Drawdown - one chance to take the TFLS?

AnotherJoe

At or relatively near to point of retirement mid this year I'd like to shift a fair chunk of my SIPP into ISAs but tax-efficiently, and without having to expose that money to either no growth as cash, or susceptible to tax outside an ISA. Reason for the move would be for future tax free withdrawals from that ISA to manage the gap between retirement and SP/company pension, about 5 years and then longer term taking drawdown from ISAs first.

Am i right in thinking you get just one chance to take the TFLS? For example, lets say my SIPP is £1M, then I could take £250k tax free, but I couldn't take £50k/year tax free for 5 years, or £100k in year one and £150k year two (tax free)?

Plan 1. If my understanding is right then my plan on which I'd welcome feedback would be to take £100k out in March 2018 , so that £40k can go into his and her ISAs immediately, and then same again in April a few weeks later (eg spanning two tax years), plus perhaps £20k for a years spending. This £80k would be invested in the market as it was in the SIPP, and then if its growing I'd spend some of it (but not much) plus other cash. If it wasn't growing I'd spend much more of the other cash, and then hopefully it will eventually recover before I need to sell investments at a low point.

Plan 2. Now I could take more than £100k up to the full £250k but then it would be outside a tax free wrapper. I suppose i could just put that into ISAs over time, and bed and breakfast the stuff thats outside to minimise or remove any CGT issues (and the £5k dividend tax free helps). Is that a better plan potentially? eg if i take £250k across Funds* X, Y and Z in SIPP and I move those into a mix of the same funds in ISAs and ordinary trading accounts and then shovel them into ISAs as fast as possible over the next 3-4 years?

End game /reasoning is that as and when I do need to be selling investments down (since I do not plan to have to maintain all my pension capital very long term) it will be a mixture of tax free ISAs, cash buffer and minimised SIPP withdrawals. Once I get my (very small) DB pension and SP I'll be just over the PA so all SIPP withdrawals will be BR taxable.

So in Plan 2 whenever I take money from SIPP (which I may never need to do) it will always be fully taxable (eg not 25/75) .

If I'm wrong about the one chance to take the TFLS then that alters things but I dont think thats the case?

TIA for reading this and any comments

* 'funds' as shorthand for whatever type of investment it is

bigadaj

The rules allow you to stage the pension and tax free lump sum, so you would have part crystallised and part uncrystallised.

So you should be able to mix and match over tax years as you want, whether your provider allows this could be another matter so you may need a switch.

Linton

You now have 2 separate options with the tax free lump sum - you cant mix and match except by splitting the pension:

1) Take it all at the beginning.
2) Take 25% tax free from every drawdown you make.

For more information Google UFPLS.

If your current provider doesnt offer the option you want you may need to transfer elsewere.

jamesd

When you move all or part of a pot into drawdown you can take a tax free lump sum of up to 25%. If you don't take the full 25% from that you can't take the remainder later, so always take the 25% maximum.

If you have 100k you can put say 50k into drawdown taking 25% of that as a tax free lump sum and any portion of the remainder as taxable income whenever you like. You can put any portion of the untouched 50k into drawdown whenever you like, same 25% at the start and rest when you want it option.

No problem to take 50k a year tax free from a million, that's putting 200k each time into drawdown. No problem to take 100k then 150k, that's 400k then 600k into drawdown.

Money in a flexible drawdown pension pot is only taxed when you take it out, not when you go into flexible drawdown. None of the scenarios produces an immediate tax liability on any of the taxable 75%.

dunstonh

Am i right in thinking you get just one chance to take the TFLS? For example, lets say my SIPP is £1M, then I could take £250k tax free, but I couldn't take £50k/year tax free for 5 years, or £100k in year one and £150k year two (tax free)?

That is correct if you crystallise the whole of the fund on day one. You do not need to crystallise the fund on day one though. You can phase it either through income or future ad-hoc withdrawals.

Generally speaking, the pension is the best place for the money for most people. So, taking more out of the pension than is needed can be a bad idea. There are caveats to that as its not all black and white.

AnotherJoe

jamesd wrote: »

When you move all or part of a pot into drawdown you can take a tax free lump sum of up to 25%. If you don't take the full 25% from that you can't take the remainder later, so always take the 25% maximum.

If you have 100k you can put say 50k into drawdown taking 25% of that as a tax free lump sum and any portion of the remainder as taxable income whenever you like. You can put any portion of the untouched 50k into drawdown whenever you like, same 2% at the start and rest when you want it option.

No problem to take 50k a year tax free from a million, that's putting 200k each time into drawdown. No problem to take 100k then 150k, that's 400k then 600k into drawdown.

Right but thats against the desire not to pay tax on the rest as i take it especially if i dont need it ! I'd immediately be liable for tax on the parts that weren't 25% tax free. eg of the first £200k, no tax on the £50k and a hefty whack of tax on the £150k, and so on.

It may be i never take that £150k out of the pension as I have other money elsewhere i can use plus SP and DB pension mean any need for withdrawals from SIPP will be relatively small after 5 years.

AnotherJoe

Perhaps another way to do it is, since I actually have several SIPPs, I take my 25% TFLS from one of them, that will be pretty close to £80k.

That immediately goes into ISAs (over two tax years). I dont actually need all that money immediately but now its in the same investments, still in a tax free wrapper, so as and when i do i take it with no tax at all rather than having to pay tax on 75% of what i take. If I deplete that, I can do the same with another SIPP but it may well be i never pay any tax on money in my SIPPs because i snuff it before I need to draw from the non tax free portion.

Also avoids the mess of having crystallized /uncrystallized and working out how much is due for future tax returns.

EdSwippet

AnotherJoe wrote: »

Right but thats against the desire not to pay tax on the rest as i take it especially if i dont need it ! I'd immediately be liable for tax on the parts that weren't 25% tax free. eg of the first £200k, no tax on the £50k and a hefty whack of tax on the £150k, and so on.

Flexi-access drawdown? From page 5 of this article:

Flexi-access drawdown replaces capped drawdown which will no longer be available for new arrangements. All new drawdown arrangements set up from 6 April 2015 will be FAD. At any time from a client’s minimum retirement date (normally 55) onwards they can choose to move some or all of their pension fund into FAD.

Normally 25% of the amount can be taken as tax free cash. The rest remains invested in a drawdown plan. Clients can then take as much or as little income from the fund as they choose. They can choose to take nothing at all or the entire fund in one go. Any income payments will be subject to income tax and taxed at their marginal rate (s).

dunstonh

AnotherJoe wrote: »

Perhaps another way to do it is, since I actually have several SIPPs, I take my 25% TFLS from one of them, that will be pretty close to £80k.

That immediately goes into ISAs (over two tax years). I dont actually need all that money immediately but now its in the same investments, still in a tax free wrapper, so as and when i do i take it with no tax at all rather than having to pay tax on 75% of what i take. If I deplete that, I can do the same with another SIPP but it may well be i never pay any tax on money in my SIPPs because i snuff it before I need to draw from the non tax free portion.

Also avoids the mess of having crystallized /uncrystallized and working out how much is due for future tax returns.

We had a discussion with a compliance expert on doing this and he considered that it may be classed as a mis-sale as the pension is more tax efficient than ISA. Mainly on death benefits before 75 and being outside of the estate and the ability to draw greater amounts late tax free through growth.

However, he also agreed that there are scenarios where it could be justified. Tax planning being one of them but too many people are apparently just taking money out of the pension (because they can) and sticking it in a bank account.

AnotherJoe

EdSwippet wrote: »

Flexi-access drawdown? From page 5 of this article:

Yes thanks think ive seen that elsewhere, as far as i understand it, you can either take some tax free up to a max of 25% but only once and after that each withdrawal is taxed, or you just have each withdrawal taxable but only 75% of it.

What you cant do (I think) is say "well I have 25% i can take tax free, so this year i'll take 5% TF, next year I'll take 5% TF and year after that I'll take 15% TF, then after than all withdrawals are fully taxed.

But as readers of this thread will see i am having difficulty getting my head round it all I think it has been confirmed though that the initial TFLS is a one-off with a max size of 25% of the pot.

neilvw

If the scheme allows it, you can allocate any amount to drawdown and take up to 25% of that amount as TFC. The balance of 75% is available to draw as (taxable) income, one-off or regular, or can be left invested or in cash.