TFLS rules

TcpnT

Apologies for bringing up a subject that is often discussed here but I just want to be absolutely clear on the (current) rules. Reading through previous posts I think I have it correct but would be grateful for confirmation.

Taking a TFLS is often referred to as a "Once only" event but I have noticed that some have interpreted this to mean a "Once in a lifetime event" rather than once per crystallisation.

My understanding is that a 25% TFLS can be taken each time a chunk of a DC fund is crystallised or when a DB pension starts paying.

In my case I hope to crystallise 500K DC funds at 57, taking 25% TFLS to transfer to ISA's and putting the remaining 75% into drawdown. 200K+ of DC fund and DB pension will then remain uncrystallised.

Then at 65 I wish to start drawing my DB pension (approx LTA value of 375K) and also take a TFLS of 25% of total value from the remaining DC fund. This will crystallise most of my remaining LTA.

Am I correct in my understanding that taking 2 separate TFLS's in this scenario is within current rules ?

dunstonh

In my case I hope to crystallise 500K DC funds at 57, taking 25% TFLS to transfer to ISA's and putting the remaining 75% into drawdown. 200K+ of DC fund and DB pension will then remain uncrystallised.

Do you need to do that? i.e. do you need all that lump sum?
Is ISA the best option? pensions are more tax free than ISAs whilst invested. Would a phased option be better?

Am I correct in my understanding that taking 2 separate TFLS's in this scenario is within current rules ?

There is no limit on the number you can have. There are people that have crystallisation events on a monthly basis and could have over several hundred in their lifetime.

Linton

You have two options for taking the tax free lump sum from a DC pension. You can take it as a 25% lump sum at the start or you can take 25% tax free as part of every individual drawdown. The tax free lump sum and what you do with it for one pension is independent of any other pension you may have.

westv

If people don't take it in one go how on earth are they going to go on luxury world cruises and monthly dinners at Michelin starred restaurants?!!

jamesd

Your understanding is right.

Because it appears likely that you will have to pay the lifetime allowance charge and investments tend to increase in value over time it may be best to start crystallising at 55 instead of waiting until 57. If you see a big market drop that would also be a good time to consider crystallising a lot of the DC.

Added later, also note that you can only get 25% tax free lump sums on amounts up to the lifetime allowance, so you couldn't take a tax free lump sum from the whole of the final DC portion and also take DB, just from part of it.

Taking DB before normal pension age for the scheme might cost you less in actuarial reduction than the lifetime allowance charge for going over. The 20 multiplier is on the pension being paid, whenever you take it, plus any lump sum that you get without commuting income. So getting a similar lifetime total amount but less per year saves lifetime allowance. Some schemes also let you reduce your pension in exchange for a higher spousal pension after your death and that can be interesting sometimes. Worth checking to see whether yours is a case where taking the DB early ends up with you getting more.

zagfles

TcpnT wrote: »

Apologies for bringing up a subject that is often discussed here but I just want to be absolutely clear on the (current) rules. Reading through previous posts I think I have it correct but would be grateful for confirmation.

Taking a TFLS is often referred to as a "Once only" event but I have noticed that some have interpreted this to mean a "Once in a lifetime event" rather than once per crystallisation.

My understanding is that a 25% TFLS can be taken each time a chunk of a DC fund is crystallised or when a DB pension starts paying.

Yes.

In my case I hope to crystallise 500K DC funds at 57, taking 25% TFLS to transfer to ISA's and putting the remaining 75% into drawdown. 200K+ of DC fund and DB pension will then remain uncrystallised.

Then at 65 I wish to start drawing my DB pension (approx LTA value of 375K) and also take a TFLS of 25% of total value from the remaining DC fund. This will crystallise most of my remaining LTA.

All of it by the looks of it. Unless you're talking in future money terms and accounting for the LTA increasing.

Am I correct in my understanding that taking 2 separate TFLS's in this scenario is within current rules ?

Yes, you can crystallise part of your pot now and part later, ie phased drawdown, and can take 25% TFLS for each part when you crystallise - provided you haven't exceeded the LTA, which is looks like you might.

zagfles

dunstonh wrote: »

Do you need to do that? i.e. do you need all that lump sum?
Is ISA the best option? pensions are more tax free than ISAs whilst invested. Would a phased option be better?

When he risks exceeding the LTA? Really? In the OPs case the pension could well be less tax free than the ISA!

dunstonh

zagfles wrote: »

When he risks exceeding the LTA? Really? In the OPs case the pension could well be less tax free than the ISA!

Insufficient information to say. Hence why I asked the question.

AnotherJoe

dunstonh wrote: »

Insufficient information to say. Hence why I asked the question.

In my case I hope to crystallise 500K DC funds at 57, taking 25% TFLS to transfer to ISA's and putting the remaining 75% into drawdown. 200K+ of DC fund and DB pension will then remain uncrystallised.

Then at 65 I wish to start drawing my DB pension (approx LTA value of 375K) and also take a TFLS of 25% of total value from the remaining DC fund.

=====

That is more than £1M to start with.

EdSwippet

westv wrote: »

If people don't take it in one go how on earth are they going to go on luxury world cruises and monthly dinners at Michelin starred restaurants?!!

With this unhelpful comment, it appears that you have conflated DC pension 'crystallisation' with 'drawdown'. Crystallising a complete DC pension is not taking it "all in one go".

TcpnT

Thanks for all your replies - you have confirmed my main question about the TFLS.

There was a discussion in a previous thread a couple of weeks ago about my general strategy with the same diversity of views about whether it was preferable to move a large sum into drawdown in the near future or to stage the withdrawal as required.

I know that I am already over the LTA and so will (barring a stockmarket slump) be paying the penalty tax on a portion of my DC fund. I have considered the options and reckon it is sensible to get as much as possible into drawdown now so so that any further growth in that portion between now and age 65 in 9 years will be outside LTA. I plan to use the TFLS and drawdown fund, together with existing ISA's before DB and SP start at 65/67.

As for the points about taking DB early or increasing spouse pension in order to reduce LTA liability - I have put these questions to Willis Towers Watson, the administrators, and await their reply. Normally seems to take weeks though.

dunstonh: "pensions are more tax free than ISAs whilst invested" - could you expand on that comment please. Once you have benefited from the tax relief going into the pension is there really a significant tax benefit in a pension as opposed to ISA ?