, because you can invest the money in shares and get a dividend income which is effectively tax free if you are a basic rate taxpayer. Then you can switch the money over into your ISA every year, as you plan.

But there's no real advantage to a BRT in storing the money in the pension unless you are in poor health, and there's always the underlying concern that the tax free cash facility might be cancelled.

A big plus point before for going phased was to avoid the problem of getting stuck with the same income limit for 5 years although your drawdown value was rising, but now that the Revenue is going to allow annual fund reviews, you can increase your income if appropriate on demand with an ordinary drawdown.

Related to this (at least in my mind) can you contribute to a pension whilst part of it is in drawdown?

Yes. But it might make things unnecessarily complicated.A new SIPP might be better. (SIPPs have to be segmented by the date they are vested, so you will end up with losts of smaller SIPPs under your phased plan anyway.) BTW you aren't allowed to recycle tax free cash from one vested pension into a new one.

plonkee

BTW you aren't allowed to recycle tax free cash from one vested pension into a new one.

But if you are still earning, presumably you can contribute up to the amount you earn?

I don't know that I would actually pursue this strategy, but it gives me something to think about.

bigbloke45

I know that GB has stopped pension "recycling", but I still wonder how the revenue could distinguish between out of income contributions and recycled tax free cash if you are still working?

I used to present this idea many years ago, but never saw many takers; shame, it was essntially "free" money from the taxman.

EdInvestor

bigbloke45 wrote: »

I know that GB has stopped pension "recycling", but I still wonder how the revenue could distinguish between out of income contributions and recycled tax free cash if you are still working?

If you take benefits from one pension, the Revenue will usually know about it as you will be taxed on the income. If at the same time, you claim tax releief on a lump sum paid into another pension, and it looks to be about the same size as the TFC would have been in the first case, then expect them to get suspicious and check.

BTW you can recycle lump sums of 15k or less.

dunstonh

bigbloke45 wrote: »

I know that GB has stopped pension "recycling", but I still wonder how the revenue could distinguish between out of income contributions and recycled tax free cash if you are still working?

I used to present this idea many years ago, but never saw many takers; shame, it was essntially "free" money from the taxman.

They would look at your contribution history. Anything less than £3600 a year wouldnt even make the radar. If you go higher than that, would it be consistent with your contributions in earlier years? Would the amount you pay extra stick out like a sore thumb?

peterg1965

plonkee wrote: »

Is the following possible with a SIPP fund of £100K assuming (for the sake of argument) 5% growth

@55 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £72K to grow
fund grows to £75K
@56 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £47K to grow
fund grows to approx £50K
@57 take £28K of fund, £7K as tax-free lump sum, move £21K into income drawdown, leaving £22K to grow
fund grows to £23K
@58 take £23K of fund, £5750 as tax-free lump sum, move £17,250 into income drawdown

Unsurprisingly, I'm thinking that the £7K could be invested in an ISA each year.

Excuse my ignorance, but I thought that taking a tax free drawdown from your pension fund was a 'once only' act. Or is it that you can do it as many times as you like up to the maximum permitted 25% of the pot? If so, is the actual maximum figure taken as 25% of the fund when you first drawdown?

Also, do current rules permit you to do this with a Protected Rights funded PPP at 55?