Crystallisation and Tax Free Cash

Sterlingtimes

If I should crystallise a fund and wish to exercise the the 25% cash free right, am I obliged to take the cash immediately?

Is there a method of ring-fencing the cash free element and parking that in the pension?

There are benefits now in crystallising, but removing the cash from the pension loses the effective IHT protection.

redbuzzard

No, if you do not withdraw the full 25% TFLS then you lose the opportunity, or the part that you don't take up.

david78

When you crystallise some of your funds you can take up to 25% TFLS at that point (it must be paid to you). If you don't take any TFLS at that point, you cannot take it in the future.

If you want to keep the 25% TFLS invested in a tax efficient way you can consider using a S&S ISA. Or just spend it, of course.

Why do you want to crystallise now? What benefits are you thinking of?

jamesd

I suggest not worrying about the IHT protection. Just look at how the benefit of that with pensions has varied over the years and accept that you can't trust this wrapper for that purpose.

Sterlingtimes

david78 wrote: »

When you crystallise some of your funds you can take up to 25% TFLS at that point (it must be paid to you). If you don't take any TFLS at that point, you cannot take it in the future.

Thank you, David, that tells me exactly what I needed to know. I have to take possession of the cash.

david78 wrote: »

If you want to keep the 25% TFLS invested in a tax efficient way you can consider using a S&S ISA. Or just spend it, of course.

Thank you, I was clear on this point.

david78 wrote: »

Why do you want to crystallise now? What benefits are you thinking of?

I was wondering whether I could get a better percentage LTA by crystallising early. I do not expect to exceed the £1 million LTA in the normal course of events but many dynamics can affect pension value. I think that I may just reduce pension contributions should I approach LTA over my few remaining years of work.

Sterlingtimes

jamesd wrote: »

I suggest not worrying about the IHT protection. Just look at how the benefit of that with pensions has varied over the years and accept that you can't trust this wrapper for that purpose.

As always, James, I highly value your help.

I think that perhaps I would say "I can't trust this wrapper for any purpose." I fear Balls-Tax and suspect that some nasty attack upon the middle class is coming our way. My inclination upon retirement will be to use the 25% cash sum first for pension income. Grab it while the going's good.

david78

Sterlingtimes wrote: »

I was wondering whether I could get a better percentage LTA by crystallising early.

Yes you can. But you don't need to crystallise until late March 2016 as the LTA next year is still going to be £1.25M.

jamesd

It's my intent to take the 25% tax free lump sum as soon as the law allows me to, to reduce legislative risk and diversify.

David78 is right about the LTA not dropping yet but something you do lose if you wait is the ability to start capped income drawdown, because no new capped drawdown plans can be started from 6 April 2015. You can add money to any existing capped drawdown plans, though.

One difference between capped drawdown and flexi-access drawdown that is available form 6 April is that you can take out the GAD limit income from capped drawdown without triggering the reduction in annual pension contribution allowance from £40k to £10k. Take a penny more than the 25% from flexi-access and you do. You can convert from capped to flexi-access whenever you like.

So if you think that you might use that capability you might want to at least put some of the money into capped drawdown while you still can.

I suggest that you don't use the 25% for income first. Instead what I suggest you do is look into using a mixture of VCT and EIS. VCT provide nice tax relief but not IHT protection. EIS provides IHT protection after the money has been invested for two years. Both of these invest in relatively high risk companies but that comes with commensurate gain potential and you're playing a long game, not a short one.

Of course, if you can afford it, the cleanest way to get money out of IHT is to give it way well before you die and while you can still enjoy seeing those who receive it getting the benefits of the money.

Aegis

Sterlingtimes wrote: »

If I should crystallise a fund and wish to exercise the the 25% cash free right, am I obliged to take the cash immediately?

Is there a method of ring-fencing the cash free element and parking that in the pension?

There are benefits now in crystallising, but removing the cash from the pension loses the effective IHT protection.

Strictly speaking you have 12 months from the point of crystallisation to take the selected lump sum, but it takes quite a good provider to actually allow you to do that. What benefits are you getting from crystallisation that make you want to crystallise while leaving the 25% in the pension?

david78

Aegis wrote: »

What benefits are you getting from crystallisation that make you want to crystallise while leaving the 25% in the pension?

I believe he wants to crystalise to benefit from the current £1.25M LTA and continue with a £40k annual allowance. However, he would like to keep the 25% invested.

Jamesd: Is the option to convert to capped drawdown now only useful if you need to take out some income as well as cash? In my case crystalising in 2014/15 to take out the tax free cash is all I will need to keep my LTA below £1M. Both preserve the £40k annual allowance don't they?

jamesd

If you don't take out anything more than the 25% tax free there's no immediate difference. But in general I'd suggest considering taking out he GAD limit amount and using it to fund more pension contributions if the lifetime allowance and annual allowance don't make that undesirable.

Taking out the GAD limit amount also slows down the pension pot growth so it's less likely to be over the lifetime allowance at the time of the age 75 check, which is on how much the pot has increased since it was first crystallised. So it's particularly handy for those near to LTA limits.

If you don't need the income and/or can't recycle you might consider doing some VCT investing with the money. that'll get you some tax free ongoing income as well as the initial 30% tax relief. Small companies so higher risk that some investments but anyone concerned about the LTA can handle some VCT use if the risk tolerance is OK.