Drawdown - one chance to take the TFLS?

MoneySavingUser

neilvw wrote: »

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The crucial distinction now is age 75 - on death before then all DC pension benefits can be passed on and withdrawn free of income tax; on death from age 75 any withdrawals are taxable at the beneficiary's marginal rate.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

Sorry Neil, yes you are correct.

I meant to refer to the distinction between crystallised funds referred to in this table: http://adviser.royallondon.com/technical-central/pensions/death-benefits/death-benefits-from-april-2015/ which is the LTA charge you refer to rather than an IHT issue.

For some people could it be beneficial to crystallise the funds before 75 so any growth after that would escape a possible LTA charge if die before 75?

jamesd

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.

No, you wouldn't be liable for any tax on the £150k. You're only liable for tax on it when you take it out of the pension, not when you put it into drawdown. You could take the whole £250k tax free lump sum and have no immediate tax bill at all on the remaining £750k. Or on any portion of it, whenever you like, taking out just the 25% tax free lump sum and leaving the taxable 75% untaxed in the flexible drawdown account.

There are two main ways to get a tax free lump sum:

1. UFPLS. This is always a mixture of 25% tax free lump sum and 75% taxable income. You would not use this in your situation. Some pension providers might only offer this, the solution in that case is to transfer. The worst of them might tell you that you aren't allowed to do anything else when what they really should be saying is only that their product doesn't allow it.

2. Flexible drawdown. You can take the 25% tax free lump sum from any part of a pot and the 75% goes into another pot. You can draw taxable income from the 75% whenever you like and as you draw it it becomes taxable income via PAYE. Until you take money from the 75% it is still in the pension untaxed. This is the type most suitable for your planning needs and it allows you to manage your taxable drawings very well, without restricting your ability to take tax free lump sums.

neilvw

MoneySavingUser wrote: »

For some people could it be beneficial to crystallise the funds before 75 so any growth after that would escape a possible LTA charge if die before 75?

Yes, I suppose it could. But we should bear in mind:

(1) - LTA increases annually from 2018 as per Govt plans. However, only in line with CPI. So won't make a huge difference to the % LTA used up.

(2) - If the person does make it to 75, the growth in the drawdown pot at 75 will usually be that much higher, the earlier they crystallised, hence a bigger % LTA used up then (Benefit Crystallisation Event 5A).

AnotherJoe

Thanks folks. Will have to ask HL how they handle Flexible Drawdown retaining crystallised money in the pot, eg do they show what there is in each category. (this assumes they let you do it. )

neilvw

AnotherJoe wrote: »

Thanks folks. Will have to ask HL how they handle Flexible Drawdown retaining crystallised money in the pot, eg do they show what there is in each category. (this assumes they let you do it. )

I handle my brother's SIPP with HL; he recently crystallised two transfers-in. They split uncrystallised and crystallised into two accounts: "SIPP" and "SIPP Income Drawdown" respectively, and show you the value of each. Is that what you mean?

AnotherJoe

neilvw wrote: »

I handle my brother's SIPP with HL; he recently crystallised two transfers-in. They split uncrystallised and crystallised into two accounts: "SIPP" and "SIPP Income Drawdown" respectively, and show you the value of each. Is that what you mean?

Possibly not because transferring in makes it easier as you are starting with then being crystallised . Say in contrast I have 20 funds in my SIPP and take out £50k tax free by selling half of one of them but not taking out the corresponding £150k.

So £150k has been crystallised. That doesn't apply to any particular funds though, you can't say that funds 1-7 are uncrytalised and 8-20 are. So how do they show that I wonder ? I'll have an root around on their site.

neilvw

We crystallised when he was in cash, so I can't speak to HL processes in this regard, but other SIPP providers I have looked at will move a proportion of the units into the crystallised account.

Sometimes you can even specify particular funds you want to move, to make up the value, along with some cash.

Worth speaking to them, they're very helpful on the phone.

jamesd

ironhead wrote: »

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 ?

ISA provides protection from future tax rises, pension doesn't. Moving to ISA helps to protect against the age 75 lifetime allowance test. Using the flexible ISA feature you can put money into things like P2P that are currently not viable with a pension, something that will become easier as more P2P providers offer the Innovative Finance ISA.

The benefits of staying in the pension are largely related to inheritance tax that don't apply to most of the population and other death benefits. Those can often be addressed with more pleasure for the giver and benefit for the recipient by making gifts while alive. If you don't have inheritance motive the ISA is likely to win. Particularly if combined with VCT use to make withdrawing taxable income from a pension tax free or low tax.

You can do something like tax free lump sum at the start for five years of living on tax free money and at the same time start the VCT assisted tax free withdrawing of the rest. As the tax free lump sum runs out the five year minimum holding period for the first VCT buy ends and you switch to the VCT sales for your ongoing tax exempt income.

The new ability to inherit the ISA pot value to allow some beneficiaries to reinvest potentially millions inherited into the ISA wrapper can also help.

AnotherJoe

In summary, looks to me as if putting it in ISA is clean and simple with really no downsides !
And if I do it one SIPP or equivalent at a time, even cleaner. 25% of one my SIPPS over 5 years plus other cash and investments will easily cover the gap I have to SP, and I may not need to access the SIPP contents ever once SP kicks in, and if I do it will just be at basic rate tax anyway.

James, can you explain the VCT thing or point me at a place where its explained? Not VCT's themselves but how it works in terms of moving taxable money out of pension into VCT which is not taxed, which is what I read into that? Presumably it IS taxed but then i get it back when i buy the VCT, is that the jist of it?

EdGasket

I was thinking that taking out amounts each year using UFPLS looked best because so long as I don't take too much, then even the 'taxable' amount becomes non-taxable if kept within the personal allowance. It also means nothing left in the pension is crystalised so if the pension grows, I can take out more tax-free money in the future than if I crystalised it now. It also means I don't have the headache of what investments are crystalised and which ones aren't; sounds an admin nightmare.

Does this sound like a good idea assuming I don't need to make big withdrawals from my pension?