Single or multiple drawdowns?

secondincometrader

One question I do have regarding drawdown, probably best asked with an example. If you were lucky enough to have a pension pot of the maximum £1.03M, what would be the pros and cons of either putting it all into drawdown in one go and taking the 25% tax free lump sum, or doing it in, say, yearly tranches to provide you with the money you need for that coming year? Many thanks.

Alibert

The trouble with your example is that by choosing £1.03 you encounter the LTA , and LTA considerations will swamp the decision .. you would want to crystallize the whole lot, and drawdown enough to stay under the LTA when you reach you 75th birthday.

If your example was a pot of £600k then the discussion would be different

Alexland

Also having a pot of 1.03m usually takes more than luck and those who get there seem to consider themselves unlucky to be in an LTA situation.

woody190388

I am also quite interested in the answer to this question as this is a decision I may be taking in the near future. So if we ignore the LTA how do you decide which way to approach drawdown?

shinytop

I'm thinking about this too. It depends on how much you need, whether you have income from other sources and where that leaves you in relation to the income tax thresholds. You then draw down a mix of taxable and tax-free to minimize your tax liability.

dunstonh

what would be the pros and cons of either putting it all into drawdown in one go and taking the 25% tax free lump sum, or doing it in, say, yearly tranches to provide you with the money you need for that coming year?

The idea would be to pick the method that is most suitable for your circumstances. We don't know the circumstances. So, cannot really say which would be a pro or con. One person could have the feature as a positive but the same feature could be a negative to another person.

However, with the pension at the value of the LTA, that will be the dominant factor and would likely see drawdown used with pretty high income rather than phased drawdown.

OldMusicGuy

It depends on your personal situation, other income streams and tax status. In my case I have a large DC pot (but not at LTA level yet). I am retired early at 60, no other income, so I am withdrawing up to personal allowance through UFPLS at present to avoid paying tax. That is augmented with other savings. Withdrawing 25% tax free as a lump sum would be a waste as I don't need the money (it would be quite a lot).

The only reason I would take the full 25% out as a single lump would be if the tax free allowance was going to be abolished.

AnotherJoe

I did the full 25% from one of my two SIPPs and then invested that in ISAs and elsewhere because I was approaching LTA and simple investment growth would have put me over and this gave me a way to put that off for a while, if it looks like happening again I'll take 25% from the other SIPP.

woody190388

Old Music Guy - did you choose UFPLS over flexi access drawdown to make use of your otherwise unused annual income tax allowance?

As we have rental income and a part-time work income I am thinking along the lines of flexi access drawdown of the PCLS to add to our annual income with no further income tax.

To tie this back to the original question (ignoring LTA) we would be crystallising the whole pension pot now but only drawing down the the tax free portion. This would allow us to carrying on contributing up to £40,000 pa and not add to our tax burden until the tax free portion is used up. Is there any flaw in this thinking?

coyrls

woody190388 wrote: »

To tie this back to the original question (ignoring LTA) we would be crystallising the whole pension pot now but only drawing down the the tax free portion. This would allow us to carrying on contributing up to £40,000 pa and not add to our tax burden until the tax free portion is used up. Is there any flaw in this thinking?

It doesn't work like that. If you crystallise the whole pension pot, you have to take the 25% PCLS at that time (it is a Pension Commencement lump sum) or lose it. There is no option to keep the 25% invested in your pension and draw it down over time.

Albermarle

I think Coyrls has misunderstood the question .
Yes as long as you do not take any taxable income from the drawndown pot then you can still add to a pension up to the annual allowance .
One point be careful of is that if HMRC think that you taking tax fee cash from one pension and re investing it in another , then this is known as recycling and can be subject to a tax penalty.