Flexi-access Drawdown - difficult application form

tenchy

Having finally - after a few months - got my DC pension pot transferred from my company scheme to my SIPP provider I'm now grappling with the less-than-clear Benefits Drawdown application form. Some advice would be gratefully received:


Under 'Benefit Options' the question is asked "How much of your SIPP fund do you want to crystallise and take benefits from". Two boxes are provided, one for a % figure, the second for a £ value. A straightforward question, you might think, but really it isn't.


My plan is to take the 25% tax free lump sum and then draw down £30k per year to start with. My assumption is that the fund from which drawdown takes place remains available to me to invest accordingly? Is this a correct assumption? I ask this question because when I spoke to the SIPP provider help desk they said to enter 100% as the amount of the fund I wish to crystallise, but I'm now wondering if I do this, will the entire fund be frozen, effectively as cash? If this is not the case, why would you want to crystallise less than 100%? They also ask for a Crystallisation Date - again perhaps suggestive of the entire fund being frozen.

NoMore

AIUI each crystallization event allows you 25% tax free from the amount crystallized. It can remain invested and still grow after that, but any further withdrawals are subject to tax.

As for not crystalizing the full pot, you may not require/need the tax free amount of the full pot, so don't crystalize it all, only the amount to satisfy your need and leave the rest to grow and take at a later date with a new 25% TFLS.

HappyHarry

As per NoMore’s comment above

The date is asked for as, for example, you might want to crystallise at the beginning of next tax year tather than this one.

Chickereeeee

tenchy wrote: »

I ask this question because when I spoke to the SIPP provider help desk they said to enter 100% as the amount of the fund I wish to crystallise, but I'm now wondering if I do this, will the entire fund be frozen, effectively as cash?

No.

Pretty much, the size of the tax free lump sum you want to take determins the amount you want to crystallise. Maximum tax free lump sum in one go = crystallise 100%.

The rest stays invested, if you want it to be.

C

dunstonh

There are multiple drawdown methods. If you are going with a phased drawdown, you will take it differently to a full crystallisation. Some may take it as income. Some ad-hoc. Some regular.

My plan is to take the 25% tax free lump sum and then draw down £30k per year to start with.

That method is not as common as it used to be as phased is more popular nowadays. However, if that is what you want to do then that is full crystallisation.

tenchy

Thanks guys for the clarification. The key point being, as you pointed out, that 'crystallisation' relates only to tax. So yes, I need to crystallise 100% to get the 25% tax free lump in one go and this won't affect my ability to invest the remaining funds.


Next question (hopefully last ):


The form goes on to ask about "Are you a member of any other registered pension schemes ....". This is followed by a number of supplemenatary questions such as "Pre 6th April 2006 Protection, do you have enhanced protection" and "Do you have fixed protection 2012" and several other questions about date-specific protections. All this is concerned with the lifetime allowance. In my case I have a couple of frozen DB occupational pension schemes from previous employers, which together will deliver £10k pa in a few years' time. I have no HMRC certificates concerning prootection. I'm thinking that in answer to the question "Are you a member of any other registered pension schemes" I answer Yes, but for all the questions about "Do you have this that or the other type of protection" I answer "No". I've never drawn on these pensions.


Thanks again for any advicre/suggestions.

tenchy

dunstonh wrote: »

There are multiple drawdown methods. If you are going with a phased drawdown, you will take it differently to a full crystallisation. Some may take it as income. Some ad-hoc. Some regular.



That method is not as common as it used to be as phased is more popular nowadays. However, if that is what you want to do then that is full crystallisation.

Interesting. Prior to retiring, all the presentations I went to concerning pensions suggested that nearly everyone takes the 25% straight away. My thinking is that it's safer to do so, in case the government decides to reduce the tax free percentage at some point - and I have some other plans for the full 25% anyway. However, thanks for the information about the current situation - I'll review my options again before finally submitting my form. In a word or two, what do you reckon is the reason for this: leave uncrystalised funds for - hopefully - future growth, persumably?

HappyHarry

tenchy wrote: »

Interesting. Prior to retiring, all the presentations I went to concerning pensions suggested that nearly everyone takes the 25% straight away. My thinking is that it's safer to do so, in case the government decides to reduce the tax free percentage at some point - and I have some other plans for the full 25% anyway. However, thanks for the information about the current situation - I'll review my options again before finally submitting my form. In a word or two, what do you reckon is the reason for this: leave uncrystalised funds for - hopefully - future growth, persumably?

Since April 2015 when the new pension reforms came in, most people realised that taking money out of a tax free environment and putting it into a taxable environment didn’t make much sense, given that funds could now be taken from pension pots at any time without limit. The removal of the 25% tax free amount is regularly mooted by the press and the anti-pension brigade, but there is not, and has never been, any serious consideration that this will happen overnight.

If you have have been to presentations within the last three years suggetsing otherwise, then that is very disappointing, and would generally demonstrate that the presenter would not be a trustworthy source of information.

dunstonh

Interesting. Prior to retiring, all the presentations I went to concerning pensions suggested that nearly everyone takes the 25% straight away.

Trying not to exactly duplicate HappyHarry's corrrect response too much....

Pre 2015, that was very much the case. Phased drawdown before 2015 did exist but it was mainly the wealthy with large pots that used it. Post 2015 changes, I do far more on phased basis than 100% crystallisation.

What I tend to find is that the potential client tells me at the start they want to draw the 25% because that is what they think they need to do. However, once I find out what their needs and objectives are, in most cases there is no financial reason for taking the 25% right at the start. For many, it is just going to go in a bank account and that is completely pointless. The longer you leave it, the greater the 25% will be. It is outside of the estate, its tax free in the pension until you take it out (more tax free than an ISA).

The general rule of thumb is that you dont take money out of the pension unless you need it for a purpose or it is for tax reasons.

My thinking is that it's safer to do so, in case the government decides to reduce the tax free percentage at some point -

That has never been on the cards. Indeed, if you look at all the pension changes that have occurred since personal pensions were introduced in 1988, they have actually increased the amount of tax free cash you can draw. AVCs never had tax free cash. Now they do. Protected rights never had tax free cash, now they do.

The treasury benefits more from tax free cash because it gives people money to spend. Spending drives the economy. Take those lump sums away and it the economy suffers.

The two most likely areas under threat from change on pensions are tax relief on contributions and salary sacrifice (which was never funded to be a mainstream option but is now one of the biggest costs of pensions after tax relief despite being one of the smallest a decade ago).

westv

We all know the evil Chancellor will, with a maddening cackle, withdraw the 25% the very moment YOU want to take it.

Malthusian

Prior to retiring, all the presentations I went to concerning pensions suggested that nearly everyone takes the 25% straight away.

Notwithstanding what HappyHarry and dunstonH said, this is still accurate. Most people do still take their 25% immediately.

Even though the government has never actually carried out the threat to restrict the 25%, people were still afraid they might. Until 2014, kites were flown in the media before every Budget suggesting that the Government was considering restricting the 25% lump sum, right up until Osborne's pension freedom Budget.

Instead the government raised money by restricting tax relief and squeezing the Lifetime Allowance. Every Budget the Government squeezed pensions and every year they got away with it because people were just happy they'd left the 25% tax free lump sum alone.

Anyway, it's not just fear of future changes to the rules that cause people to take their pension lump sums early. The reason many pensions came with an upfront lump sum in the first place was so you could celebrate retirement by paying off the last of your mortgage or going on a round the world holiday or failing that being generous to your kids. People still do those things. Tax isn't a problem if you plan to spend the money.