UFPLS or Drawdown, NO difference for me?????

happyhero

Hi I’m progressing through my pension sort out and have got stuck.


I want to make maximum use of my PA and SIPP until I become a tax payer.


I don’t want to pay any tax if at all avoidable.


I am not sure I can see a difference with my particular case between UFPLS and Drawdown so can anybody please tell me what the difference is for my situation?


I am 56, a non taxpayer with ISA and SIPP investments (about £20,000 in the SIPP). My wife (55) is part time worker earning about £10,400. I have just opened SIPP for wife and put in maximum for her (currently waiting for tax relief)(Also I have allowed for the £600 she pays in in her work pension). I fed her SIPP with investments I had recently sold in my ISA, so this time round I fed it from my ISA. But I want to feed the SIPP as much as possible from the 25% tax free part of the SIPP in the future.


So I am due to take my BT pension at 60 and until then I want to keep emptying my SIPP with maximum tax free withdrawals (I do not want to pay any tax until I have to, basically I want to make maximum use of my PA…… and feed my wife’s SIPP to maximum whilst we can afford it and draw tax free from her SIPP to with some recycling going on for both of us.


Here is my problem, both UFPLS and Drawdown are 25% tax free and 75% taxed, both I can take a lump sum ( I realise you can take drawdown over months etc but you can also take it as a lump from what I have read).


So 2 scenarios


1. 1. UFPLS. I take £14666 so £3666.50(25%) tax free and £10999.50(75%) taxed and then claim the tax back as the £10999.50 falls into my £11000 PA. I end up with £14666 tax free for 2016/17.
2.

2.Drawdown. I take £14666 so £3666.50(25%) tax free and £10999.50(75%) taxed and then claim the tax back as the £10999.50 falls into my £11000 PA. I end up with £14666 tax free for 2016/17.

I did speak to HL about taking UFPLS and they explained the tax was a bit more complicated than that and that I would end up paying 45% on some of it but at the end of the day I correct all that by claiming the tax back.



So both ways after a bit of tax reclaiming and a bit of time, I end up with same amount.


After using 2 tax years I can empty my £20,000 SIPP tax free even if I do put £2880 into it next year.


With wife’s SIPP we just keep taking the 25% tax free as drawdown but leaving £1000 in both our SIPP’s to stop them being closed.


So have I got anything wrong here?


Which way should I go and more importantly why?

xylophone

Take the full 25% PCLS from your £20000, feed your wife's SIPP, wait until next tax year, get tax code to apply £11500 PA to your SIPP and have your pension paid monthly?

happyhero

xylophone wrote: »

Take the full 25% PCLS from your £20000, feed your wife's SIPP, wait until next tax year, get tax code to apply £11500 PA to your SIPP and have your pension paid monthly?

Thank you for the advice but I still have questions on what you have said,

25% understood but why wait until next tax year, should I not use this years PA before it has been wasted by taking the 75% now and then do again from sometime after April to use 17/18's PA? I mean I can claim tax back cant I or are you saying its easier to wait for tax code in which case what will cause me to receive a tax code, will the 25% cause that?

Also I assume you are suggesting Drawdown as you mention to take pension monthly but I am doing this for investment purposes at the moment and not to take an income to live on so I just want to maximise potential at the moment so is it not going to be tidier taking the 75% as a lump instead of monthly?

Note I invest within my ISA and SIPP so any money I am not going to use for a while I will immediately invest to try to make profit, so again taking as a lump would mean I can get on with doing this sooner.

xylophone

T

hank you for the advice but I still have questions on what you have said,

Not advice - I'm not qualified to give it!

I didn't say that you needed to wait to take the 25% PCLS.

I was suggesting that if you then drew down the remaining taxable portion in 2017-18, having your pension income coded correctly and paid monthly, you would not need to worry about reclaiming tax overpaid.

HMRC should provide HL with a code after the first income withdrawal.

If there is still "space" in your wife's SIPP and you do not require the SIPP income you could consider contributing much of it to her SIPP.

Or only draw down as much as will fit into her SIPP?

I am assuming that the SIPP income would be your only income?

Or are you saying that you have other earned or pension income?

Or other savings income / dividend income above your allowances?

If so, you would contact HMRC.

jamesd

Xylophone was on the right track, just missed the bit about using your PA this year in the first post.

I'd take the 25% tax free lump sum from the whole pot, or all but £1k of it. HL will create a new drawdown SIPP for you with just the taxable 75% in it. Then draw enough from that drawdown account to use your PA this tax year.

HL will be required to use the emergency tax rate, which treats the payment as if it will be made every month, and you can reclaim the overpaid tax from HMRC. HMRC will send them a tax code to use next year and that should eliminate the issue, or most of it.

happyhero

jamesd wrote: »

Xylophone was on the right track, just missed the bit about using your PA this year in the first post.

I'd take the 25% tax free lump sum from the whole pot, or all but £1k of it. HL will create a new drawdown SIPP for you with just the taxable 75% in it. Then draw enough from that drawdown account to use your PA this tax year.

HL will be required to use the emergency tax rate, which treats the payment as if it will be made every month, and you can reclaim the overpaid tax from HMRC. HMRC will send them a tax code to use next year and that should eliminate the issue, or most of it.

Thanks jamesd, so Drawdown will work fine for what I want and forget UFPLS, yes?

Why would you favour Drawdown over UFPLS for doing this the way I want to?

jamesd

It gets the tax free part out faster, makes the calculation of how much taxable to take easy and causes the lifetime allowance percentage to be calculated on it now.