Drawing Down soon, does this sound okay from IFA?

GSP

Next month I'm 55 and hope to start drawdown from pension once its been transferred and invested.

My IFA has asked a few things.
One though I would like an opinion if someone could please provide.

He asks about my personal allowance of £11,500 and suggesting I take this in one lump. He said that I would initially be deducted tax, but could claim back later.

My pot will be a decent size and I intended to withdraw £28k p.a. and see how we get on with that. Intended to withdraw £16,500 from the tax free sum and take £11,500 from the taxable portion.

1. Surprised I will see tax charges bearing in mind I will not go above the limit.
2. Wonder why he suggested having £11.5k in one go as I think having a monthly income is better. Would of thought the funds are coming out the fund slower, leaving more money in the fund working for me. Thought taking lump sums out was a bad idea and keep as much invested in the fund as possible would be better. Thanks

Skibunny40

Will you have other income (ignoring the £16.5k tax free) in addition to the £11.5k from your pension in the tax year?

xylophone

See http://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

GSP

Skibunny40, no I have no other income.

Thanks for the link xylophone which explains how I will arrive with that tax code.

zagfles

Yes it seems to make no sense to get the £11500 out in one go if you don't need it. I presume you're using phased drawdown?

To take £16,500 tax free you'd need to crystallise £66,000, take the £16500 tax free up front (you could put this into an ISA if you don't need it straight away and still have enough ISA allowance), then you could draw down £11500 from the crystallised part, £958 per month, and that should mean no tax is paid up front.

Or you could phase it more by crystallising £33,000 every 6 months or £16500 every 3 months, depends how complicated you want to make it. But either way, I can't see the need to take the taxable part as a lump sum. Get him to explain why he thinks this is a good idea because it makes no sense to me.

GSP

Thanks Zagfles. I get confused with terminology. What does crystallise mean? I'm transferring out so please could you explain where this takes place. Thanks

zagfles

GSP wrote: »

Thanks Zagfles. I get confused with terminology. What does crystallise mean? I'm transferring out so please could you explain where this takes place. Thanks

Basically - you can only take 25% tax free out of you pension pot. The other 75% is taxable (though note that "taxable" means subject to tax, not that tax will necessarily be charged for instance it could be within your personal allowance).

So whenever you take tax free money out of a pension, 3 times that amount must either also be taken taxable at the same time (this is known as a UFPLS), or earmarked as "crystallised" (this is known as phased drawdown - or full drawdown if it's the entire pot).

Crystallised means it's still in the pension pot but subject fully to tax when withdrawn - ie no further tax free lump sum or UFPLS from that part.

So say you have a £200k pot, and want £16500 out tax free. You can either take a UFPLS of £66,000, get £16500 tax free and £49,500 taxable (a lot of tax!). Or you can use phased drawdown and crystallise £66,000, taking £16500 tax free and leave £49,500 crystallised in your pot.

So you pot now has £134,000 uncrystallised, and £49,500 crystallised. I think most providers separate these two elements into different pots but some proportion it somehow.

You can withdraw taxed income from the crystallised £49,500 whenever you want, but no further tax free from this part.

You'll often hear the term "flexi-access" in front of drawdown, this just means it's under the new pension freedom rules and not one of the older drawdown types which won't apply to you.

ermine

GSP wrote: »

One though I would like an opinion if someone could please provide.

He asks about my personal allowance of £11,500 and suggesting I take this in one lump. He said that I would initially be deducted tax, but could claim back later.

My pot will be a decent size and I intended to withdraw £28k p.a. and see how we get on with that. Intended to withdraw £16,500 from the tax free sum and take £11,500 from the taxable portion.

1. Surprised I will see tax charges bearing in mind I will not go above the limit.
2. Wonder why he suggested having £11.5k in one go as I think having a monthly income is better. Would of thought the funds are coming out the fund slower, leaving more money in the fund working for me. Thought taking lump sums out was a bad idea and keep as much invested in the fund as possible would be better. Thanks

The obvious question is why are you seeking potentially uninformed second opinions when you are paying good money to your IFA for financial advice? Ask your IFA about things you don't understand, it's what you're paying him for

Yes, you will pay tax if you draw out a lump to start out with and would have to reclaim it. The form you probably need is here

https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-tax-year-p55

It's worth reading/printing off the printed form even if you do it online, as the printed form has a better explanation of what the boxes mean than the online versions.

It's not a big deal, it happened reasonably quickly and painlessly for me. The alternative is to make your first withdrawal in the tax year about £100, HMRC will issue the tax code and then you don't have to reclaim the personal allowance tax. But you get to wait another month for it. It's faster to take the hit and reclaim. Reasons for taking a big lump sum to start off with as

a) you're an adult now and don't need the spoonfeeding of a weekly/monthly income

b) you can put the cash to work in an unwrapped investment vehicle or cash savings should that be what you want to do

c) the idea of it still earning in the stock market has a nasty sting in the tail, in that you are exposed to stock market risk. There's a case to be made for having about a year's worth running costs in cash so you aren't a forced seller, in that case you may as well have that under your control

Last year I took my pension in monthly lumps. It was bonkers. I'm a big boy now and can perfectly well budget the year myself, so why not hook it out all in one go and get some paltry return on the cash, as opposed to a guaranteed zero return on cash in the SIPP? Plus the part that goes into my ISA gets to do that at the beginning of the tax year, which is also good.

Some people are more comfortable with a monthly income because that is what they've been used to all their working lives. I made this mistake, but in retrospect it was irrational, and very slightly reduced what I might have "made/lost less to inflation" on the year's cash.

GSP

That's great thanks Zagfles.

Thanks ermine. I will get my IFA to go through, but I always seek another opinion in areas I am not used to, that goes with anything, health etc. Doesn't do any harm asking and may highlight something.
Yes I have been used to a monthly income all my working life since aged 16. Consider this the best way to receive money. We talk about budgetting and see a monthly income is better budgetting of a yearly income to attribute to the monthly bills and payments. Money in money out, done.
May be wrong here but I thought a message from using this board was to keep money invested in the pension fund wherever possible. If its sitting outside, its doing nothing although you suggest putting into ISA's so at least its working. Outside the fund I assume its less exposed as well.

Linton

GSP wrote: »

1. Surprised I will see tax charges bearing in mind I will not go above the limit.
2. Wonder why he suggested having £11.5k in one go as I think having a monthly income is better. Would of thought the funds are coming out the fund slower, leaving more money in the fund working for me. Thought taking lump sums out was a bad idea and keep as much invested in the fund as possible would be better. Thanks

1) Pensions are taxed under PAYE. It is a feature of PAYE that until HMRC are told about the first ever payment they don't know you are receiving money from the "employer". At that time they issue a tax code. So for the first payment the pension company must use a default tax code, which in general leads to excess tax being deducted.

2) I agree with ermine that monthly payments are an unnecessary complication and that one needs to keep at least one year's needs in cash outside the pension.

What I do is to take the maximum out of my pension towards the end of the tax year keeping within the current tax band. This minimises the risk of paying higher rate tax later in life. This in principle is what the IFA is proposing. Any excess cash can be put in an S&S ISA.

kidmugsy

To "crystallise" used to be known as to "vest". That obviously had to go because it had only four letters and only one syllable.