25% pension lump sum

dunstonh

westv wrote: »

So you can
take 25% of the pot in one go all tax free
take 25% of the pot split over several years all tax free
take lump sums ( of which 25% will be tax free) until the pot runs out
????

yes.

So if the starting SIPP pot was £100,000 and £4,000 is withdrawn in the first year, tax is paid on 3/4 of the £4,000 and the SIPP is part crystallised.

No. The £4000 part is crystallised but it is fully withdrawn. So, the remaining 96k is fully uncrystallised.
If you were to crystalise £16,000 of the fund to draw £4000 tax free. then you would have a pot of £84000 uncrystallised and £12000 crystallised. (with £4k paid out)

bigadaj

westv wrote: »

So you can
take 25% of the pot in one go all tax free
take 25% of the pot split over several years all tax free
take lump sums ( of which 25% will be tax free) until the pot runs out
????

Yes, according to the legislation, however individual scheme rules may or may not allow it.

It should be fairly straightforward to transfer the pot to a plan that does allow whichever option you prefer though.

northbob

westv wrote: »

So you can
take 25% of the pot in one go all tax free
take 25% of the pot split over several years all tax free
take lump sums ( of which 25% will be tax free) until the pot runs out
????

take 25% of the pot in one go all tax free
Is that 25% of the starting value of the pot at the point of the first withdrawal, or 25% of whatever the value of the pot is when you take the 25% (it could be after having previously taken one or many smaller withdrawals)? dunstonh's explanation says that whenever it happens this the SIPP is then fully crystallised.

take 25% of the pot split over several years all tax free
I don't understand this one. Is that 25% of the starting value of the pot at the point of the first withdrawal so of the SIPP was £100,000 you take £25,000 cumulatively over time? If not then what is the difference between this and the next option:

take lump sums ( of which 25% will be tax free) until the pot runs out
What are lump sums - how is a lump sum defined as opposed to a normal (e.g.) 4% annual withdrawal?


dunstonh points out that taking regular income on which 25% is tax free is normally the way to get the most tax free income over the long term. If you do not need the money are there any circumstances apart from expecting a short retirement when would it make more sense to take the lump sum?

dunstonh

take lump sums ( of which 25% will be tax free) until the pot runs out
What are lump sums - how is a lump sum defined as opposed to a normal (e.g.) 4% annual withdrawal?


dunstonh points out that taking regular income on which 25% is tax free is normally the way to get the most tax free income over the long term. If you do not need the money are there any circumstances apart from expecting a short retirement when would it make more sense to take the lump sum?

Doing the phased method can be by regular income style (e.g. monthly) or ad hoc. I have clients that do it both ways and some that do a combo of both.

Some people may have a one off lump sum need and need more of it to be tax free rather than taxable. So, they may go for the greater initial tax free lump sum. Many of those may not even be aware they can phase unless they use an adviser. It does appear that whilst phased is popular with adviser arranged drawdowns it is less known about with those that DIY.

zagfles

northbob wrote: »

take 25% of the pot in one go all tax free
Is that 25% of the starting value of the pot at the point of the first withdrawal, or 25% of whatever the value of the pot is when you take the 25% (it could be after having previously taken one or many smaller withdrawals)? dunstonh's explanation says that whenever it happens this the SIPP is then fully crystallised.

take 25% of the pot split over several years all tax free
I don't understand this one. Is that 25% of the starting value of the pot at the point of the first withdrawal so of the SIPP was £100,000 you take £25,000 cumulatively over time? If not then what is the difference between this and the next option:

take lump sums ( of which 25% will be tax free) until the pot runs out
What are lump sums - how is a lump sum defined as opposed to a normal (e.g.) 4% annual withdrawal?


dunstonh points out that taking regular income on which 25% is tax free is normally the way to get the most tax free income over the long term. If you do not need the money are there any circumstances apart from expecting a short retirement when would it make more sense to take the lump sum?

You need to understand the difference between crystallised and uncrystallised and then it all becomes clear.

If a pot is crystallised anything you draw from it is taxed.

If it is uncrystallised (as it is before you've taken anything), then you have 3 options:

1) Take 25% of the pot tax free, and the rest of the pot is then crystallised. So any further withdrawals are taxable.

2) Take a UFPLS (Uncrystallised Funds Pension Lump Sum) of part (or all) of the pension. 25% of that lump sum is tax free and the rest is taxed. What remains in the pension is uncrystallised, so you have all 3 options available again.

3) Do phased drawdown. That is where you crystallise part of your pot taking 25% of that part tax free, and the remaining 75% of that part is then crystallised. The other part is uncrystallised.

So as an example if you have £100,000 in the SIPP you could:

Take £10,000 as a UFPLS. Pay tax on £7500 of it. £2500 tax free. £90,000 remains uncrystallised in the pot.

Then do phased drawdown - crystallise £40,000, taking £10,000 tax free and leaving the £30,000 crystallised, and the other £50,000 uncrystallised.

You can then withdraw taxed income whenever you want from the £30,000 crystallised. And do any of the above 3 options with the uncrystallised part.

northbob

In short does the untouched value of the SIPP remain uncrytallised and all withdrawals eligible for 25% tax free so long as no amount equal to 25% of the value of the SIPP is withdrawn as a tax free payment?

On the £100,000 SIPP what stops you taking a payment of £24,999 tax free then if after some time the remaining uncrystallised £75,001 has grown to e.g. £80,000 or £100,000 taking another £19,999 or £24,999 again, and so on?

greenglide

If you withdraw an amount tax free then a supporting amount must be crystallised. If you withdraw £24,999 then an amount equal to 75% must be crystallised or withdrawn subject to tax. In this case this would be £74,997. You then have £74,997 crystallised in the fund and 4p uncrystallised.

Crystallised means the 25% has already been taken, uncrystallised means it has not. You cannot double dip and use the same 25% again.

All of the uncrystallised funds are available for a tax free 25% so if the fund grows the 25% is worth more - that is the reasoning behind not crystallising the fund if you don't need to.

northbob

greenglide wrote: »

If you withdraw an amount tax free then a supporting amount must be crystallised. If you withdraw £24,999 then an amount equal to 75% must be crystallised or withdrawn subject to tax. In this case this would be £74,997. You then have £74,997 crystallised in the fund and 4p uncrystallised.

Crystallised means the 25% has already been taken, uncrystallised means it has not. You cannot double dip and use the same 25% again.

All of the uncrystallised funds are available for a tax free 25% so if the fund grows the 25% is worth more - that is the reasoning behind not crystallising the fund if you don't need to.

Now the crystallising makes sense. It always looked like it referred to the amounts being withdrawn but it isn't. This was the missing bit which puts it all into context. Thanks!

zagfles

greenglide wrote: »

Crystallised means the 25% has already been taken, uncrystallised means it has not.

Not quite. When you crystallise, you have the opportunity to take 25% of the crystallised amount tax free. You don't have to, and if you don't, you've lost that opportunity. Sometimes it's better not to take the 25% tax free lump sum, for instance DB pensions where the communtation rate is dire. When you start drawing it it is crystallised, even if you don't take the 25% TFLS.

You cannot double dip and use the same 25% again.

All of the uncrystallised funds are available for a tax free 25% so if the fund grows the 25% is worth more - that is the reasoning behind not crystallising the fund if you don't need to.

Depends whether you can get the funds into an ISA quickly or are using dividend/savings allowance to avoid tax on growth - if you can it makes no difference in or out of the pension (assuming no change to tax rates/bands), and outside may avoid a LTA charge if the fund grows above the LTA.

SabNys

With my simple mind, I need simple examples. For me, simple examples means that there should be ONE example for EACH situation. Therefore, combining two situations in one example to save time could throw me off track. Reason: I "see" things that the writer did not intend me to see, so I draw the wrong conclusions. It's not the writer's fault - it's my fault.

Examples should be identical to each other EXCEPT for the parts that are caused by the different situations.

I think the following link has good pension examples of:

- Full drawdown
- Phased drawdown
- UFPLS

https://investor.telegraph.co.uk/pages/f/sipp-benefits-guidance-notes-form15.pdf

Each example starts with the same initial pension pot of £400,000, and tells me how much of the pot is uncrystallized at the end of each example.

After reading the Telegraph examples, I re-read all the excellent posts in this thread. I think I understand each post a lot better than I did previously.

I like the following three statements in greenglides post, simply because they're short, self-complete, and easy to understand. The meanings of "cyrstallized" and "uncrystallized" are the simplest that I have seen so far:

greenglide wrote: »

greenglide said:

If you withdraw an amount tax free then a supporting amount must be crystallised.

Crystallised means the 25% has already been taken, uncrystallised means it has not. You cannot double dip and use the same 25% again.

All of the uncrystallised funds are available for a tax free 25% so if the fund grows the 25% is worth more - that is the reasoning behind not crystallising the fund if you don't need to.