Drawdown - one chance to take the TFLS?

AnotherJoe

dunstonh wrote: »

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 later 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.

Since I dont need any permission to do this though, who would be misselling? I'd just say to SL or HL or whoever, give me my TFLS of 25% please.

As for better death benefits,well that would only apply on second death? eg whoever goes first me or Mrs AJ, the other effectively inherits their ISA.

And by the time I'm 75 I'll likely have burned through a fair bit of what was in the ISAs. I guess the only remaining issue is, if growth is so fantastic in the SIPPs that I'll beat the Lifetime Allowance but that seems unlikely on multiple counts - either or all of it wont be there / I'll be looking and spending it down if its a danger well beforehand / it will have risen substantially

neilvw

Yes there is the inherited ISA allowance, but ISAs still form part of your estate for IHT.

coyrls

Linton wrote: »

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.

and

3) Phased drawdown, where you stage crystallisation. The difference between phased drawdown and UFPLS is that you can take the 25% tax free at each stage and decide how much (from 0-100%) of the remaining 75% you want to take out. What you don't take out can remain invested and crystallised, logically separate from your invested and uncrystallised assets.

dunstonh

You can do what you like as you DIY. I was making a more general point.

As for better death benefits,well that would only apply on second death? eg whoever goes first me or Mrs AJ, the other effectively inherits their ISA.

Indeed but when you are talking hundreds of thousands, it could be an issue for some who start thinking of their children and grandchildren inheriting their money.

AnotherJoe

dunstonh wrote: »

Indeed but when you are talking hundreds of thousands, it could be an issue for some who start thinking of their children and grandchildren inheriting their money.

They will have to get to the back of the queue well behind my scuba diving in tropical locations

AnotherJoe

coyrls wrote: »

and

3) Phased drawdown, where you stage crystallisation. The difference between phased drawdown and UFPLS is that you can take the 25% tax free at each stage and decide how much (from 0-100%) of the remaining 75% you want to take out. What you don't take out can remain invested and crystallised, logically separate from your invested and uncrystallised assets.

Ahah !! Thank you. Will have to research that.
At the moment though the full 25% as a TFLS seems like the easiest to manage and keep track of assuming I'd like to xfer some of my SIPP into another wrapper but I'll see if I can get my head round it. Thats the other issue, being dim about these nuances !

ironhead

Very interested in this thread as I am undergoing something similar myself.

Could I ask - why would you want the funds in your isa rather than your pension ? Presumably you can just draw it down from the pension in the same way as you can cash in the isa so what's the advantage of moving a portion of it into your isa ?

In my case I have my pension and my isa both in the exact same investment but it costs me more and it performs slightly less well to hold it in the pension. As I've now stopped contributing to the pension I am considering taking the tfls and moving it into my isa to save a bit on charges and get a slightly better return

MoneySavingUser

We seem to be mixing up UFPLS and Flexible drawdown here:

Let's assume you have £400k in your DC pot.

Under UFPLS you can do the following every year:
Year 1: £25k tax free, £75k taxable taken out - £300k left in pot - all uncrysallised;
Year 2: £25k tax free, £75k taxable taken out - £200k left in pot - all uncrysallised;
Year 3: £25k tax free, £75k taxable taken out - £100k left in pot - all uncrysallised;
Year 4: £25k tax free, £75k taxable taken out - £0k left in pot;

The important thing here is that when you take a UFPLS you MUST also take the taxable element out as well.

Under flexible drawdown it is different - You MUST crystallise the taxable amount but you don't have to withdraw it (and you don't pay income tax on it until you withdraw it).

Let's say you only want to take out the lump sum:

Year 1: £25k tax free taken out, £75k crystallised but not taken out - £375k left in pot; £75k crystallised, remainder uncrystallised
Year 2: £25k tax free taken out, £75k crystallised but not taken out - £350k left in pot; £150k crystallised, remainder uncrystallised
Year 3: £25k tax free taken out, £75k crystallised but not taken out - £325k left in pot; £225k crystallised, remainder uncrystallised
Year 4: £25k tax free taken out, £75k crystallised but not taken out - £300k left in pot; £300k crystallised;

Sounds like you want the second option.

There are also different IHT implications for crystallised vs uncrystallised funds.

AnotherJoe

ironhead wrote: »

Very interested in this thread as I am undergoing something similar myself.

Could I ask - why would you want the funds in your isa rather than your pension ? Presumably you can just draw it down from the pension in the same way as you can cash in the isa so what's the advantage of moving a portion of it into your isa ?

In my case I have my pension and my isa both in the exact same investment but it costs me more and it performs slightly less well to hold it in the pension. As I've now stopped contributing to the pension I am considering taking the tfls and moving it into my isa to save a bit on charges and get a slightly better return

The reason was that I didn't realise as per the latest post from MSU you can take out the tax free sum and leave the corresponding portion in the SIPP.

I suspect, depending upon how the market performs, that I may never need to take any taxable money out of the SIPPs hence moving it to an ISA. Knowing I can leave it there (though possibly at the cost of some complexity ?) changes things somewhat.

neilvw

MoneySavingUser wrote: »

There are also different IHT implications for crystallised vs uncrystallised funds.

The special lump sum death benefits charge (55%) went completely in April 2015 and since then there has been no difference in the tax treatment of crystallised and uncrystallised funds, except that there is a Lifetime Allowance check on uncrystallised funds on death before age 75.

The crucial distinction now is age 75 - on death before then all DC pension benefits can be passed on and withdrawn free of income tax; on death from age 75 any withdrawals are taxable at the beneficiary's marginal rate.

IHT has long rarely affected pensions, except where a binding nomination is made, rather than a nomination subject to the trustee's or administrator's discretion.