Income Drawdown Pot - Dilemma

Fermion

I have an interesting dilemma regarding my Drawdown pension and would be interested to hear views on what to do.
I went into partial (almost full) Drawdown with my HL SIPP in Dec 2015(age 67) taking 25% lump sum. My SIPP was very healthy and as a result I used 75.6% of my Std Lifetime Allowance at the time.
My Drawdown pot was (and remains) invested in a mixture of Global, Asia/Pacific and UK Equity Income funds and I take a "Natural Yield" monthly drawdown pension income of about 3.7%. (I monitor performance and cash flow on a regular basis).
The funds I am invested in have performed very well since drawdown (partially as a result of FTSE and global market rises, but also as a result of the fall in the £). As a result my Drawdown pot has grown by about 18.5% in 18 months.
Given that even if the Drawdown pot continues to grow (even at a much lower rate) I could potentially end up with a sizable tax bill when the Drawdown pot is revalued at age 75; should I:-
1. Take limited profits now on some of the investment funds in order to take additional one-off income up to my higher rate tax level (with the risk that stock markets and my Drawdown pot value my fall as a result and recognising that this is a one-way transaction), or:-
2. Keep my Drawdown Pot fully invested in the expectation that Markets are bound to fall or undergo a big correction at some stage(with the risk that if they don't I won't have sufficient time to take additional one-off payments without falling foul of Higher Rate tax bands).
My gut instinct says that I should do a small/limited amount of profit taking now while the markets are buoyant, viz. Option 1, but I would be interested in other views?

Linton

I agree you should take as much out of your drawdown pot as you can whilst keeping within your current tax band. If you are taking your State Pension it could be worth deferring it to give yourself some more tax space to drawdown more. Any money you dont need in the short term you could put in an S&S ISA.

But reducing your drawdown pot is completely independent of whether or how you de-risk. If you wanted you could invest in your S&S ISA with the same funds that you sold from your SIPP. If you have more than enough income you could invest the transferred money and some of the remaining drawdown pot in cautious funds. Alternatively you could move some equity income funds into bond income funds. I think its more a matter of rethinking your portfolio allocations than "taking profit".

dmelife

Have you applied for any lifetime allowance protection?

Fermion

Have you applied for any lifetime allowance protection?

I haven't because I don't think I'm eligible in this case.
I can't apply for Fixed Protection 2016 because I did a partial Drawdown - I still have a small SIPP and I am paying £2880/annum in that SIPP. I understand that I can't apply for this as will be taking benefits after the 5th April 2016.

Also individual Protection 2016 doesn't apply because my total pensions were under £1M at the 5th April 2016 (most of the 18.6% growth came post Brexit referendum)

kidmugsy

I regret to say that I think you are fretting at a non-problem. If you are worried about Lifetime Allowance (i) consider stopping adding to the problem by filling your SIPP, (ii) drawdown as much as you can without paying higher rate income tax, (iii) harken to the wisdom above recommending a suspension ("deferral") of state pension (iv) reinvest excess drawdown income into an S&S ISA, or into high interest bank accounts, or into Premium Bonds, or into gold sovereigns, according to whatever your own investment policy is.

Linton

Beyond the lifetime allowance problem, another issue could be whether you could ever drawdown a £1M pension pot without paying higher rate tax bearing in mind State Pension and any other pensions you may have. If you are planning on leaving a large inheritance then it's not a problem, but if you want access to the whole pot you do need to plan the long term drawdown strategy.

Fermion

Beyond the lifetime allowance problem, another issue could be whether you could ever drawdown a £1M pension pot without paying higher rate tax bearing in mind State Pension and any other pensions you may have. If you are planning on leaving a large inheritance then it's not a problem, but if you want access to the whole pot you do need to plan the long term drawdown strategy.

Thanks - Yes I understand that.
My plan is to leave the vast majority intact (only drawing natural yield) and leave the pot as a beneficiary drawdown shared between my 2 children.

kidmugsy

It wouldn't be wise to risk a 55% tax charge: that's higher than the IHT charge of 40% and probably higher than your children's marginal rate of income tax too. Once you've moved a fair bit of cash out of the SIPP and into other investments you'll be able to adjust the SIPP capital by drawing down in some years and refraining in others.

In terms of detailed decision-making, it looks to me as if a sensible policy would be to leave many decisions until near the end of each tax year.

zagfles

Linton wrote: »

Beyond the lifetime allowance problem, another issue could be whether you could ever drawdown a £1M pension pot without paying higher rate tax bearing in mind State Pension and any other pensions you may have. If you are planning on leaving a large inheritance then it's not a problem, but if you want access to the whole pot you do need to plan the long term drawdown strategy.

Given the oft quoted rule of thumb that 4% is a "safe" drawdown rate, a £1M pot of which 25% is tax free, leaving £750k taxable, 4% of which is £30k taxable pa - easily within the basic rate tax band even with the state pension.

Linton

zagfles wrote: »

Given the oft quoted rule of thumb that 4% is a "safe" drawdown rate, a £1M pot of which 25% is tax free, leaving £750k taxable, 4% of which is £30k taxable pa - easily within the basic rate tax band even with the state pension.

Yes, but that gives you very little opportunity to drawdown and use the capital before you go. It seems a pity to die with £1M capital in the bank unless you really want to leave a very large sum to your descendents/relatives/friends. In fact it would probably be a lot more than that as if the 4% is "safe", the probability is that your capital will increase over time.

zagfles

kidmugsy wrote: »

It wouldn't be wise to risk a 55% tax charge: that's higher than the IHT charge of 40% and probably higher than your children's marginal rate of income tax too. Once you've moved a fair bit of cash out of the SIPP and into other investments you'll be able to adjust the SIPP capital by drawing down in some years and refraining in others.

In terms of detailed decision-making, it looks to me as if a sensible policy would be to leave many decisions until near the end of each tax year.

My understanding is, in the case of death under 75 with funds exceeding the LTA, they could pay the lower 25% charge and use drawdown to draw the funds tax free. So it's a no brainer to do that rather than take a lump sum.

In the case of death over 75 all the LTA stuff will already have been dealt with.