Unused personal allowance - enter drawdown now?

DairyQueen

Should I enter drawdown? Your help would be much appreciated.

Background:
Age 58 and married. I do not have sufficient income to use most of my personal tax allowance, and that is likely to remain the case until I reach SPa (66). OH is a higher rate taxpayer and therefore I can't transfer any of my unused allowance to him.

I have a mix of SIPP and DC. I do not need to enter drawdown anytime soon but have an eye on my future tax situation.

Proposed plan:
I am therefore considering entering drawdown now as the best way to maximise my unused personal allowance until SPa.

The plan would be to drawdown as much as possible (without incurring tax) from the pension wrapper each year and transfer into S&S ISA. I wish to stay invested and would sell/buy the same fund each time in order to keep my portfolio balanced.

I have assumed that in doing this, by my mid 60s (when my other income increases), I will have more non-taxable assets available to draw-on than would otherwise be the case. At least, I think this is so.

I realise that there will be a cost to this strategy - drawdown fee? dealing charges? platform charges? I will look at the impact of this in detail if the experts here consider it a reasonable strategy in principle.

I am aware that the MPAA may be triggered (not an issue). I am in no danger of breaching the LTA and I currently contribute the max £2880 net for non-earners. OH has LTA protection.

FAD or UFPLS?
This may be better on a new thread but it's directly linked to the above scenario.

I am trying to understand the detail of drawdown options, and which would be best if I adopt the above strategy. The majority advocate FAD in most circumstances but FAD seems to involve 'crystallisation' and I'm not sure exactly what that means, or the impact on me now and in the longer-term.

Questions:
1) Will FAD allow me to specify how much of each withdrawal should be offset against the 25% total tax free available? Ideally I would like to delay any withdrawals classified as part/all tax free until SPa.

2) When is the total tax free value of a FAD scheme calculated? On set-up? Would this trigger an event that fixes the total available tax free throughout the life of the scheme to 25% of the total value at the setup date, regardless of when/how it was subsequently withdrawn?

3) I understand that UFPLS withdrawals are always classified as 25% tax-free / 75% subject to tax. This suggests that a total tax free amount is never determined on these kinds of schemes, and that the maximum tax free available will always be 25% of the current portfolio value. It may therefore increase/decrease in line with the portfolio value from one day to the next. Have I understood that correctly?

Apologies if these are dumb questions. It has taken me the best part of 18 months to understand our current pension situation, and to try to optimise our retirement pot. Drawdown is a whole new area of research.

All opinions welcome. Thank you.

kidmugsy

What's FAD?

DairyQueen

Flexi Access Drawdown.

Sorry, should have made that clear.

bigadaj

kidmugsy wrote: »

What's FAD?

Flexi access drawdown apparently.

My understanding OP is that you can't defer the 25% tax free, it's available on each crystallisation event up to 25% of the value. If you don't use it you lose it as that time.

This makes the second question easier or more straightforward as you then obviously can take up to 25% at each crystallisation event, if the pension has increased or decreased in value then the same will apply to the tfls.

I think that fas is in principle more flexible than ufpls as the name suggests.

Your approach seems sensible to bridge a gap in income for a defined period. Providers charges will vary widely for what you want so have a look at snowmans spreadsheet on these boards or monevator.

ermine

DairyQueen wrote: »

Should I enter drawdown?

Yes If you have no immediate need for the money stick it in an ISA invested in the same sorts of things as your SIPP was and you secure that part against tax. Since your personal allowance is use it or lose it then use it.

1) Will FAD allow me to specify how much of each withdrawal should be offset against the 25% total tax free available? Ideally I would like to delay any withdrawals classified as part/all tax free until SPa.

Is there a reason for this strange requirement? It would seem sensible to take the 25% tax free pension commencement lump sum first. What's left shows as the crystallised part in my SIPP, then run out the taxable part under the personal allowance. My SIPP PCLS got parked in an ISA over two years. Get your money away from HMRC's filthy paws ASAP.

Some providers do let you crystallise just part of the fund, best to ask your specific provider.

zagfles

DairyQueen wrote: »

Should I enter drawdown? Your help would be much appreciated.

Background:
Age 58 and married. I do not have sufficient income to use most of my personal tax allowance, and that is likely to remain the case until I reach SPa (66). OH is a higher rate taxpayer and therefore I can't transfer any of my unused allowance to him.

I have a mix of SIPP and DC. I do not need to enter drawdown anytime soon but have an eye on my future tax situation.

Proposed plan:
I am therefore considering entering drawdown now as the best way to maximise my unused personal allowance until SPa.

The plan would be to drawdown as much as possible (without incurring tax) from the pension wrapper each year and transfer into S&S ISA. I wish to stay invested and would sell/buy the same fund each time in order to keep my portfolio balanced.

I have assumed that in doing this, by my mid 60s (when my other income increases), I will have more non-taxable assets available to draw-on than would otherwise be the case. At least, I think this is so.

I realise that there will be a cost to this strategy - drawdown fee? dealing charges? platform charges? I will look at the impact of this in detail if the experts here consider it a reasonable strategy in principle.

Yes it seems sensible to not waste your personal allowance. Charges in drawdown usually aren't too significant, some providers don't charge anything extra for drawdown, just the usual fund/platform charges, same as before you entered drawdown.

I am aware that the MPAA may be triggered (not an issue). I am in no danger of breaching the LTA and I currently contribute the max £2880 net for non-earners. OH has LTA protection.

I was going to say you could drawdown to enable your OH to contribute more and get more 40% tax relief, but might not be a good idea if he's breaching the LTA. And probably a very bad idea if he has fixed protection!

FAD or UFPLS?
This may be better on a new thread but it's directly linked to the above scenario.

I am trying to understand the detail of drawdown options, and which would be best if I adopt the above strategy. The majority advocate FAD in most circumstances but FAD seems to involve 'crystallisation' and I'm not sure exactly what that means, or the impact on me now and in the longer-term.

Crystallisation just means you've taken the tax free element from that part of the pension so you can't have any more tax free.

For instance in full drawdown where your crystallise the whole pot, you take 25% of it tax free and then you drawdown taxable income from the crystallised pot whenever you want, and it's taxable when you draw it.

Or you can use phased drawdown to crystallise just part of the pot, so eg if you have a £200k pot, you can crystallise £100k of it, taking 25% of that part (ie £25k) tax free and leaving the £75k in the pot, crystallised. You'd also still have the other £100k uncrystallised. Conisder these 2 totally separate pots. You can drawdown taxable income from the crystallised pot. You can take UFPLS's from the uncrystallised pot or crystallised further funds, taking 25% tax free and adding the other 75% to the crystallised pot.

Questions:
1) Will FAD allow me to specify how much of each withdrawal should be offset against the 25% total tax free available? Ideally I would like to delay any withdrawals classified as part/all tax free until SPa.

You take 25% tax free of the amount you crystallise, as above.

2) When is the total tax free value of a FAD scheme calculated? On set-up? Would this trigger an event that fixes the total available tax free throughout the life of the scheme to 25% of the total value at the setup date, regardless of when/how it was subsequently withdrawn?

At crystallisation.

3) I understand that UFPLS withdrawals are always classified as 25% tax-free / 75% subject to tax. This suggests that a total tax free amount is never determined on these kinds of schemes, and that the maximum tax free available will always be 25% of the current portfolio value. It may therefore increase/decrease in line with the portfolio value from one day to the next. Have I understood that correctly?

Every UFPLS is 25% tax free and 75% taxable. The remaining pot is uncrystallised.

Apologies if these are dumb questions. It has taken me the best part of 18 months to understand our current pension situation, and to try to optimise our retirement pot. Drawdown is a whole new area of research.

All opinions welcome. Thank you.

I think you're overthinking it a bit - basically you can get 25% out tax free and 75% taxable, there's several ways of doing it.

DairyQueen

bigadaj wrote: »

Flexi access drawdown apparently.

My understanding OP is that you can't defer the 25% tax free, it's available on each crystallisation event up to 25% of the value. If you don't use it you lose it as that time.

This makes the second question easier or more straightforward as you then obviously can take up to 25% at each crystallisation event, if the pension has increased or decreased in value then the same will apply to the tfls.

I think that fas is in principle more flexible than ufpls as the name suggests.

Your approach seems sensible to bridge a gap in income for a defined period. Providers charges will vary widely for what you want so have a look at snowmans spreadsheet on these boards or monevator.

Thank you for the clarification, and I have seen references to Snowman's spreadsheet so will take a close look at that before proceeding.

DairyQueen

ermine wrote: »

Yes If you have no immediate need for the money stick it in an ISA invested in the same sorts of things as your SIPP was and you secure that part against tax. Since your personal allowance is use it or lose it then use it.

Is there a reason for this strange requirement? It would seem sensible to take the 25% tax free pension commencement lump sum first. What's left shows as the crystallised part in my SIPP, then run out the taxable part under the personal allowance. My SIPP PCLS got parked in an ISA over two years. Get your money away from HMRC's filthy paws ASAP.

Some providers do let you crystallise just part of the fund, best to ask your specific provider.

HMRC have taken enough of my hard-earned dosh over many decades. Oh the joy of being able to grab a bit back!:T

In answer to the bolded bit.
I was trying to establish whether there was any way to leave all of the tax free amount inside the pension wrapper. Given that this is just an exercise in using up my personal allowance (and I don't want to spend any of the dosh now, or change the investment allocation), I would have left the tax free amount in situ if that had been an option. It seems that it isn't so I'll likely follow your strategy.

Thank you for helping.

DairyQueen

zagfles wrote: »

some providers don't charge anything extra for drawdown, just the usual fund/platform charges, same as before you entered drawdown.

]I'll take a look at Snowman's spreadsheet per the advice kindly given by bigadj. I have assumed that I may need to transfer to a different provider.

zagfles wrote: »

I was going to say you could drawdown to enable your OH to contribute more and get more 40% tax relief, but might not be a good idea if he's breaching the LTA. And probably a very bad idea if he has fixed protection!

He has fixed protection so he can't make any more contributions.

zagfles wrote: »

Crystallisation just means you've taken the tax free element from that part of the pension so you can't have any more tax free.

Ah ha. I see. That's the type of definition that makes the rest clear.

zagfles wrote: »

I think you're overthinking it a bit.

I think you may be right.:)

DairyQueen

Could I please ask you knowledgeable ones for a little more info? The devil (as always) is in the detail.

Having checked as much of the small print as I can find, it seems that the different inheritance rules applied to ISAs and pensions are a factor I need to consider.

Given that, for the next 7 years-ish, it's likely that I will only withdraw an amount annually sufficient to use up my personal allowance, I am trying to put a knife between UFPLS and phased FAD/fas (what is the correct acronym for the latter btw - I've seen it referred to as both?).

The first withdrawal on any scheme (other than taking just the PCLS) seems to trigger the 'Month 1' emergency tax issue. I assume that applies to both UFPLS and phased drawdown. Once the provider has been given a tax code by HMRC is the issue then resolved for the life of the SIPP/DC? i.e. will a one-off withdrawal in any future tax years also be the subject of emergency tax?

If I was to make a very small initial withdrawal (say £10) would that trigger a resolution to the emergency tax issue for that tax year? In all subsequent tax years? I was considering whether a small withdrawal, followed by a second (the balance of the amount I want), would avoid the 'month 1' tax deduction widely reported. I realise the tax can be reclaimed but avoiding that hassle would be an advantage.

I believe that the MPAA will be triggered as soon as I take any benefit classified as income (for tax purposes) so that will apply regardless of which option I take. However, I don't want to fall foul of any recycling rules. I believe that I will still be allowed to make the maximum (2880 net) contribution for non-earners each year to the scheme on which I have also made annual withdrawals. Is there any difference on this issue between UFPLS and phased drawdown?

Many thanks again for your time.

ermine

DairyQueen wrote: »

Having checked as much of the small print as I can find, it seems that the different inheritance rules applied to ISAs and pensions are a factor I need to consider.

Yes, pensions can bizarrely be inherited at the recipient's marginal tax rate under some circumstances. Until you get to 75 ISTR, but check. ISAs form part of your estate

DairyQueen wrote: »

The first withdrawal on any scheme (other than taking just the PCLS) seems to trigger the 'Month 1' emergency tax issue. I assume that applies to both UFPLS and phased drawdown. Once the provider has been given a tax code by HMRC is the issue then resolved for the life of the SIPP/DC? i.e. will a one-off withdrawal in any future tax years also be the subject of emergency tax?

Sadly only for that tax year, I've been hit for that twice. But I found the process of claiming the tax back the second time reasonably painless

DairyQueen wrote: »

If I was to make a very small initial withdrawal (say £10) would that trigger a resolution to the emergency tax issue for that tax year?

I took the amount I planned to draw divided by 12. It did sort that out, next month I drew the remaining 11/12ths to stick into my ISA.

DairyQueen wrote: »

In all subsequent tax years? I was considering whether a small withdrawal, followed by a second (the balance of the amount I want), would avoid the 'month 1' tax deduction widely reported. I realise the tax can be reclaimed but avoiding that hassle would be an advantage.

Works fine, but only for that year. BTDT

DairyQueen wrote: »

I believe that the MPAA will be triggered as soon as I take any benefit classified as income (for tax purposes) so that will apply regardless of which option I take. However, I don't want to fall foul of any recycling rules. I believe that I will still be allowed to make the maximum (2880 net) contribution for non-earners each year to the scheme on which I have also made annual withdrawals. Is there any difference on this issue between UFPLS and phased drawdown?

Many thanks again for your time.

If you are only putting in £2880 don't worry about it. The grisly details from HMRC are here to wit:

The recycling rule applies when all of the following conditions are met:
[...]

• the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds
  • £7,500 for events on or after 6 April 2015, or
  • 1% of the standard lifetime allowance for events before 6 April 2015

and

• the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

I guess there's technically a narrow range between £7500 PCLS and where £3600/30*100 =12000 applies but they are after bigger fish than you. jamesd has written about this, eg here