Two different types of Drawdown?

gterr

EdGasket wrote: »

You sure about that? AJ Bell are charging £100 per year plus amounts ranging from £25 to £75 per withdrawal. Plus a fee for putting a tranche into drawdown whatever that means.

Yes, I think so. They do charge 0.45% annual management charge on funds up to £250,000, with a lower percentage charge for bigger pots. otherwise:


"There is no set up fee, no transfer in fee, and no annual drawdown fee. There are no charges for one-off or regular withdrawals, or for changing your income instructions. In fact, the only addition to our normal pension charges is an early closure fee for people who open and then close their drawdown account within a year."


Normal pension charges seem to be the annual management charge and extras for things like splitting a pension on divorce. I haven't found anything that would bother me. (But _do_ tell me if I'm missing something!)


It's why I chose HL for my SIPP, even though I transferred my ISA and unwrapped fund account away from HL when they changed their pricing structure a year or so ago.

peterg1965

So, a further question regarding drawdown and measurement against the Lifetime Allowance please.

With Flexible Drawdown the whole pot is crystallised at a day in time and is measured against LTA. So how and when is a gradual crystallisation in UFPLS measured against the LTA?

Say, you took 5% of a £400k pension pot each year as a UFPLS drawdown, is the £20k measured against the LTA or is it the £400k, this could get complicated if you are tight up against the LTA at the start.

coyrls

peterg1965 wrote: »

So, a further question regarding drawdown and measurement against the Lifetime Allowance please.

With Flexible Drawdown the whole pot is crystallised at a day in time and is measured against LTA. So how and when is a gradual crystallisation in UFPLS measured against the LTA?

Say, you took 5% of a £400k pension pot each year as a UFPLS drawdown, is the £20k measured against the LTA or is it the £400k, this could get complicated if you are tight up against the LTA at the start.

So my understanding is that at each crystallisation event the crystalised funds are measured against the LTA. To make the maths easier, if you took £100K and the LTA is £1M then each time you take your £100K via UFPLS you will use 10% of your LTA. After 10 cyrstallisation events of £100K each you will have used 100% of your LTA.

I've been trying to work through these options and you're right, if you are up against the LTA, I think the best course of action is to crystalise as soon as possible, take the full 25% tax free, look to use that 25% to provide income over x years and where it looks like you will have some free tax allowance (assuming you are using captial from the 25% to live on), take money from your crystallised funds to top up to the tax free allowance.

coyrls

EdGasket wrote: »

Whats the difference between crystalised and uncrystalised please? Can either be left in the pension fund and invested?

Crystallisation happens when you first draw benefit from a pension. At each crystallisation event, the value of your crystalised funds is tested against the Life Time Allowance. I have over simplified as there are 11 types of crystallisation events, see for example http://www.pensionchoices.com/public/post/list-of-pension-related-benefit-crystallisation-events-193.asp.

You don't necessarily have to crystalise your entire fund. If you stage the crystallisation, you can take a 25% tax free lump sum at each crystallisation. That staging can be done via UFPLS or via a Flex Drawdown (or indeed through multiple annuity purchases, I believe).

Please note this is my understanding and you should confirm with your own research.

jamesd

EdGasket wrote: »

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"

The key word there is "large". the recycling rules specify various limits. When writing about recycling the discussions here go into detail beyond the AJ Bell guide and explain what the actual HMRC limits are. AJ Bell can explain those limits as well, it just happens that we discuss then here so you get to read about them here.

EdGasket wrote: »

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?

There will probably be a check box to say that you do not intend to recycle when you take the money out. It's HMRC's decision but if you do not check that box you can expect the pension firm to ask you for more information about your intentions.

EdGasket wrote: »

Seems rather woolly though.

This is why I tend to suggest planning with the recycling rules in mind and do my own planning in that way, even though I have no intention of recycling the lump sum into more pension contributions. I prefer not to simply trust that HMRC will view things as I do, particularly when it comes to what I regard as normal retirement planing, like increasing contributions before retirement, which will often also coincide with the two tax years before the tax year in which the lump sum is taken.

Somewhat ironically, to increase the certainty I might actually choose to become tax resident in Portugal, thereby depriving HMRC of any of potential revenue that it would not have lost had I had more certainty that I would not be caught up in the recycling issue.

coyrls wrote: »

OK the way I read that (and it’s just my interpretation), is that they are looking to see if the contributions increase after you have taken the lump sum. That is why they are comparing contributions for the two years after taking the lump sum to the contributions two years before the lump sum.

You need to read the examples, which specifically do include increases in the two tax years before the tax year in which you take the lump sum as part of the five year cumulative increase test. One example looks at the pattern of contributions over the previous ten years.

EdGasket wrote: »

So how the hell are they going to know how I funded my increased contribution and whether it was from any loans I took out, my savings, or gifts from family? Seems too woolly to prove either way. Would be a nightmare to sort out surely?

You trust HMRC to agree with you or face the potential of a long fight. Personally, I prefer to plan to avoid giving HMRC that discretion to subject me to a punitive tax charge.

jamesd

gterr wrote: »

It's just that I'm struggling to see - in my case where I want to take one single lump sum per year - that there's any advantage to DD over UFPLS. I'm with HL and there's no specific charge for either option, but with some platforms there might be different charges depending which method you choose?

Charges and avoiding the reduction in the money purchase annual allowance if UFPLS is used are the main potential reasons.

Don't bother with UFLPS if there's no charging difference, flexi-access gives you more control.

jamesd

EdGasket wrote: »

Whats the difference between crystalised and uncrystalised please? Can either be left in the pension fund and invested?

Both can be left in the pension pot invested.

Uncrystallised: the state when paying money in originally, no tax free lump sum taken, no income taken.

Crystallised: the state when any amount of tax free lump sum or income has been taken. "Taking benefits" is a more normal non-technical way to describe this - where benefits means lump sum, income or any other withdrawing of the money.

There is no requirement to crystallise all of a pension pot at the same time. 3100,000 pot and you can crystallise £10k of it and leave the rest uncrystallised if you want. You can take up to 25% tax free lump sum from the £10k. You can't at that time take 25% tax free lump sum from the remaining 90k because it's not crystallised, but at any time you can crystallise some more of the 90k to get more tax free lump sum.

Uncrystallised Funds Pension Lump SUM (UFPLS): you must take 25% tax free lump sum and 75% taxable. You have no choice and cannot choose to leave any of this part of the pot inside the pension. You can take £10k of UFPLS from a 100k pot and have 90k to choose how to use later. Always triggers the reduction in the money purchase annual allowance from £40k to £10k.

Flexi-access drawdown: you choose how much to crystallise and take up to 25% tax free lump sum from that. With the remaining 75% you can choose how much to take out and do that at any time or times you choose. Only triggers the drop in the MPAA if you take out any of the 75%, you can take out the tax free 25% without triggering it.

peterg1965 wrote: »

With Flexible Drawdown the whole pot is crystallised at a day in time and is measured against LTA. So how and when is a gradual crystallisation in UFPLS measured against the LTA?

You don't have to use the whole pot for either UFPLS or flexi-access drawdown. Whichever one you use, the amount you crystallised is calculated as a percentage of the lifetime allowance in effect at that time and that percentage is added to the percentage that you have used. You start to pay the LTA charge once the percentage goes over 100%.

peterg1965 wrote: »

Say, you took 5% of a £400k pension pot each year as a UFPLS drawdown, is the £20k measured against the LTA or is it the £400k

Each 20k is calculated as a percentage at the time you take it. Do it once a year for five years and you'd have five different percentages used each time if the LTA was changing each year.

If with the same £400k you were to crystallise 5% into flexi-access drawdown and take a 25% tax free lump sum plus 75% taxed from that 5% you'd have an identical LTA calculation. In both cases it's the £20k as a percentage of the LTA that is recorded.

While there is no LTA calculation difference, the flexi-access route gives you the choice not to take any of the 75% or to take some of it, to better manage your income tax situation.

jamesd

coyrls wrote: »

I've been trying to work through these options and you're right, if you are up against the LTA, I think the best course of action is to crystalise as soon as possible

Yes, provided you can easily do that and remain within the LTA. If you would go over it you may want to leave some uncrystallised until there is a market downturn, then crystallise that part. There are some very extensive discussions of this sort of wait for a downturn planning in the topic LTA Protection, illustrating how it's possible to plan to avoid the lifetime allowance charge even if you go over the LTA by a bit, provided you can afford to wait for some of the money.

peterg1965

coyrls wrote: »

So my understanding is that at each crystallisation event the crystalised funds are measured against the LTA. To make the maths easier, if you took £100K and the LTA is £1M then each time you take your £100K via UFPLS you will use 10% of your LTA. After 10 cyrstallisation events of £100K each you will have used 100% of your LTA.

I've been trying to work through these options and you're right, if you are up against the LTA, I think the best course of action is to crystalise as soon as possible, take the full 25% tax free, look to use that 25% to provide income over x years and where it looks like you will have some free tax allowance (assuming you are using captial from the 25% to live on), take money from your crystallised funds to top up to the tax free allowance.

I think you are right James, when I eventually get there (over 55) I will have already used 62% of the LTA with my AFPS75 pension which I am about to take. If my SIPP and New job's DC pension fund combined come close to the remaining 38% of the LTA (which will be a real possibility) at the time I decide to fully retire, then it makes sense take the full 25% and go straight into full flexi drawdown.

I read a good article on UFPLS on "This is Money" today, with a different set of circumstances UFPLS would make real sense and better value for money than flexi..

coyrls

jamesd wrote: »

Only triggers the drop in the MPAA if you take out any of the 75%, you cant take out the tax free 25% without triggering it.

I think you meant you can take out the tax free 25% without triggering it.