Crystallised funds

Mirador

I just want to try and understand about crystallised pension funds.
I will shortly be starting pension drawdown and plan to take the full TFLS plus an annual drawdown equivalent to my personal allowance. I will then use some of the TFLS to supplement my income and re-invest the remainder in ISA’s for myself and my wife.
However, as I don't actually need all the TFLS,I could take a smaller TFLS %.
I expect to draw down from the fund until my other pensions start, at which point I will suspend withdrawals and any remaining pot, hopefully will pass on to my daughter on my death.

Am I correct in thinking that if I took 12.5% of my TFLS, then only 50% of my fund has been crystallised?

Does it make any difference to the taxation if part of the fund remains uncrystallised.

Hope this makes sensense, as I am struggling to understand the different treatment of crystallised/uncrystallised funds.

jamesd

Don't take a smaller TFLS. Instead, crystallise a smaller part of your pot and take 25% from that smaller portion. The TFLS provides 6.5% pension use gain for a basic rate tax payer and you should not just give up that gain - it's the main gain vs ISA for the basic rate paying in and taking out case.

If you had say £200,000 you could crystalise £120,000 of it and take £30,000 from that as the tax free lump sum in the first year, then repeat in the second year for the remaining £80,000.

You are not correct in thinking that taking 12.5% of the TFLS means that only half of your pot has been crystallised. When crystallising you can choose any TFLS from 0% to 25%. If you tell a pension provider to crystallise a £200,000 pot and pay you 12.5% TFLS that's what they will do, losing you the remaining 12.5% TFLS potential. The way you deal with this is to crystallise just part of the pot and take the full 25% from that part. Then repeat as required to get the full 25% from the lot. Of you could crystallise it all and accept investing some of the TFLS outside a S&S ISA for as long as it takes to get it moved. That's OK if it takes two or three years. If you have a million Pounds to crystallise then doing it in stages would be a better move.

Taxation is on the portion that is not the TFLS. That's just added to your normal taxable income as you take it.

jamesd

It's worth knowing that even if you have no earned income you can pay £2880 net, £3600 gross into a pension every year. It's worth both of you doing that every year to benefit from the pension tax relief.

Mirador

Thanks James, that's the bit I couldn't quite understand. Does it make any difference to the tax treatment after death whether all or part of the fund is crystallised? Thanks

jamesd

Yes, the tax treatment changes. Using the after April rules if the death is before age 75 it's all inheritable tax free. From age 75 any money taken out by the beneficiary is added to their normal taxable income and taxed accordingly.

In older posts and reporting you'll see lots of mentions of a 55% tax charge. That's going away.

jamesd

Using the after April rules if the death is before age 75 it's all inheritable tax free. From age 75 any money taken out by the beneficiary is added to their normal taxable income and taxed accordingly.

In older posts and reporting you'll see lots of mentions of a 55% tax charge. That's going away. Before 6 April 2015 it also matters whether it's crystallised or not - no tax charge if not crystallised, 55% if it was.

Daniel_Elkington

If you don't die before April, fingers crossed; then there is no death tax until you hit age 75, whether the fund is crystallised or not.

After April 5th this year the crystallisation only matters for PCLS (tax-free cash is officially called Pension Commencement Lump Sum) and the lifetime allowance (currently £1.25M).

If you are lucky enough to have over £1.25M you need to talk to an IFA about planning around this.

If you are like the rest of us, then crystallisation doesn't really matter - except it seriously reduces your annual allowance, which may not be a problem.

coyrls

jamesd wrote: »

If you have a million Pounds to crystallise then doing it in stages would be a better move.

The problem is that your ability to stage the crystallisation of a million pounds is restricted by the need to avoid the Life Time Allowance limit. Assuming a 5% growth rate, my basic spreadsheet calculations show that you'd have to crystallise at least £110,000 a year from a million pound pot to avoid hitting the LTA. The LTA prevents you from phasing your crystallisation to benefit from a tax free income over a long term.

jamesd

Yes, it can do that. It's one of the reasons why I have regularly advocated crystallising as early as possible. With the bigger sums you just have to accept being out of a tax wrapper for a while to avoid the LTA issues. Or using VCTs as an alternative wrapper to ISA if that's appropriate for you.