Taking less than 25% tax free - how does this work

Tabby_cat

Hi All,

I have a question that I can't see having been covered before about flexible draw-down.

I understand I can take up to 25% tax free at aged 55. But, what happens if I don't want to take the full 25% amount? What happens if the remaining fund values drop or raise significantly?

As an example, say I had 100k in a SIPP. If I take 10k at the start of year one, that leaves 90k invested. 10k is obviously less than my tax free amount so no tax payable and I have a further 15k of tax free pension to draw-down in coming years.

But, say my funds do remarkably well and at the end of year one my fund has grown considerably (unlikely I know, but just trying to understand this,) and now instead of a fund of 90k, I have a fund of say 150k.

What would be the tax free amount on the above example?
Is it 15% of the fund as I've taken 10% tax free already? Or some other calculation.

Apologies if this has been covered before. I did look but couldn't spot it. All help in understanding appreciated.

NoMore

No point in not taking 25% tax free, but it depends on the amount, you could take it all and 25% of it is tax free and crystallise the full amount (crystallising basically means you've already took the 25% tax for that amount)

Or

You could take a smaller amount like 20k, 5k of which is tax free, leaving 80k uncrystallised and ready to take a another chunk of it with the first 25% of said chunk tax free. Continuing like this until the entire pot is crystallised

Both crystallised and uncrystallised pots can continue to grow, just uncrytallised portion is available for further tax free cash.

xylophone

https://www.pensionsandannuities.co.uk/Uncrystallised_funds_pension_lump_sum.htm

Dox

NoMore wrote: »

No point in not taking 25% tax free

There may be very good reasons not to do so, depending on individual circumstances - e.g. if the individual concerned is more interested in the heritability aspects of their pension for their children, especially if they are in poor health and might die before age 75.

dunstonh

I understand I can take up to 25% tax free at aged 55. But, what happens if I don't want to take the full 25% amount?

Very common scenario. Just crystallise enough of the pension to generate the lump sum you need. No more than that.

What happens if the remaining fund values drop or raise significantly?

nothing apart from the value falls.

A

s an example, say I had 100k in a SIPP. If I take 10k at the start of year one, that leaves 90k invested. 10k is obviously less than my tax free amount so no tax payable and I have a further 15k of tax free pension to draw-down in coming years.

You would only crystallise £40k of the pension and leave the other 60k uncrystallised.

NoMore

Dox wrote: »

There may be very good reasons not to do so, depending on individual circumstances - e.g. if the individual concerned is more interested in the heritability aspects of their pension for their children, especially if they are in poor health and might die before age 75.

The response was to a question of starting drawdown.

If your taking any form of drawdown, why would you not use the 25% portion tax free ? Whether its the full amount or a smaller proportion ?

Your question seems to be in response to not taking any amount, which was not the question.

Tabby_cat

Thank you All, thanks for clearing that up for me.
Best regards to all.

shinytop

I was going to ask a similar question but it has now been partially answered. I (sort of) understand what is possible now. I have some follow on questions (sorry if they are a bit basic). If I wanted a lump sum plus an income would I (for example) crystallise enough for the lump sum I need plus say a year's income and draw that down? If I then needed a further lump sum, more income or to extend for another year, I'd just repeat? If so, what would that look like in my (yet undecided) SIPP - would I have one drawdown account that got topped up by each crystallisation or would I have one for each crystallisation? And is crystallising a routine (i.e. quick and online) transaction for SIPP platforms?

Pension_Geek

shinytop wrote: »

I was going to ask a similar question but it has now been partially answered. I (sort of) understand what is possible now. I have some follow on questions (sorry if they are a bit basic). If I wanted a lump sum plus an income would I (for example) crystallise enough for the lump sum I need plus say a year's income and draw that down? If I then needed a further lump sum, more income or to extend for another year, I'd just repeat? If so, what would that look like in my (yet undecided) SIPP - would I have one drawdown account that got topped up by each crystallisation or would I have one for each crystallisation? And is crystallising a routine (i.e. quick and online) transaction for SIPP platforms?

It will vary greatly depending on the SIPP provider. How quickly they can set up a drawdown and ultimately get the money to you is something you should look at when setting it up.

dunstonh

If I wanted a lump sum plus an income would I (for example) crystallise enough for the lump sum I need plus say a year's income and draw that down

Depends on how you fund the lump sum. Is it from the 25% chunk or the 75% chunk or a combination.

Also, if you take the 25% up front or some of it, you reduce the ability to use phased flexi-access drawdown which may be better over the long term. So, you need to compare short term and long term.

? If I then needed a further lump sum, more income or to extend for another year, I'd just repeat?

yes

If so, what would that look like in my (yet undecided) SIPP - would I have one drawdown account that got topped up by each crystallisation or would I have one for each crystallisation?

You will have a crystallised pot and an uncrystallised pot. Providers using different software have different ways of showing that but all have to separate.

And is crystallising a routine (i.e. quick and online) transaction for SIPP platforms?

It varies. With some, you can have your lump sum in your account in about 20 minutes with no forms required. Others can take weeks and require paper forms. Most fall somewhere in between.

This is part of the research you should do when picking a platform. And the FCA report published today confirms that in general, cost and features/functionality tend to be closely aligned. i.e. if you pay cheap, you get cheap. Obviously, exceptions apply. So, when you decide your provider, do not make the mistake of looking only at cost. Look at features and functionality.

shinytop

thanks Dunstonh, something to think about. I definitely don't want the paper forms/weeks option so I need to do some research. I have a small HL SIPP already but that would become expensive with my full DC amount.