Take 25% lump sum or not?

jamesd

Crystallising does mean taking something out of the pension pot but it doesn't have to be the whole pot that is crystallised. An example: £100k pot, crystallise £40k taking 25% tax free lump sum from that leaving 75% still in the crystallised pot. You now have an uncrystallised pot of £60k from which you can still take a tax free lump sum in the future, the £10k tax free lump sum and a crystallised pot of £30k.

You could alternatively have taken less than £10k of tax free lump sum from the crystallised portion but couldn't then take the remainder later. you could say have taken 12.5% to get just £5k tax free lump sum and £35k in the remaining crystallised pot. You could not take out more tax free lump sum from the crystallised pot later even though you didn't take the highest possible tax free lump sum initially.

You can still make contributions to any pension after taking money from any pension. Can be same SIPP if the SIPP provider allows it and they probably do.

The amount you can pay in is the lower of your earned income or the 40k annual allowance. If earned income is above the annual allowance you can carry forward unused annual allowance from the past three years. If you take even a penny beyond the 25% tax free lump sum from money purchase pensions your money purchase annual allowance is reduced from £40k to £10k. You can take income from workplace defined benefit pensions or lifetime annuities that do not decrease amount paid purchased with money from money purchase pensions without triggering this drop.

terin

jamesd wrote: »

Crystallising does mean taking something out of the pension pot but it doesn't have to be the whole pot that is crystallised. An example: £100k pot, crystallise £40k taking 25% tax free lump sum from that leaving 75% still in the crystallised pot. You now have an uncrystallised pot of £60k from which you can still take a tax free lump sum in the future, the £10k tax free lump sum and a crystallised pot of £30k.

You could alternatively have taken less than £10k of tax free lump sum from the crystallised portion but couldn't then take the remainder later. you could say have taken 12.5% to get just £5k tax free lump sum and £35k in the remaining crystallised pot. You could not take out more tax free lump sum from the crystallised pot later even though you didn't take the highest possible tax free lump sum initially.

If crystallised means 'taking out', then in your first example I understand that if I take out £40K then £40K has been crystallised of which up to £10K (25%) can be tax free. What I don't get is how this is "leaving 75% still in the crystallised pot" - how can it be 'in' the pot if I have taken it out (the 75% is part of the £40K withdrawn)?

I also don't follow the next bit: I now have £60K not withdrawn so there is £60K still in the SIPP from which I can still take a tax free lump sum in the future, the £10k tax free lump sum and a crystallised pot of £30k. So I took the maximum 25% from the first withdrawal so £30K was taxable and £10K tax free. £60K is left in the pot. I can take another tax-free lump sum - "the £10k tax free lump sum and a crystallised pot of £30k." I can't see how these amounts apply to the £60K. I already took the £10K tax free on the first £40K withdrawal, and I have already taken out the £30K when I crystallised it. How come the same figures are being applied to the £60K remaining in the pot when start to draw on that?

The final example totally stumps me. Why would anyone start to withdraw "crystallise" from their SIPP and not claim the maximum 25% tax free on whatever they withdrew? Why pay tax on it if you don't have to?

I am probably being slow. But it does all seem very complicated.

jem16

terin wrote: »

If crystallised means 'taking out', then in your first example I understand that if I take out £40K then £40K has been crystallised of which up to £10K (25%) can be tax free. What I don't get is how this is "leaving 75% still in the crystallised pot" - how can it be 'in' the pot if I have taken it out (the 75% is part of the £40K withdrawn)?

James meant if you crystallised £40k but only withdrew the tax-free part of £10k, then £30k is still remaining in your crystallised pot. Any more withdrawals from that £30k will be taxed.

I also don't follow the next bit: I now have £60K not withdrawn so there is £60K still in the SIPP from which I can still take a tax free lump sum in the future, the £10k tax free lump sum and a crystallised pot of £30k. So I took the maximum 25% from the first withdrawal so £30K was taxable and £10K tax free. £60K is left in the pot. I can take another tax-free lump sum - "the £10k tax free lump sum and a crystallised pot of £30k." I can't see how these amounts apply to the £60K. I already took the £10K tax free on the first £40K withdrawal, and I have already taken out the £30K when I crystallised it. How come the same figures are being applied to the £60K remaining in the pot when start to draw on that?

They are not. The £10k, the £30k and the £60k are 3 separate figures.

For the £60k remaining, you can then take another 25% tax free - so £15k tax-free and £45k taxable.

The final example totally stumps me. Why would anyone start to withdraw "crystallise" from their SIPP and not claim the maximum 25% tax free on whatever they withdrew? Why pay tax on it if you don't have to?

That does seem a bit daft, yes.

terin

jem16 wrote: »

James meant if you crystallised £40k but only withdrew the tax-free part of £10k, then £30k is still remaining in your crystallised pot. Any more withdrawals from that £30k will be taxed.



They are not. The £10k, the £30k and the £60k are 3 separate figures.

For the £60k remaining, you can then take another 25% tax free - so £15k tax-free and £45k taxable.



That does seem a bit daft, yes.

I am still not getting how there can be any more withdrawals on the £30K. In James's example isn't the whole £40K a withdrawal made in one go, of which £30K was taxable and £10K tax free. Where do any more withdrawals come into it?

Thank you for clarifying the other points.

jamesd

terin wrote: »

If crystallised means 'taking out', then in your first example I understand that if I take out £40K then £40K has been crystallised of which up to £10K (25%) can be tax free. What I don't get is how this is "leaving 75% still in the crystallised pot" - how can it be 'in' the pot if I have taken it out (the 75% is part of the £40K withdrawn)?

I didn't mean taking out 40k. I meant crystallising 40k, taking out 10k tax free lump sum and leaving in 30k that will be taxable when taken out.

There was no 40k of drawdown, there was 10k of drawdown, just the tax free lump sum, and 30k not drawn down yet. You do not have to take out all of the money that you crystallise at the time that you crystallise it.

terin wrote: »

£60K not withdrawn so there is £60K still in the SIPP from which I can still take a tax free lump sum in the future, the £10k tax free lump sum and a crystallised pot of £30k.

You started out with 100k. You crystallised 40k and took a 25% tax free lump sum from that 40k. Now you have 60k not yet crystallised, 30k still in the pension, crystallised, and 10k tax free lump sum also crystallised.

terin wrote: »

The final example totally stumps me. Why would anyone start to withdraw "crystallise" from their SIPP and not claim the maximum 25% tax free on whatever they withdrew? Why pay tax on it if you don't have to?

There's little to no reason to. It's there as a caution because if someone accidentally says that they wanted 10k tax free lump sum from a 100k pot that's perfectly acceptable and they couldn't then take the missing 15k tax free lump sum later. The pension provider would hopefully double-check to confirm that they wanted to crystallise only 40k of the pot and take 25% from that but they aren't required to do the check.

terin wrote: »

But it does all seem very complicated.

It is until you understand it but it's not really that bad.

jamesd

terin wrote: »

I am still not getting how there can be any more withdrawals on the £30K. In James's example isn't the whole £40K a withdrawal made in one go, of which £30K was taxable and £10K tax free. Where do any more withdrawals come into it?

I didn't write that the 30k was taken out, just that it was part of a crystallised pot.

That 30k can be left inside the pension in a crystallised pot to grow tax free for as long as desired. Or any part of it can be taken out at any time, as a taxable lump sum or taxable income spread over time, or any combination.

So from the 40k you can do any of these things and more:

1. 10k tax free lump sum, 10k taxable lump sum, 20k taken as ten payments of 2k (subject to future investment performance).

2. 10k tax free lump sum, 30k taxable lump sum.

3. 10k tax free lump sum, 0.4% of the 30k each month until there's nothing left, if that ever happens. 0.3% a month is roughly equal to 3.6% and is within the sustainable withdrawing range for a 30 year retirement, so it may never be exhausted.

terin

Thank you again. So crystallising is not the same as 'taking out'. I had understood it was the same. I think this is where it seems complicated as if crystallising and withdrawing are two separate things then the permutations seem daunting to work out how much to do with each.

If you have £100K SIPP and you decide to 'crystallise' £40K but take out only £10K tax free, where does the other £30K go? I imagine it stays in the SIPP. So if you're invested in S&S you have to sell £40K of them and wthdraw £10K as cash then buy S&S back again with the remaining £30K that is crystallised but not withdrawn? Or you just sell £10K of S&S and withdraw the cash, and fill out some forms telling the SIPP provider that you have taken £10K in cash and to treat £30K of your remaining SIPP invested in S&S as crystallised.

I am looking to the future so not ready to take any money from the SIPP yet. But it sounds like when the time comes it is quite complicated to work out how much to crystallise and withdraw in cash and how to go about it.

Orwell

When you crystallise part of a SIPP, the uncrystallised portion and the crystallised portion will be accounted for separately in the plan. Aside from anything else to stop you taking a TFLS on funds that you have already taken one from.


In terms of where the TFLS comes from, they will probably sell a equal portion all of your holdings unless you can get them to do otherwise. So that your remaining investments have the same percentages.

jem16

terin wrote: »

Or you just sell £10K of S&S and withdraw the cash, and fill out some forms telling the SIPP provider that you have taken £10K in cash and to treat £30K of your remaining SIPP invested in S&S as crystallised.

That's the one.

terin

Orwell wrote: »

When you crystallise part of a SIPP, the uncrystallised portion and the crystallised portion will be accounted for separately in the plan. Aside from anything else to stop you taking a TFLS on funds that you have already taken one from.


In terms of where the TFLS comes from, they will probably sell a equal portion all of your holdings unless you can get them to do otherwise. So that your remaining investments have the same percentages.

This sounds like starting to withdraw cash from a SIPP gets more complicated!
"the uncrystallised portion and the crystallised portion will be accounted for separately in the plan." - what "plan" is this?
" they will probably sell a equal portion all of your holdings unless you can get them to do otherwise. So that your remaining investments have the same percentages." - who is "they"?

At present have a SIPP and I handle it myself - I have a diversified portfolio of a dozen funds, all accumulation, and I rebalance once a year unless any become really over or under weight. It sounds like when I decide to start taking some cash from my SIPP I lose some control over it to third-parties and it starts getting more complicated.