Single or multiple drawdowns?

kidmugsy

woody190388 wrote: »

if we ignore the LTA how do you decide which way to approach drawdown?

I'd probably opt for taking the TFLS pronto, while it's still 25% and still tax-free. Remember that Gordon Brown changed its name from "Tax-Free Lump Sum" to "Pension Commencement Lump Sum". Now, why would he do that?

DairyQueen

You use the plural 'us and 'we'. I assume you are referring to yourself plus spouse? Do you have the same pension provision? same tax rate now and in retirement? etc. If so, that would be very unusual. A more typical scenario would be that spouses have different pension provision, income, tax rates, etc. and this difference can be used to optimise a couple's finances pre-and-post retirement. In our case, spouse's pension is higher and he has lifetime protection so can make no further pension contributions. I have no such constraint.

Spouse would pay HRT in retirement if he used the recommended flexi-access drawdown rate (3/3.5%) in addition to his DB and SP. I will have the flexibility to drawdown at higher than the recommended rate without incurring a tax liability. We will therefore drawdown at different times/rates. We also wish to retain funds within the pension wrapper for as long as possible in case one of us falls off the perch before age 75 (zero income tax on withdrawal for the beneficiary applies), but that will depend on investment returns.

If you crystallised your whole pot when it is valued close to LTA, and you took only the 25% TFC, then you would need to keep an eye on the investment growth on the remaining 75% as you will effectively have used the major %age of your LTA at that crystallisation event. Making further contributions, and without drawdown on the taxable element, would simply bring forward the date at which you would breach the LTA. It would be difficult to avoid a large tax hit if you survive until age 75 as (currently) that age automatically triggers a crystallisation event, and your new contributions, plus investment returns, would almost certainly be valued higher than the small percentage of LTA remaining.

By crystallising and using the TFC for income first you will delay paying income tax on the remaining 75%. This works for those whose other sources of taxable income are likely to drop in later years. OMG has the opposite issue as his income sources will increase when he receives SP so he is using UFPLS (as you suggest) to withdraw some of the taxable pot within his personal allowance whilst he can.

Beware falling foul of recycling rules if making further large contributions after entering drawdown but no problem if you only take the TFC. Also, if you take one penny of any taxable amount you will trigger the MPAA (£4k). The first UFPLS always triggers the MPAA. However, failing to drawdown on the taxable portion will leave you vulnerable to a bigger tax hit if you subsequently breach the LTA.

How close you are/could be to the LTA is therefore a big consideration on how/when to access your pot. For example, OH has a DB in addition to his DCs/SIPPs. He took 2016 protection as the total pot was projected to be higher than the newly reduced LTA by his DB scheme NRA, and much higher if he delayed taking his DB. Two years on, and we have been crunching numbers as he approaches DB NRA. He plans to continue working for another 3 years, and would ideally like to defer taking his DB. However, in so doing he will likely breach his LTA.

I realise it's a nice problem to have.

The experts here could probably give you an indication of how/when best to crystallise/drawdown but they would need more info: e.g. current pension value, years to retirement, planned future contributions, income requirement. Also info on spouse's pension and plans.

coyrls

Albermarle wrote: »

I think Coyrls has misunderstood the question .

I may have misunderstood the question but the poster did say:

I am thinking along the lines of flexi access drawdown of the PCLS

but there is no such option. Perhaps the poster was suggesting a strategy analagous to flexi access drawdown of the PCLS, in which case I did misunderstand. I realise I was pointing out an issue rather than answering the question!

woody190388

Albermarle wrote: »

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.

Any future pension contributions would be from our Ltd company. I would imagine this could not be construed as recycling?

woody190388

DairyQueen wrote: »

You use the plural 'us and 'we'. I assume you are referring to yourself plus spouse? Do you have the same pension provision? same tax rate now and in retirement? etc. If so, that would be very unusual. A more typical scenario would be that spouses have different pension provision, income, tax rates, etc. and this difference can be used to optimise a couple's finances pre-and-post retirement. In our case, spouse's pension is higher and he has lifetime protection so can make no further pension contributions. I have no such constraint.

Spouse would pay HRT in retirement if he used the recommended flexi-access drawdown rate (3/3.5%) in addition to his DB and SP. I will have the flexibility to drawdown at higher than the recommended rate without incurring a tax liability. We will therefore drawdown at different times/rates. We also wish to retain funds within the pension wrapper for as long as possible in case one of us falls off the perch before age 75 (zero income tax on withdrawal for the beneficiary applies), but that will depend on investment returns.

If you crystallised your whole pot when it is valued close to LTA, and you took only the 25% TFC, then you would need to keep an eye on the investment growth on the remaining 75% as you will effectively have used the major %age of your LTA at that crystallisation event. Making further contributions, and without drawdown on the taxable element, would simply bring forward the date at which you would breach the LTA. It would be difficult to avoid a large tax hit if you survive until age 75 as (currently) that age automatically triggers a crystallisation event, and your new contributions, plus investment returns, would almost certainly be valued higher than the small percentage of LTA remaining.

By crystallising and using the TFC for income first you will delay paying income tax on the remaining 75%. This works for those whose other sources of taxable income are likely to drop in later years. OMG has the opposite issue as his income sources will increase when he receives SP so he is using UFPLS (as you suggest) to withdraw some of the taxable pot within his personal allowance whilst he can.

Beware falling foul of recycling rules if making further large contributions after entering drawdown but no problem if you only take the TFC. Also, if you take one penny of any taxable amount you will trigger the MPAA (£4k). The first UFPLS always triggers the MPAA. However, failing to drawdown on the taxable portion will leave you vulnerable to a bigger tax hit if you subsequently breach the LTA.

How close you are/could be to the LTA is therefore a big consideration on how/when to access your pot. For example, OH has a DB in addition to his DCs/SIPPs. He took 2016 protection as the total pot was projected to be higher than the newly reduced LTA by his DB scheme NRA, and much higher if he delayed taking his DB. Two years on, and we have been crunching numbers as he approaches DB NRA. He plans to continue working for another 3 years, and would ideally like to defer taking his DB. However, in so doing he will likely breach his LTA.

I realise it's a nice problem to have.

The experts here could probably give you an indication of how/when best to crystallise/drawdown but they would need more info: e.g. current pension value, years to retirement, planned future contributions, income requirement. Also info on spouse's pension and plans.

Thanks Dairy Queen for the comprehensive reply.

We are in the unusual situation the my wife and I have equal Sipps, Isa's, shared cash deposit a/cs, 50/50 share of imvestment properties and identical incomes and future state pensions. This is not accidental as we have planned it this way. We are each currently 60% of the LTA at age 56. I guess if we carried on working to our State retirement age of 67 we would both breach the current LTA especially if we continued to make substantial contributions. However we are not planning to do this as we intend to retire at the latest by 60.

I think that it is best if I start a new thread in the near future with full details of our financial situation to harvest ideas on how best to approach retirement. I am conscious that I have hijacked this thread which seems a bit rude:o

Albermarle

HMRC have six tests I think to determine whether recycling is happening. I can not comment on the use of Ltd companies .
The basic premise is that recycling tax free cash back into a pension is against the spirit of all the generous tax benefits pensions offer . So it is grey legal and moral area .

DairyQueen

woody190388 wrote: »

Thanks Dairy Queen for the comprehensive reply.

We are in the unusual situation the my wife and I have equal Sipps, Isa's, shared cash deposit a/cs, 50/50 share of imvestment properties and identical incomes and future state pensions. This is not accidental as we have planned it this way. We are each currently 60% of the LTA at age 56. I guess if we carried on working to our State retirement age of 67 we would both breach the current LTA especially if we continued to make substantial contributions. However we are not planning to do this as we intend to retire at the latest by 60.

I think that it is best if I start a new thread in the near future with full details of our financial situation to harvest ideas on how best to approach retirement. I am conscious that I have hijacked this thread which seems a bit rude:o

Agreed re 'rude' to hijack, and definitely a good idea to start a new thread to gain max input from the community. Stunning planning btw (equality in every respect applies).

A few thoughts:
1) If you are both intending to retire in 4 years max then it's worth planning to pay voluntary NI (Class 3) contributions from when you retire until SP age (or whatever age is required to max your SP). The SP is great value.

2) You are both at approx 60% of LTA. That's not a bad place to be in your circumstances. You will have roughly 40% remaining if you crystallise your current pots now. That will give some headroom on investment returns on the remaining approx £450k. How much headroom will depend on when you intend to enter drawdown and at what rate. Having said that, if the markets return their historical norms over the next decade then that £450k could hit £600k (3% annual growth compounded and net of charges) in 10 years. That's an additional £150k to set against your remaining LTA without any further contributions.

3) You may want to consider reserving an amount of your pots to purchase annuities when interest rates/age improve the returns. If you have no other guaranteed, index-linked income this may be a sensible step as you reach 70+ and are less inclined to want to micro-manage a DC/SIPP. OH and I have plans in place to convert some DC/SIPP funds to annuities in later life. This will likely be at the expense of our beneficiaries but, hey ho, rule number one of pensions planning: look after your own needs first.

4) Don't forget to plan for care needs, This could be residential or at-home care, or both. Regardless, the probability is that the survivor of your couple (probably your spouse if the same age as you as she is female) will need to pay for some kind of care in her dotage. Local Authority provision is a postcode lottery and all regions have been hit by cuts. Better to retain sufficient dosh to self-fund the best possible care if at all possible. Our property provides the contingency for the survivor to exercise options on residential care.

And I am aware that I am also hijacking the thread (apologies OP).

zagfles

secondincometrader wrote: »

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.

Other factors need to be taken into account but in general if you're at the LTA, full crystallisation followed by drawing down at least growth to avoid a charge at 75 would normally be sensible.

kidmugsy

DairyQueen wrote: »

3) You may want to consider reserving an amount of your pots to purchase annuities when interest rates/age improve the returns. If you have no other guaranteed, index-linked income this may be a sensible step as you reach 70+ and are less inclined to want to micro-manage a DC/SIPP.

I saw a newspaper article recently pointing out that the ability to bequeath your pension pot to someone else, free of both IHT and income tax, ends at age 75 - so that that's a natural age at which to consider buying an annuity.