25% pension lump sum

SabNys

I forgot to mention. I'm no expert, but I think there might be an error in the following sentence, which occurs in the top half of page 4 of the Daily Telegraph PDF:

- He could then choose to take further payments under UFPLS. As before, the frst 20% <I think this should be 25%> of each payment is tax-free and the remainder taxed at his marginal tax rate.

I think the "20%" should be "25%". The writer might be confusing with the tax rate of 20%, which is mentioned in the previous paragraph of the DT PDF.

I have one issue regarding the good DT examples. About 3 weeks ago, when I first read the "Peter" example on page 3, I reached the following conclusion:

- To find the uncrystallized value (200,000), you need to add "Tax-free lump sum" (50,000) to "Remaining for income" (150,000).

I told you I was dumb.

IMHO, the writer could have avoided the confusion by choosing any value other than "50,000" for the tax-free lump sum.

Here's my idiot's rewrite of the calculation, using "60,000" for the tax-free lump sum:

- (1) Pension fund . . . . . . . . . . . . . . . . . .400,000
- (2) Required tax-free lump sum . . . . . . .60,000
- (3) Need to crystallize [ (4) x (2) ] . . . . 240,000
- (4) Remaining for income [ (3) - (2) ] . .180,000
- (5) Uncrystallized [ (1) - (3) ] . . . . . . . . 160,000

As a check, you can see that "crystallized" plus "uncrystallized" = starting value of pension fund. So, you can now repeat the calculation with a new starting value of "160,000".

(I hope all that is correct.)

gnash101

I will be contemplating drawdown in the next 2 to 3 years and am still unsure whether I will take the 25% lump sum up front or not.
Some good knowledge to be picked up on this pensions forum, courtesy of some very knowledgeable posters.

From what I have read so far would the following example be permissible.

Pension pot 400k
UFpls 20k per year for 10 years(5k tax free)


Could I then in year 11 crystallise the remaining pot, and take 25% of what is left tax free.

Thanks

northbob

dunstonh wrote: »

Lets say you have £100k (for roundness) and wish to draw £1000 as an ad hoc payment. They will pay you £250 tax free (25%) and £750 taxed (75%). The rest of the pension is still uncrystallised and fully able to pay 25% of whatever value it grows to in future.

Phased flexi-access drawdown is where you take a fixed frequency income (typically monthly but can be q, h, y). Lets say £1000 pm with 25% tax free and 75% taxable (subject to personal allowance).

If you want to take a fixed withdrawal rate, e.g. 4% of the value of the SIPP once a year, so the amount in £ will be variable but regularly withdrawn once a year. Is this ad hoc or phased flexi-access drawdown?

Or you want to decide each year how much is reasonable to withdraw - cutting back if markets are bad - but making the withdrawal once a year. This is ad hoc or phased flexi-access drawdown?

Are there any different fees or administration issues to consider if planning to take one withdrawal annually, but the amount being decided each year?

zagfles wrote: »

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.

In option 2. If you take all "(or all)" what is the difference between this and option 1.? if you took 25% of all the pot tax free as a UFPLS how does that allow what is left (75%) to be uncrystallised when in option 1 taking 25% tax free leaves the whole pot crystallised?

Suddenly more confused again.

jamesd

Phased just means leaving some of the pension pot uncrystallised, meaning still having the ability to take a 25% tax free lump sum from it. So with varying money being taken out it can be phased or not phased depending on whether the money is coming from an uncrystallised or already crystallised pot.

Fees depend on the particular pension firm you're using.

Because the income tax personal allowance is a use it or lose it allowance it's usually a good idea to always take out at least enough taxable pension money to use it.

A person who is deferring their state pension to get higher guaranteed for life income has the extra benefit that they aren't having their state pension income use their personal allowance.

Even a person who is not working can pay 2880 net/3600 gross into a pension and get their 2880 topped up to 3600 by basic rate tax relief. even if not paying any income tax at all. A useful bit of free money.

There is no difference between 1 and 2 if the whole pension pot value is taken.

UFPLS means taking a lump from a pension pot that is currently uncrystallised. 25% of the amount taken will be a tax free lump sum and the remaining 75% is taxable income in the tax year in which the money is taken. With UFPLS you have to take a 25%:75% split, you can't leave any part of the 75% still in the pension pot.

When not using UFPLS you can take a 25% tax free lump sum from as much of the pension pot as you like. Then 75% is placed into a drawdown pot. You can take any part of the 75% as taxable income whenever you like. Any of the original pot that you didn't take 25% from stays in an uncrystallised pot with that 25% still available.

dunstonh

Are there any different fees or administration issues to consider if planning to take one withdrawal annually, but the amount being decided each year?

Depends on the provider. Some have no extra charges whatsoever whether it is in accumulation state of decumluation stage. Some have a one-off charge the first time you put the plan into drawdown but no additional charges after that. Some charge on every event.

The models providers use tend to look at their target market. Some may have very low annual charges but a long menu of charges for various admin tasks and events. Others will be mono charged with a single annual charge (typically higher than those with a menu of other charges) and no other charges. Some will be in between.

You do not decide your retirement income method on the basis of charges from one provider. You decide the provider on the basis of what retirement income method you want.

zagfles

gnash101 wrote: »

I will be contemplating drawdown in the next 2 to 3 years and am still unsure whether I will take the 25% lump sum up front or not.
Some good knowledge to be picked up on this pensions forum, courtesy of some very knowledgeable posters.

From what I have read so far would the following example be permissible.

Pension pot 400k
UFpls 20k per year for 10 years(5k tax free)


Could I then in year 11 crystallise the remaining pot, and take 25% of what is left tax free.

Thanks

Yes. UFPLS leaves the remaining pot uncrystallised.

zagfles

northbob wrote: »

In option 2. If you take all "(or all)" what is the difference between this and option 1.?

The difference is if you take all the pot as a UFPLS you now have nothing left in the pension! You'll get 25% tax free and pay tax on 75% of it. Which would be very expensive with a big pot.

Option 1 (drawdown) you take the 25% tax free but the rest remains inside the pension (crystallised) and you take it out whenever you want and pay tax on it when you take it out.

if you took 25% of all the pot tax free as a UFPLS how does that allow what is left (75%) to be uncrystallised when in option 1 taking 25% tax free leaves the whole pot crystallised?

What? If you take 25% of the pot as a UFPLS you only get 25% of that 25% tax free, the rest is taxed.

Example, £400k pot.

Take £100k as a UFPLS. You get £25k tax free and £75k is taxed. £300k remains in the pot uncrystallised.

Take £400k as a UFPLS. You get £100k tax free and pay tax on £300k (a LOT of tax, well into the 45% band)

Put whole pot into drawdown. Take £100k tax free, £300k remains in the pot crystallised. You can then take the £300k over say 10 years so £30k per year taxable.

northbob

jamesd:
With UFPLS you have to take a 25%:75% split, you can't leave any part of the 75% still in the pension pot.

Another bit of extra detail which makes it much clearer. Thank you.

gnash101

Thanks for replies re Ufpls.

Still unsure whether to go this route or take the 25% upfront and invest max in S&S isa's over march/april(40k me, 40k OH).