Clarification on crystalising pension/s

232607

Hi all,

This is my understanding. Can someone please tell me if I'm correct or point out where I am wrong.

If you ONLY take your TFLS from your pension/s then they remain un-cystalised and you can continue to contribute up to 40K per year and gain the benefits.

If you take out any more than your TFLS from any one of your pension/s then all your pensions become cystalised and you can only contribute up to 10K per year and gain the tax benefits.
Also...If you have converted any pension to an annuity then this 10K per year is applicable.

Another Qu...If you have cystalised your pension/s and are contributing more than 10K per year, what would be the tax implications on the amount over 10K.

Thanks in advance.

kidmugsy

jamesd often explains that it might be in your interest to crystallise a pension, put it into "capped drawdown", and take out the tax-free lump sum, plus the permitted tax-exposed annual amount (but not a penny more). That way you retain your ability to contribute up to £40k p.a. to pensions in future. (Have I got that right, jamesd?)

PensionTech

If you ONLY take your TFLS from your pension/s then they remain un-cystalised and you can continue to contribute up to 40K per year and gain the benefits.

Not quite. If you only take your PCLS from your pension (and I assume we are talking money purchase here, otherwise it's not possible), you put it into drawdown. This does crystallise your benefit. However, provided that the type of drawdown you have entered is "capped drawdown" - which is only available if started before 6 April 2015, but will be grandfathered into the new regime and limits what you can withdraw from the fund in any one year - this does not currently trigger the £10k annual allowance, and therefore you can contribute up to £40k per year. You will be able to continue to do this after 6 April 2015 if you stick to the capped limits.

However, if:
- you enter into a drawdown arrangement after 6 April 2015;
- you entered into a flexible drawdown arrangement prior to 6 April 2015 (only possible if you have guaranteed income in retirement - e.g. from a pension or annuity - of min £12kpa);
- you enter into a capped drawdown arrangement prior to 6 April 2015 but then withdraw more than the capped amount after 6 April 2015; or
- you take a "UFPLS", which is a lump sum withdrawal from your pension pot that is 25% tax free and 75% taxed, and does leave the rest of your fund uncrystallised;
then you will be deemed to have triggered the £10k annual allowance and therefore your future money purchase contributions (note: benefits accrued in defined benefit arrangements not affected) will be limited to £10k per annum.

Also...If you have converted any pension to an annuity then this 10K per year is applicable.

Nope. It's only if you use one of the new flexibilities.

Another Qu...If you have cystalised your pension/s and are contributing more than 10K per year, what would be the tax implications on the amount over 10K.

Technically nothing as it doesn't depend on whether you've crystallised your pension - only on whether you've done one of the things in the above list. However, if you do trigger the £10k annual allowance, then any contributions in excess of £10k per year to a money purchase arrangement will have the tax relief reversed - i.e. you will have to pay an amount of tax called the Annual Allowance Charge, equivalent to what would have been payable on the contributions were they not tax-relieved, to HMRC.

232607

Thanks for both your replies.
I'll be honest & say I don't fully understand them so can I explain the situation.

There is a number of work colleagues who converted their DB to a DC. They then took the 25% TFLC from the DC & bought an annuity with the remainder. They have carried on working but now find they will be in the 40% tax bracket by virtue of their wage & pension income. To get out of this they would need to put more than 10K per year in their ongoing DC.
Can they do this without falling foul of the 10K limit rule?

Thanks again.

PensionTech

Yes.

However, this only applies if the annuity really is an annuity. If it is instead a drawdown arrangement - and I appreciate if that's a bit jargony, but it is an important distinction - then possibly not.

Anyone who has entered into a drawdown arrangement will certainly know about it though, so if you ask them "is it an annuity or drawdown?" and they say "I don't know", it's almost definitely an annuity.

kidmugsy

232607 wrote: »

There is a number of work colleagues who converted their DB to a DC. They then took the 25% TFLC from the DC & bought an annuity with the remainder.

Good grief, what possessed them? And where did they find an IFA prepared to sign off on this manoeuvre?

gadgetmind

www.unbiased.co.uk

jamesd

232607 wrote: »

If you ONLY take your TFLS from your pension/s then they remain un-cystalised and you can continue to contribute up to 40K per year and gain the benefits. ...If you take out any more than your TFLS from any one of your pension/s then all your pensions become cystalised and you can only contribute up to 10K per year and gain the tax benefits.

Yes, that's the situation if you use the new drawdown rules from 6 April 2015.

As PensionTech explained there is still time in this tax year to enter capped income drawdown. If you do that you can take out the GAD limit amount from the 75% each year as well without triggering the reduction in annual allowance. That's about 6% a year at the moment at typical ages, varies a bit depending on how old you are and what the 15 year gilt yield is at the time your own calculation gets done. If you take even a penny over the GAD limit amount you'll trigger the reduction in annual allowance.

What this means is that if you're going to be 55 before 6 April 2015 and might be affected by the reduced limit you should enter capped income drawdown with at least some of your money this tax year. Even one pot portion with £1 in capped drawdown will let you use this for all future pots.

232607

kidmugsy wrote: »

Good grief, what possessed them? And where did they find an IFA prepared to sign off on this manoeuvre?

Thanks for all your replies, much clearer now.
Just to answer the reply from Kidmugsy.

When our Co closed the DB (1 Y/O) the union supported people with an IFA. It's this IFA that a lot of people are using. His advise seems to be the same to all. Covert to DC, take the 25% TFLS & buy a flat annuity with the rest.
There is 2nd IFA who's come on the seen who's advice seems to be different...Convert to DC but then draw down using a continued investment strategy.
I have to say I prefer the 2nd IFA's model but can't argue with figures I've seen on both models.
To put it bluntly, people are ripping money out of the DB like there's no tomorrow & despite this contravening the general advise, I have to say I can see why when I see the figures.

Any comments?

kidmugsy

232607 wrote: »

When our Co closed the DB (1 Y/O) the union supported people with an IFA. It's this IFA that a lot of people are using. His advise seems to be the same to all. Covert to DC, take the 25% TFLS & buy a flat annuity with the rest.

Perhaps everyone is worried that the DB scheme will go "phut". In which case I can see them wanting their money out, though in such cases the transfer value offered by the scheme trustees is often poor. But if I were younger than normal retirement age, I'd think twice about taking a flat annuity, I must say. I only hope they took joint annuities, so that their widows will benefit too.

I'm a bit surprised that his advice "seems to be the same to all". I'd rather expect it to depend on things like health record, lifespan of family members, and so on. Oh well, no use my speculating in ignorance, is there?

jamesd

Depends on the figures, the life expectancy of the individual, whether they have a spouse and what the spousal benefits after first death are. Here I usually say don't transfer but sometimes the transfer looks attractive and I say transfer instead.

The issue of spousal benefits means that I think the second IFA is making the better suggestion. Also the high chance that an annuity is being suggested at an age where it's poor value for money. The first one may be indirectly exploiting the lack of inflation linking in the annuity being sold to make things appear better than they are for annuitants. I suspect that the first IFA is accumulating a reservoir of future mis-selling complaints for the annuity sales due to the low risk tolerance the annuity requires to be a correct sale vs drawdown that can have almost any desired risk by varying the investments and possible future or partial annuity purchase combined.

232607 wrote: »

If you take out any more than your TFLS from any one of your pension/s then all your pensions become cystalised

I'm not sure that this has been fully contradicted yet. It's not so. Only the part of the one(s) you take any money from become crystallised. Say you have pots of £50k and £100k.

1. Take 25% lump sum from £40k of the first pot and you now have three pots and £10,000 cash: £30k crystallised from the 50k and 10k uncrystallised. Also the whole 100k in the second pot is uncrystallised.
2. Now take a 25% tax free lump sum from £4,000 of the uncrystallised 10K in the 50k pot. Another £1k cash, 3k more crystallised and still £6,000 uncrystallised. Still the whole £100k uncrystallised.
3. Now 6 April 2015 passes. You can crystallise any part, say all, of the £100k pot and put it into capped drawdown, taking the 25% plus ballpark 6% capped drawdown each year without triggering the annual allowance reduction, because you already have a pot in capped drawdown.

Most personal pension providers will use two sub-pots, called arrangements, when you crystallise, one for the crystallised part and one for the rest. Iii is the only one I know that keeps them combined in one pot and does weird things to work out the value that's not yet crystallised. When you crystallise more they usually just add it to the existing crystallised pot, though they do have the option of keeping each crystallised pot independent of the rest, something HMRC wants them to do consistently for all customers/pots.

Deliberately creating more than one crystallised pot can be useful because rules require transferring a whole crystallised pot at once, no splitting allowed after crystallisation. Someone with sufficient money might create a few £100k crystallised pots and put each pot with the provider offering the best deal for the particular investments held in each.

I'm not really happy with the no split rules for crystallised pots because they make it harder to make good investment/cost combinations sometimes. It'd be a nice simplification to remove the restrictions.