Start Drawdown or not with PP?

AlanP_2

Having seen a few references to the upcoming changes in April this year and in particular the point made by Linton in another thread:

"Capped income drawdown.

Available now, allows the 25% tax free lump sum then up to the GAD limit income each year, currently in the 6-8% a year range at common retirement ages. Being removed as a new use option from 6 April 2015 but those who already have it can continue. It's advantage is that the drawdown does not trigger the annual allowance reduction from £40k to £10k after 6 April 2015."


We have just opened a PP for my wife who will bee 55 in April 2015, just before the changes come in on the 6th.


My question is - Should we start draw down from the PP pot (even though we don't need money and are looking to build the pot) before the 6th to protect that flexibility or is it not worth it?

She is a HR taxpayer but may change jobs in the next couple of years to one that pays a lower salary. My thinking is that at that stage we may want to draw down some of that PP pot to enhance income up to the HR threshold before her Defined Benefit LGPS scheme starts to pay out at 65 and State Pension at 66 - All whilst being able to put any Lump Sums into a PP pot (from inheritance or redundancy for example up to the Earned Income / 40K limit.

In simple terms I guess I mean is there any DISADVANTAGE to starting the draw down before 6 April 2015 as all I can see at the moment is the flexibility advantage?


Thanks

atush

One disadvantage would be paying HRT on the dd money. But yu could then put more into a pp?

costs are also likely to be higher now rather than later? Ie you'll have to pay for a GAD calc. So check fees with your provider

AlanP_2

Thanks Atush,

So it could cost more pre 6 April 2015, I can see that's possible, but would not the small (as possible) amount taken in early April come from the 25% TFLS and therefore not attract any tax at all?

mgdavid

No; the TFLS is taken out of the fund and paid to you first. The remaining pot (75%) is then available for investing and/or drawing down from, according to your instruction.

kidmugsy

AlanP wrote: »

We have just opened a PP for my wife who will bee 55 in April 2015, just before the changes come in on the 6th.

I hope you've opened it with a provider who could pay out on your timetable. Some have one payout date late each month.

AlanP_2

mgdavid wrote: »

No; the TFLS is taken out of the fund and paid to you first. The remaining pot (75%) is then available for investing and/or drawing down from, according to your instruction.

Not sure what you are saying, sorry.

My understanding is that we could take £n out of the PP, and as long as it is less than 25% of the pot value at that point in time it would be tax free.

The remainder we would want to leave invested.


Am I correct or have I misunderstood?



Thanks

AlanP_2

kidmugsy wrote: »

I hope you've opened it with a provider who could pay out on your timetable. Some have one payout date late each month.

No idea TBH, haven't looked into that but thanks for pointing it out. I did think the timing might be an issue - 55 on the 4/April.

atush

Yes, if your provider allows DD, you could take part ,not all of your TFLS, but again you have to ask your provider.

mgdavid

you need to check the precise wording of the rules on this; it's not clear to me if taking a small part of the TFLS and not taking any of the remaining pot counts as 'starting drawdown' or not. Maybe you need to take both a bit of TFLS and a tiny bit of the remainder as a drawdown payment. What I'm saying is I don't believe the TFLS on its own counts as part of drawdown. Hopefully one of the qualified pros that work in the industry will confirm one way or the other.

jamesd

When you take a tax free lump sum you have to make a choice for the rest. Mgdavid is right that strictly the lump sum doesn't trigger drawdown but in practice you'll be told you have to do something and drawdown is the something to do. Though in theory you do have a few months to decide. You don't have to actually take any money out to trigger drawdown, though, just telling your provider to start capped income drawdown with no income initially being taken is sufficient.

For personal pension pots it is usually best to take the maximum tax free lump sum. If you take a partial tax free lump sum from a pot being put into drawdown you can't take more tax free lump sum later, so you lose the significant tax benefit provided by the lump sum. Putting the money into a S&S ISA is one way to go with this money.

You can put say £40,000 of a £100,000 pot into drawdown and take a £10,000 25% tax free lump sum from that £40,000, leaving £60,000 not yet touched. From this £60,000 you could then take a 25% tax free lump sum later. the alternative to watch for is saying you want a £10,000 lump sum from a £100,000 pot and finding that your provider has used 10% lump sum from the whole £100,000, losing you the tax gain on £15,000 of tax free lump sum that you can now never take.

AlanP wrote: »

In simple terms I guess I mean is there any DISADVANTAGE to starting the draw down before 6 April 2015 as all I can see at the moment is the flexibility advantage?

No large disadvantage provided you do get out the full tax free lump sum to maximise the tax gain. But if the provider has a charge for being in drawdown you'll have to pay that charge and it might be more than not being in drawdown. Countering that is the advantage of being able to take the GAD limit income and recycle that into more pension contributions, so you'll probably make money on the deal from this income recycling.

Recycling the tax free lump sum has some significant limitations so ask about those if you're considering doing that. The limitations don't apply it a lump sum from one person is used to fund contributions for a different person, though.

Looks as though your initial quote is from this post of mine.