Flexible Drawdown Questions

Nomeansno

Hello, I have some questions regarding flexible access drawdown. I am 54 and will be 55 early next year. I have already retired and have no plans to return to paid employment. I have a SIPP with AJ Bell Youinvest with a current value of circa £840k. I along with my wife have other investments(partly in ISA's) and cash totalling around £800k. The only taxable income I will have in the current tax year is dividends of £3k. My original intention before the pension changes was to take the 25% tax free cash as early as possible and then to take an income from the SIPP equivalent to a 3% withdrawal rate. I did flirt with the idea of buying a HMO rental flat with the tax free cash as I live in a university city but I have decided that this might be more hassle than it's worth. I therefore have no immediate need for the tax free cash.
I am now thinking that I would like to take annual tax free withdrawals of say £10k per year growing with inflation and/or investment returns and take taxable payments to utilise my personal allowance. This way, I could take say £10k tax free and £7.6k taxable from the SIPP and not pay any tax. Is this allowable per the current rules?
Alternatively, I could utilise the UFPLS route but this way would only allow me to take £10.1k in the current year before paying tax.
I am conscious that these are big decisions so would appreciate views on whether my thinking makes sense. I realise that the rules could easily change in the future and that there are also inheritance tax implications too (but the rules for this can also change).
I am also concerned whether I might be caught by the Lifetime Allowance rules, though I have no plans to contribute any more to the SIPP?
I also realise that is may be worth paying for a Chartered Financial Planner IFA to come up with a personal plan.
Sorry for going on and many thanks in advance for any contributions.

coyrls

Under current rules you can crystalise £40K per year, take £10K tax free, withdraw £7.6K taxable and leave the balance invested. With an £800k pot, you could do this for more than 20 years depending on investment performance.

Your biggest issue will be LTA. You should take protection this year to keep your LTA at £1.25M but it's possible that you will still breach the LTA. I haven't done the calculations but you can do it yourself. Assume the non-crystallised balance grows at 5% say, and each crystallisation event will use 3.2% of your annual allowance. Any balance left after 32 years would be over your protected LTA, although if you are lucky, the LTA may have increased beyond your protected LTA by then.

Nomeansno

Thanks coyrls for confirming that the series of £40k crystallisations are currently possible.


I am though now concerned about the implications of the LTA. I cannot it seems apply for Individual Protection but I should be able to apply for Fixed Protection 2016 but that is currently not open and the rules are unknown - is this correct?


I think I follow your logic on using up the LTA at 3.2% - I assume this is £40k crystallisation of the £1.25m LTA? Is my position improved if I make a bigger crystallisation now - say the whole pot in fact, and I take all the tax free cash now and continue to withdraw at £7.6k pa or a higher amount?


When is any tax due under LTA paid. Is there a test at age 75?

coyrls

Nomeansno wrote: »

Thanks coyrls for confirming that the series of £40k crystallisations are currently possible.


I am though now concerned about the implications of the LTA. I cannot it seems apply for Individual Protection but I should be able to apply for Fixed Protection 2016 but that is currently not open and the rules are unknown - is this correct?


I think I follow your logic on using up the LTA at 3.2% - I assume this is £40k crystallisation of the £1.25m LTA? Is my position improved if I make a bigger crystallisation now - say the whole pot in fact, and I take all the tax free cash now and continue to withdraw at £7.6k pa or a higher amount?


When is any tax due under LTA paid. Is there a test at age 75?

Yes you're right, there's been no announcement for 2016 protection. If you don't plan to make any more pension contributions after April 2016, you won't need individual protection. If the rules stay the same, your fund would need to have exceeded £1M in order to apply for individual protection anyway.

If you crystalise everything at once it will be tested against the LTA at that point and not again until you are 75. At 75 the test is whether growth since crystallisation exceeds the remaining percentage of your LTA. You can always remove money prior to 75 to ensure you do not breach the LTA at 75. Just prior to 75 might even be a good time to consider an annuity purchase with some of the funds.

I believe that tax due under the LTA is paid at the time of withdrawal of excess amount and only on the amount you withdraw.

Nomeansno

Many thanks. I am leaning towards taking the maximum tax free cash but I will pay for an IFA to get hopefully professional advice on the best course of action. I am really pleased you have alerted me to the LTA issue as I had just assumed my pot wasn't big enough.

xylophone

6 Apr 2015 - Key Features for Drawdown in the Vantage SIPP produced by HL might be worth a look.

coyrls

Nomeansno wrote: »

Many thanks. I am leaning towards taking the maximum tax free cash but I will pay for an IFA to get hopefully professional advice on the best course of action. I am really pleased you have alerted me to the LTA issue as I had just assumed my pot wasn't big enough.

I'm trying to work around the same sort of issues myself. As it's a pretty serious decision, I too plan to consult an IFA. I'd be interested to hear in general terms what advice you receive.

The LTA is unlikley to be an issue for you if you crystalise all at once but it could be if you go for a phased crystallisation. If you don't plan to make any more pension contributions after April 2016, applying for protection at £1.25M seems to be a good option but you need to be certain that you won't ever want to make any more contributions.

Nomeansno

I spoke with an IFA this afternoon and am off to see him in early May for an initial meeting. I will let you know how I get on. I have really no idea how much the advice might cost but I will keep the terms of reference tight to just this issue. I have no need for a general review of my SIPP, ISA etc.

jamesd

Maximum tax free cash now will leave you well under the lifetime allowance with plenty of room to make more pension contributions in the future.

However you take it, remember that if you take even a penny of the 75% that is taxable your money purchase annual allowance will be reduced from £40k to £10k.

The lump sum money can be invested in a huge range of ways, including things like buying VCTs if they are suitable in risk level for you and if you have taxable income and want to eliminate the income tax liability on it.

A disadvantage of taking the whole tax free lump sum is that it'd be a while until you could get it all into the protection of a tax wrapper, so you might pay more income tax or capital gains tax on its investment proceeds temporarily.

Nomeansno

Thanks James. My preference is to not take the full tax free lump sum in one go but will wait to see if the IFA can provide some insight to help me. I have no plans to add to the SIPP other than perhaps the £3,600 pa but obviously I wont be do this if LTA is an issue.


When I was a 40% tax payer for many years, I did look at VCT's but never did invest so I am unlikely to consider them now without the tax benefits.

jamesd

The VCT tax benefits still apply when not working. Same limit of no more VCT relief than tax paid in the year so that will limit how much could be used to get the relief. Of course if you're getting all income from inside tax wrappers or your personal allowance that's moot because you have no taxable income at all.