Best option for making use of tax free allownaces

EdGasket

I am 58 and expect to be out of work soon. Assuming I don't find any other job and start taking some income from my dc pension fund what is the best way of making use of my tax-free allowance each year, Flexi-drawdown or UFPLS? As I will have at least 7 years before I receive the state pension, I see this as an opportunity to take income from the pension that is normally 'subject to tax' however so long as I keep it below the tax-free allowance, it would be tax-free. Conversely I see little point in taking the maximum tax-free lump sum at this stage as that would not be making any use of my personal tax-free allowances each year (I have no need of a lump sum at this stage so may as well leave it in the pension?).

Can anyone recommend the best option for me assuming I have enough funds in my pension to last 7 years and beyond?

EdGasket

I am thinking taking about £12K pa using UFPLS would be the most straightforward. A quarter of this would be tax-free anyway and so would the remainder as it would be under the tax-free allowance. However a lot of people on this site seem to recommend flexi-access drawdown over UFPLS so I am confused and maybe the above is not the best idea?

atush

Dont forget that as you are still working you will have income this year taking up some of your PA. So you'd take less this year, unless you think of putting your entire income this year into the pension?

EdGasket

atush wrote: »

Dont forget that as you are still working you will have income this year taking up some of your PA. So you'd take less this year, unless you think of putting your entire income this year into the pension?

Yes I am aware of that so probably wouldn't start the pension until the next tax year. Just not sure if I am correct in thinking UFPLS of about £12K pa is better than flexi-drawdown which I don't really see the point of if I don't need a large tax-free lump sum but would be nice to know my thinking is right.

xylophone

http://adviser.royallondon.com/articles/updates/2015/january/fad-versus-ufpls/

http://www.investcentre.co.uk/Resources/Content/PDF/AJBIC_Summary_of_the_new_pension_freedoms.pdf

Yer pays in yer money and yer takes yer choice......:D

McKneff

...........................................................

kidmugsy

atush wrote: »

Dont forget that as you are still working you will have income this year taking up some of your PA. So you'd take less this year, unless you think of putting your entire income this year into the pension?

You might also want to take extra TFLS so that you can fill an ISA or two.

Those two plans might clash: look up the rules that restrain recycling of pension commencement lump sums.

atush

I have to say I like the ISa idea

jamesd

Flexi-access drawdown offers the most flexibility over how much taxable income to take and when. It can do anything that UFPLS can do and more.

If you're happy to always take 25% taxable and 75% taxed the two are the same. If you want to do things like more tax free initially then the flexibility of flexi-access is worth having because you can do that.

For this year, you'll probably have more than £3600 gross income so you can benefit by making gross pension payments of your whole earned income, subject to the £40k cap and any available carry-forward allowance.

If the pension lifetime allowance is a possible factor it would often be best to take the 25% tax free lump sum from the whole pension pot to get it calculated as a percentage of today's higher then in the future lifetime allowance.

The taking out more lump sum to fill ISAs is a good option, since it eliminates the political risk of changes to the tax free lump sum limits/taxation that could always happen but probably won't.

If the risk tolerance is right you could consider VCT investing. I rather like the proposition of the Albion Venture Capital Trust because it is completely secured on property and is expected to pay around 7% tax free or 10% after allowing for the 30% tax refund, capped at income tax actually paid in the year. The additional tax free income could be handy and it can also allow you to take out more of the taxable part of the pension if desired, with the VCT getting you back the income tax paid. You can ask HMRC to change your tax code to give you the VCT relief in the same tax year, provided you have already made the VCT purchase. This can mean that you can collect your taxable pension tax free with monthly payments once HMRC have issued the correct tax code to your pension provider.

EdGasket

With FAD can you take just taxable income and no tax-free (saving it for later) or must you always take at least 25% tax-free? Doesn't it get rather complicated having x amount tax-free, then the value of investments changing, then maybe contributing some more, meaning you are never quite sure how much tax-free is left?

kidmugsy

EdGasket wrote: »

With FAD can you take just taxable income and no tax-free (saving it for later) or must you always take at least 25% tax-free? Doesn't it get rather complicated having x amount tax-free, then the value of investments changing, then maybe contributing some more, meaning you are never quite sure how much tax-free is left?

Your provider will organise the assets in your pension into two "arrangements" or "accounts" - the crystallised and the uncrystallised. Then everything is dead easy to manage.