Two different types of Drawdown?

secondincometrader

On a radio programme at the weekend they mentioned the 2 different types of drawdown now available (one crystallied, one not?), can anyone explain please? Thanks.

jamesd

There are two main ways of getting money out:

1. Uncrystallised funds pension lump sum (UFPLS). 25% tax free, rest taxable as normal income.
2. Flexi-access drawdown. 25% tax free lump sum, the rest can be taken whenever desired.

If a person takes any money beyond the initial 25% tax free part their money purchase annual allowance for pension contributions will be cut from £40,000 to £10,000. This is one reason why it's unlikely to be useful to use UFPLS unless it is the only option offered by a provider and you're very confident that you will never want to pay in more than £10,000, not even with say redundancy money.

Use flexi-access drawdown unless you have some specific reason for wanting to use UFPLS.

chucknorris

jamesd wrote: »

There are two main ways of getting money out:

1. Uncrystallised funds pension lump sum (UFPLS). 25% tax free, rest taxable as normal income.
2. Flexi-access drawdown. 25% tax free lump sum, the rest can be taken whenever desired.

If a person takes any money beyond the initial 25% tax free part their money purchase annual allowance for pension contributions will be cut from £40,000 to £10,000. This is one reason why it's unlikely to be useful to use UFPLS unless it is the only option offered by a provider and you're very confident that you will never want to pay in more than £10,000, not even with say redundancy money.

Use flexi-access drawdown unless you have some specific reason for wanting to use UFPLS.

Thanks, I didn't know that. I am going to retire next year (even possibly later this year). Because I will remain a 40% tax payer, due to investment (not employment) income, it isn't even worth me contributing the £3,600 that I could into a pension. Because I would only claim 20% pension tax relief paying in, but taxed 40% taking money out. Which means that I could if I wanted take all my 25% TFLS as flexi-access drawdown. However I don't need the money, so I think that it is best left earning tax free income and capital growth, unless I have missed something?

peterg1965

jamesd wrote: »

There are two main ways of getting money out:

1. Uncrystallised funds pension lump sum (UFPLS). 25% tax free, rest taxable as normal income.
2. Flexi-access drawdown. 25% tax free lump sum, the rest can be taken whenever desired.

If a person takes any money beyond the initial 25% tax free part their money purchase annual allowance for pension contributions will be cut from £40,000 to £10,000. This is one reason why it's unlikely to be useful to use UFPLS unless it is the only option offered by a provider and you're very confident that you will never want to pay in more than £10,000, not even with say redundancy money.

Use flexi-access drawdown unless you have some specific reason for wanting to use UFPLS.

I learn some thing new everyday about Pension legislation, thanks James!

I was aware that by crystallising a DC pension means that the Annual Allowance was then reduced to £10,000 pa, but I wasn't aware that this reduction in AA doesn't apply so long as you only take the 25% TFLS and do not draw any income from the remainder of the pot at the crystallisation event. That little gem will have some bearing on my future plans.

jem16

chucknorris wrote: »

Because I will remain a 40% tax payer, due to investment (not employment) income, it isn't even worth me contributing the £3,600 that I could into a pension. Because I would only claim 20% pension tax relief paying in, but taxed 40% taking money out.

When you last asked about this I wrongly told you that only basic rate tax relief would apply. That was not correct - you will get 40% tax relief.

chucknorris

jem16 wrote: »

When you last asked about this I wrongly told you that only basic rate tax relief would apply. That was not correct - you will get 40% tax relief.

Thanks Jem, that is good news, could you please explain how that would work? Would it be because the Inland Revenue allows it to be deducted from my gross earnings in my annual return? I thought perhaps that because it was not employment income, that it would not reduce my gross earnings, is that not so?

jem16

chucknorris wrote: »

Thanks Jem, that is good news, could you please explain how that would work? Would it be because the Inland Revenue allows it to be deducted from my gross earnings in my annual return?

When you include the £3600 gross payment on your tax return it will have the effect of increasing your basic rate tax band by that amount so £3600 of your total income will no longer be liable for higher rate tax.

I thought perhaps that because it was not employment income, that it would not reduce my gross earnings, is that not so?

The non-earnings rule only limits the amount of your contribution that can gain tax relief. However it doesn't limit the actual amount of tax relief as that is determined by your total taxable income.

secondincometrader

Thanks for the reply James. With Flexi access drawdown can I take the 25% tax free sum at different times for each of my different pension pots?

EdGasket

secondincometrader wrote: »

Thanks for the reply James. With Flexi access drawdown can I take the 25% tax free sum at different times for each of my different pension pots?

I thought Flexi access drawdown is where you take ad-hoc payments from your pension and 25% of any amount you take is tax-free but it does then limit what you can pay in to £10,000 pa. Is that correct?

UFPLS means you take the maximum 25% lump sum but you can still pay in £40,000 pa. so long as you don't take any further money.

zagfles

EdGasket wrote: »

I thought Flexi access drawdown is where you take ad-hoc payments from your pension and 25% of any amount you take is tax-free but it does then limit what you can pay in to £10,000 pa. Is that correct?

UFPLS means you take the maximum 25% lump sum but you can still pay in £40,000 pa. so long as you don't take any further money.

Wrong way round.

EdGasket

zagfles wrote: »

Wrong way round.

Oh that's confusing.

Under Flexi-Access Drawdown then, do you have to take the whole 25% tax-free lump in one go or can you take some now and again until it is used up?

I can't really see myself ever paying back in more than 10K a year so does it matter which option I take?