Part crystallized/non crystallized pension query

Bemma

Sorry, I should clarify... I may wish to crystallize all or just some of my pot. I'm working the variables on the different scenarios.
The above figures are just examples for clarification as it's 6 years away. I'm just making sure I understand the rules so that I can work out potential scenarios.
My preferred option may be to not do anything until 60. But I'm working out the option of living off some savings whilst maxing out my salary sacrifice contributions.

zagfles

Bemma wrote: »

Sorry, I should clarify... I may wish to crystallize all or just some of my pot. I'm working the variables on the different scenarios.
The above figures are just examples for clarification as it's 6 years away. I'm just making sure I understand the rules so that I can work out potential scenarios.
My preferred option may be to not do anything until 60. But I'm working out the option of living off some savings whilst maxing out my salary sacrifice contributions.

You seem to understand them pretty well. Google "MPAA triggers" for helpful articles about what triggers the lower 4k annual allowance, and "HMRC recycling rules" for recycling. Just to answer this which wasn't answered

Will any further contribution go into the non crystallized pot or will there be a third pot for new funds?

New contributions should go into the uncrystallised pot, I doubt any providers will set up a third pot.

dunstonh

The OP said they have a pot of £500k
They were considering crystalising £100k and taking £25k tax free

Yes. But nothing about phased flexi access drawdown. Just drawdown.

zagfles

dunstonh wrote: »

Yes. But nothing about phased flexi access drawdown. Just drawdown.

All drawdown set up after 2015 is "flexi-access". The OP is talking about crystallising part of the pot, therefore phasing.

You might use different terminology, eg thinking phased means taking the crystallised 75% or part of it, but the OP seems to understand perfectly well, as do we.

dunstonh

My point still stands and you haven't changed anything. Just because you call it something different to most others.

shinytop

I’m a bit confused about drawdown terminology. I thought there were 3 ways of taking money from a DC pension.

1. Flexi-access drawdown - You crystallise all of it. 25% is tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it.
2. UFPLS - You crystallise/withdraw a chunk where 25% is tax free and 75% is taxed. The 75% is taxed as income at the point you crystallise/withdraw the chunk. The remainder stays uncrystallised.
3. Phased Flexi-access drawdown. You crystallise a chunk. 25% of that chunk is withdrawn tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it. The remainder of your total fund stays uncrystallised. You can repeat 3 or do 2 or 1.

Have I missed something? It doesn’t help that the terminology isn’t consistent but I suppose it doesn’t really matter what you call it. I can see where 2. wouldn’t be the right thing to do in terms of income tax. I’m struggling a bit to see where 3 beats 1 as long as you’re equally careful about when you spend tax free/taxable income. Is it because tax could be due on any investment gains of your TFLS once it’s outside the pension?

zagfles

shinytop wrote: »

I’m a bit confused about drawdown terminology. I thought there were 3 ways of taking money from a DC pension.

1. Flexi-access drawdown - You crystallise all of it. 25% is tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it.
2. UFPLS - You crystallise/withdraw a chunk where 25% is tax free and 75% is taxed. The 75% is taxed as income at the point you crystallise/withdraw the chunk. The remainder stays uncrystallised.
3. Phased Flexi-access drawdown. You crystallise a chunk. 25% of that chunk is withdrawn tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it. The remainder of your total fund stays uncrystallised. You can repeat 3 or do 2 or 1.

Have I missed something? It doesn’t help that the terminology isn’t consistent but I suppose it doesn’t really matter what you call it.

Agree with your terminology. Phased to me just means part crystallisation, whether you leave the taxed 75% or take it. dunstonh seems to think it's not phased if you only take the TFLS from the crystallised part. But your terminology and explanation is a lot clearer. I guess IFA's don't want things to be clear, then people might not need them

I can see where 2. wouldn’t be the right thing to do in terms of income tax. I’m struggling a bit to see where 3 beats 1 as long as you’re equally careful about when you spend tax free/taxable income. Is it because tax could be due on any investment gains of your TFLS once it’s outside the pension?

Yes, that's the main reason. If you can get the TFLS into an ISA then they are equivalent, setting aside issues such as inheritance treatment (a pension is outside IHT whereas an ISA isn't) and benefits treatment (pensions aren't counted as capital for means tested benefits whereas an ISA is).

Also the LTA may be an issue which could lead to favouring 1 over 3.

westv

Maybe dunstonh has had a fab year and his mind is concentrating on reducing his end of year tax return.

dunstonh

1. Flexi-access drawdown - You crystallise all of it. 25% is tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it.
2. UFPLS - You crystallise/withdraw a chunk where 25% is tax free and 75% is taxed. The 75% is taxed as income at the point you crystallise/withdraw the chunk. The remainder stays uncrystallised.
3. Phased Flexi-access drawdown. You crystallise a chunk. 25% of that chunk is withdrawn tax free and the rest is in a drawdown fund, where it will be taxed as income when you withdraw it. The remainder of your total fund stays uncrystallised. You can repeat 3 or do 2 or 1.

Taking zero income but a lump sum is flexi-access drawdown. Just as taking £1 or £100 or £1000 or whatever income would be.

Phased is the sequencing of withdrawals. Most typically the taking of income (which could be annually or monthly or other) where each monthly (or other) payment is made up of the 75/25%. e.g. £1000pm income which is £250pm tax free as the 25% and £750 as the 75%. However, it can be other methods, Such as taking the 25% as a sequence of payments before the 75% is taken.

Terminology is not consistent across the board. Different providers and sites will refer to different methods in different ways. However, a certain person here deciding to make an issue over what I call it seems to have diverted from the point I was making is that phased flexi-access drawdown of 75/25 income would not be available if the 25% is taken early on. That is a very popular method and can be very tax efficient over the lifetime. It is lost or severely reduced (as new contributions will have 25%) if the 25% is taken as a lump sum up front.

The OP taking zero income and 25% at 55 is just single drawdown. It isn't phased as there is no phasing.

Bemma

I didn't want to start a terminology debate but thanks to all as my understanding of the rules is much clearer now. Which was the intent of the post. I can now do the calcs on the scenarios that suit me.