Drawing Down soon, does this sound okay from IFA?

coyrls

GSP wrote: »

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.

I too take money out as an annual “lump” but feed it into my current account monthly, rather than giving myself a fixed income, I have a fixed level that I top my current account up to each month. You can hold that annual lump where you see fit. To manage monthly drawdown direct from a SIPP, you either need to hold some money in your SIPP as cash, earning zero interest or sell holdings monthly possibly incurring transaction charges each time. Even without transaction charges, selling relatively small amounts of your holdings each month is a bigger hassle than transferring money from a savings to a current account. An annual sell also aligns with an annual rebalancing of your holdings. Finally if you take your annual income just before the end of the tax year, you can reclaim tax through a tax return as quickly as using any other method.

jamesd

There's nothing at all to prevent you from taking money invested in x inside a pension out of a pension and then investing it in x outside. Normally you'd look to do that in stocks and shares ISA.

Without knowing how much money is in the pot it's hard to know whether taking the maximum tax free lump sum out initially is useful. It is likely to be worthwhile to take at least enough tax free money out to fully use all available ISA allowances. That's because it reduces the potential to pay a lifetime allowance charge by fixing the initial value for that calculation at today's level, before there's more growth inside the pension. This reasoning can change if the value of all pensions is already close to a million Pounds.

For larger pots it can become hard to get taxable money out without eventually paying higher rate income tax, particularly after claiming the state pension. In this case it can be desirable to take the maximum basic rate out as early as possible to reduce the future tax bill.

GSP

Zagfles, sorry regarding the £49,500 crystallised taxable amount, could I withdraw £11,500 of that each year under my personal allowance meaning I don't pay any tax on it if I keep doing until it runs out in 4 years, no growth or loss permitting.

ermine, think what I will do is have the £16.5k tax free and £11.5k put into a new account in one go, then from there set up standing orders or transfer to other accounts monthly.

Coyrls, that does make sense and following ermine's suggestion as well. That's something I need to find out about. The IFA will get paid for servicing, but the more I request lumps will these cost in transaction charges each time.

Hi jamesd, the pot will be £800k. Should I be concerned about Lifetime Allowance?
When we spoke to the IFA last, we did mention things we would like to do around the house, and also a new car for me as I have had my focus estate for 17 years now. He has asked do we want to also take £30k-£40k out now to pay for all these when its been transferred and able to dip into, but I will be replying we are not ready to go yet on any home improvements, and the car is still okay.
Reading such good advice in this forum, one of my take aways was to try and keep as much money in the pension fund, so was going to tell him to leave it there for the time being. Another take away is that especially in the early years its best to preserve the fund, as a fall and taking out money as well hinder the chances of the pot recovering. Have I understood these okay?

wjr4

Why are you paying transaction charges as well as servicing charges to the ifa? Surely the servicing charge covers this?

GSP

Rjw4, something I have to ask.

jamesd

No, you haven't quite understood the fall bit correctly if I understand what you were thinking. You don't want to sell equities (shares) during a big down time, so that part is right. But you can hold the same ones outside a pension as inside so that doesn't count as selling. You'd just sell inside the pension, take the money out, then buy the same thing outside at the same lowered price.

jamesd

With an £800k pot you do have to be concerned about the lifetime allowance (LTA) and should plan to avoid it. I suggest that you show this post to your IFA and ask them what they think of the reasoning.

There are two most relevant lifetime allowance calculation times (technically called benefit crystallisation events, BCEs):

1. When you first take benefits, usually by taking a tax free lump sum. At this point the amount crystallised is calculated as a percentage of the lifetime allowance and that percentage is now used and not available in the future. So with an £800k pot if you crystallise £100k when the lifetime allowance is a million Pounds that's £25k tax free lump sum and 10% of the LTA used, 90% still to go before you have to pay the lifetime allowance charge when crystallising. The £75k can go into a drawdown pot to be taken as desired. Next year say the money is in the UK stock market and it grows at the long term average of about five percent plus inflation. The £700k uncrystalised is now £735k. Crystalise another £100k and pretend the LTA hasn't increased. Now 20% used, 80% still to go with £150k in the crystallised pot (plus growth on the original £75k), if you didn't withdraw any, and £635k now in the uncrystalised pot.

2. At age 75. This test compares the values when originally crystallised to the current value in the pot, all crystallised at this point. The increase in value is calculated as a percentage of the LTA and uses that much of it. The easy way to avoid this one is to crystallise early and then take out enough taxable money each year to avoid an increase in value. With an £800k pot if you crystallised it all now, taking £200k tax free lump sum, that's £600k in a drawdown pot and growing. If that grows at 5% you'd need to be taking out £30k a year of taxable money to avoid growth. Oops, that's getting uncomfortably close to the basic rate tax band amount and when your state pension starts it may go over it!

To avoid growth in the pension I suggest that you immediately start to take out your full basic rate band worth of taxable money each year. That should cause the value inside the pension to drop and leave you able to cut back on the withdrawing once you take your state pension, at that point with little enough still inside so you can still prevent it from growing. This way you can do it without ever paying higher rate income tax and also avoid the lifetime allowance charge.

What about the money when it's outside the pension? Well you can just invest it in the same things as inside the pension. Though going for income units instead of accumulation units in the same fund simplifies tax calculations for investments outside an ISA or pension, so I suggest using those.

What about tax on the money invested outside the pension? First you should try to move it into the ISA protection as fast as you can. For the rest you have the personal savings allowance and starter rate for savings and those also apply to interest paid by most bond funds. For others there's the dividend allowance. For capital gains tax you have an annual allowance as well, so you bed and breakfast (sell and rebuy) to use the CGT allowance and avoid an accumulated capital gain. You can't do the original bed and breakfast of selling one day and buying an identical thing the next day any more. Instead you say sell one brand of tracker fund and buy a different brand tracking the same thing. Or you switch unit type in the same fund for a while. Easy enough. So even for money not inside a tax wrapper you should be able to avoid tax.

You don't actually have to pay basic rate income tax _if_ venture capital trusts (VCTs) are suitable for you and £800k suggests that there is a good chance that some use is. I like the very boring Albion VCT (ticker AAVC) because it only makes asset-backed investments. So the buildings or whatever serve to protect the value. Most recently a couple of schools and three new build high end care homes. VCTs have 30% of the purchase price as tax relief from HMRC, capped at the income tax due in the year of purchase. So if you had £30k of basic rate taxable income and a tax bill of £6k you could buy £20k of VCT to get £6k of VCT relief, eliminating the tax cost - you reclaim it from HMRC. You have to repay the 30% if you sell within five years except sales after your death. VCTs aren't subject to capital gains tax and their dividends are also tax exempt. AAVC expects to pay 7% a year of dividends and is generating enough income for that to be sustainable. So on £20k a handy £1.4k a year of ongoing tax exempt income untill you sell, and you might just choose not to, to keep getting that income. You lose about 2% of capital when buying and around five percent when selling (assuming the discount policy stays as it is today for this VCT, each has its own policy). The tax relief and dividends still leave you well ahead.

For an IFA VCTs can be a bit of a challenge because the FOS has been showing some signs of ignoring the individual VCT risk level and treating them all as higher risk types if a complaint is made, even if the actual VCTs used are at the boring lower risk end of the VCT spectrum. So it can be important to make sure you and the IFA are sure you understand the specific and general VCT features and document suitability very well.

GSP

Wow, thanks ever so much jamesd. I'm still trying to digest this. Probably a little slower on the uptake than some others, but I'm trying to understand.

What probably seems like stupid questions here.
Do I have to crystalise to enable to drawdown money?
Crystalised v uncrystalised. Any advantage with the latter over crystalised? In the pension fund, are both still active ie growing or losing?
If reading right, seems you suggest taking a fair porportion (how much?) out of the pension and invest outside (ISA's), though while safe, returns look pretty low.
Thanks

jamesd

Drawng down just means taking money from the pension. When you do that you have to crystalise at least the part you want to take out. That can be any amount.

Uncrystalised is more flexible than crystalised because you can't split or combine existing crystalised pots. You can add to a crystalised pot at the place where you first created it by crystalising some more. No difference at all in the investments they can hold, though. Both gain or lose exactly the same amount for the same investment.

Returns outside a pension are almost identical to inside except for tax. Gain or lose almost exactly the same for the same investment.

Outside a pension, inside an ISA or not, is better for P2P because of the way the ban on splitting a crystalised pot interacts with bad debt that could take a long time to resolve, locking a crystalised pot in the same place. With uncrystalised or ISA or outside you can just move the rest away if you want to. Ability to use P2P in a pension is extremely limited at the moment.

I suggest crystalising around half or more now. That locks in today's lifetime allowance percentage value without having more than can be handled tax efficiently outside. Balancing speed getting into ISA against the LTA certainty.

GSP

Great thanks jamesd