Another FAD v UFPLS question . . .

liffy99_2

Hi
Starting to think of the options for taking my SIPP next year. My question is more focused on the financial benefits (eg best for paying less tax, maximizing benefits etc) than triggering limits on future investment etc.
So, a bit of background;

I am 62 with a modest NHS pension of £17k (so that takes care of my tax free allowance !). I will receive the full state pension in late 2022.
I do not need an initial lump sum and my SIPP pot is, say, £300k.
Neither do I have any intention of making any more pension contributions.

I have tried to forecast the outruns for both FAD and UFPLS options based on the following over 20 years (if I live beyond 82 then I will just rely on the NHS and state pensions).

SIPP annual growth of 2% (my way of saying 4% growth less 2% inflation).
Withdrawal of 10% of pot value once per year.

With the FAD option I take a £75k PCLS and then pay tax at 20% on future withdrawals.
Under UFPLS I pay 20% tax on three quarters of each withdrawal.

Over the twenty year period therefore I am withdrawing a shrinking sum each year as the value of the SIPP pot reduces. This weights my ‘income’ towards the earlier stage of retirement.

Now, according to my figures, UFPLS is a roaraway winner.
For example at the end of year 1, 10 and 20 (and after taking the £75k PCLS under FAD)
The stats are;

FAD

Withdrawals (years 1, 10 and 20). 18360, 8501, 3613
Tax 3672, 1700, 723
Pot left. 165240, 76507, 32518

UFPLS

Withdrawals. 30600, 14168, 6022
Tax 4590, 2125, 903
Pot left. 275400, 127511, 54197

Adding up all the transactions for all the years, and including the PCLS I get;

FAD
Total withdrawals. £258453
Total tax paid. £81691
Total net withdrawal. £146762
Pot Value. £32518

UFPLS
Total withdrawals. £305755
Total tax paid. £45863
Total net withdrawal. £259892
Pot Value. £54197

So, under UFPLS I have had over £100k more cash, paid nearly £40k less tax and have over £20k more left in the pot !

Where am I going wrong ???

NoMore

Because you use an arbitrary withdrawal of 10% of the remaining pot, after the initial PCLS on the FAD, your pot is always smaller than the UFLPS pot, so you take less out. Conversely you get to take more out of the UFLPS pot, for the same 10% of remaining pot.

liffy99_2

Yep, get that. The UFPLS pot is always going to be bigger as no PCLS was taken. So growth will be more.
Even so, under UFPLS I would be better off to the tune of an extra £5k per year (simple average) and have over £20k more left in the pot at the end.
I can’t see any point in FAD at all unless I was in need of the tax free lump sum at the start.
Surely UFPLS must be THE way to go in circumstances where PCLS is not needed or investors are being careful not to pay tax (using pension tax free amounts plus personal allowances).

liffy99_2

Ah, spotted my mistake !
I had deducted £45k Tax at the outset ( on the remaining £225k after the £75k PCLS) as well as taxing each withdrawal. Doh !

Updated stats are;

FAD
Total withdrawn. £304136
Tax paid. £45863
Pot left. £40648

UFPLS
Total withdrawn. £305775
Tax paid. £45863
Pot left. £54197

So, still better under UFPLS by a total over 20 years of approx. £15k.

tacpot12

UFPLS is better when you don't need th PCLS because it delays crystallisation of the tax free amount for as long as possible.

shinytop

Are you re-investing your PCLS in the FAD scenario? For a fair comparison you'd re-invest it in the same funds (or wherever) as your uncrystallised pension in the UFPLS scenario.

liffy99_2

Now that is a good point.
Even putting the cash in a bank (at say 1.2% after tax) would generate over £20k and more than even things up.
Think I might just toss a coin !

bowlhead99

tacpot12 wrote: »

UFPLS is better when you don't need th PCLS because it delays crystallisation of the tax free amount for as long as possible.

When the PCLS is only £75k or so, it would still usually be perfectly possible to invest that amount of received money in similar funds outside the pension to what it has been invested in inside the pension, without incurring tax on the income or gains arising from it from time to time.

That's presuming the OP did not already have lots of wealth so was not using their annual £2k 0% dividend allowance or their annual £12k capital gains allowance. They could gradually stuff the £75k lump sum into S&S ISAs as soon as those annual allowances become available.

If the OP (and spouse, if any) have enough total assets to create an inheritance tax bill when they pass, it would make sense to keep a greater proportion of the money stuck inside the pension so it can pass to heirs without first coming into their personal treasure trove. If there is a big pile of £75k plus growth, resulting from taking that initial TFLS which they don't need but don't gift away early, it might not be very efficient because it could lead to an unwanted IHT bill.

But if assets and pensions are modest, IHT will probably be a non issue. Only mentioned as OP talks about "best for paying less tax, maximizing benefits", which is generally easier achieved if you don't own your assets, your pension fund does instead

LHW99

Also, perhaps UFPLS until age 75, up to which point remaining DC funds can be passed on tax-free.
After that they pass on but the recipient pays tax at their normal rate. Could make a difference, depending on who is to inherit.

jamesd

liffy99 wrote: »

So, still better under UFPLS by a total over 20 years of approx. £15k.

This means that you were still making a mistake. Flexi-access drawdown should be higher or they should be the same.

General plan is take 20k PCLS and reinvest inside S&S ISA. Place remaining 60k into flexi-access drawdown. Repeat until all PCLS has been taken and moved into ISA.

It looks as though you've been taking the growth inside the pension but ignoring it outside. Those growth rates are normally the same but ISA charges tend to be lower.

liffy99_2

jamesd wrote: »

This means that you were still making a mistake. Flexi-access drawdown should be higher or they should be the same.

General plan is take 20k PCLS and reinvest inside S&S ISA. Place remaining 60k into flexi-access drawdown. Repeat until all PCLS has been taken and moved into ISA.

It looks as though you've been taking the growth inside the pension but ignoring it outside. Those growth rates are normally the same but ISA charges tend to be lower.

So, how does that work in practice ?
My SIPP is invested in a about 10 different funds. If I want a £20k lump sum under FAD to then invest in an ISA, I need to declare @£80k of the total SIPP pot as drawdown ?
Do I sell holdings to create an £80k FAD cash pot ( I assume this has to be separated somehow from the remainder of the uncrystallised pot) and then reinvest £60k in funds again ?
Otherwise I don’t understand how I can simply tag £60k of funds which would not be in exact figures needed.