Two different types of Drawdown?

jamesd

chucknorris wrote: »

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?

Depends how else you might invest it after using up your £3600 pension contribution allowance. Personally I'd be using VCT investing to get the 30% initial tax relief and tax free income of around 5%+ that is typically available from generalist VCTs.

jamesd

peterg1965 wrote: »

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.

It's better still if you have any pot in capped income drawdown. You can continue to take up to the GAD limit income without triggering the reduction. You can also combine other uncrytallised pots with it to increase the amount in capped drawdown. Too late to start any new capped drawdown now, that ended on 6 April 2015.

jamesd

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?

Yes. You can also crystallise only part of a pot at a time and take 25% from just the part you crystallise. So you could crystallise £10,000 from a £100,000 pot, take the 25% tax free lump sum from the £10,000 and leave the remaining £7,500 in a flexi-access drawdown pot, or do whatever else you want with it. Later you can take some or all of the remaining £90,000.

jamesd

EdGasket wrote: »

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?

You have to take all of it in one go from any part of a pot that you crystallise but you can say crystallise just £10,000 from a £100,000 pot if you want to.

EdGasket wrote: »

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

Not for that reason but flexi-access drawdown allows you more flexibility in timing when you take out the untaxed and taxed parts and that can let you save income tax if you happen to be around the edges of where tax rate bands change.

With flexi-access yo can do things like taking out the whole 25% tax free lump sum then taking out the remaining 75% to stay within the basic rate tax band. With UFPLS you'd have to take the whole of the 75% at the same time as the tax free 25%.

People like me might do things like using the tax free lump sum to buy VCTs to make the rest of their income tax free or even make a profit, drawing up to the top of the basic rate tax band from the taxable 75% each year and getting 30% VCT relief.

EdGasket

jamesd wrote: »

With flexi-access yo can do things like taking out the whole 25% tax free lump sum then taking out the remaining 75% to stay within the basic rate tax band.

...or in my case stay under the basic rate tax band so I don't pay any tax!

EdGasket

Re-investing the tax-free lump sum question.

From AJ Bell's Sipp Benefits Guide it says (page 4 - last paragraph) that "taking a pension commencement lump sum and no income does not restrict the amount you can contribute to your SIPP" but then goes on to say "however you cannot take a pension commencement lump sum withe the intention of using some or all of it to fund a large increase in pension contributions - known as recycling"

I thought that is exactly what a lot of posters on here are recommending and how would the pension company know whether it was 'lump sum' money being recycled or earned income being saved up and paid in for the first time?

The link is here and you download the SIPP Benefit Guide as a pdf:

https://www.youinvest.co.uk/pensions/pensions-freedom/flexible-access-to-pensions

kidmugsy

EdGasket wrote: »

how would the pension company know whether it was 'lump sum' money being recycled or earned income being saved up and paid in for the first time?

It's not up to the provider, it's up to HMRC. You want to google them on the subject.

EdGasket

Seems rather woolly though. I mean I paid in a lot to my pension this year as I haven't paid anything at all for a number of years and yet if I now take a tax-free lump sum, they are gonna say I had it all planned and claw back the tax relief? Seems very draconian and contradictory.

On the one hand they say i can use up to three years-worth of salary-based allowances when paying in to my pension while on the other hand they say if I do that and then retire, I might lose the tax benefit of those contributions??

It might be safer not to take a lump sum at all now!

http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/recycling-tax-free-cash

coyrls

EdGasket wrote: »

Seems rather woolly though. I mean I paid in a lot to my pension this year as I haven't paid anything at all for a number of years and yet if I now take a tax-free lump sum, they are gonna say I had it all planned and claw back the tax relief? Seems very draconian and contradictory.

On the one hand they say i can use up to three years-worth of salary-based allowances when paying in to my pension while on the other hand they say if I do that and then retire, I might lose the tax benefit of those contributions??

It might be safer not to take a lump sum at all now!

http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/recycling-tax-free-cash

Isn't it all about not funding subsequent pension contributions out of the tax free lump sum? Pension contributions made prior to taking any lump sum shouldn't be caught by recycling rules should they?

EdGasket

coyrls wrote: »

Isn't it all about not funding subsequent pension contributions out of the tax free lump sum? Pension contributions made prior to taking any lump sum shouldn't be caught by recycling rules should they?

From that link HMRC triggers include:

"When considering whether a significant increase has been made, contributions paid during the tax year in which the tax free cash is paid, the immediately preceding two tax years and the immediately following two tax years are included"

and

"The recycling was pre-planned. Pre-planning may take place either at or before the time the tax free cash is paid e.g. the individual significantly increases contributions in anticipation of receiving the tax free cash sum."

Looks like I'm stuffed then as far as taking a tax-free lump sum; I was not aware of these 'rules'. Maybe I will not be affected if a just take out a little at a time under flexi-drawdown? Can anyone comment?