Drawdown option question

username12345678

Hi all,
This is genuinely 'asking for a friend'...

SIPP £2.25m

LTA £1.25m

He has calculated his TFLS to be £312,500 which seems correct.

What he wants to do is divide his TFLS in to 6 equal parts and draw them annually whilst not touching the taxable remainder. He doesn't want to withdraw the entire £312,500 out of the SIPP in one go, only each years amount leaving the remainder in the SIPP until the TFLS is exhausted after 6 years.

The additional question is how could he make use of the personal allowance in this scenario?

He is seeing his IFA to ask this question but wants to be armed with some knowledge about what is possible.



My understanding is that what he wants to do isn't possible; it's either the TFLS out in one go or the alternative periodic withdrawals would have a 25% tax free element, plus personal allowance then tax at standard rate on the remainder.



Thanks.

MK62

Personally I think he should wait and see what his IFA says first.
There is a significant LTA charge hovering around here.....


Why does he not want to touch the taxable remainder? MPAA?
I agree with your assessment though - assuming he has no other income, then he cannot take advantage of his PA if only withdrawing tax free cash (though if he has no other income, the MPAA isn't really relevant, unless, perhaps, he expects to have other income in the future)

SeniorSam

He would simply move £208,333.33 from Sipp to Drawdown, then take 25% of that tax free (one sixth of his 312.500. The Sipp and remaining drawdown accounts will continue to grow if invested wisely, so the FULL tax free amount will gradually increase.
Only the growth in the Sipp will give more tax free cash, not the growth in the drawdown account. Perhaps, you then need to recalculate.

Drawing further from the drawdown account BALANCE from the first tranch, would be taxable and in order to take more tax free withdrawals, more would need to be transferred to the drawdown account

gm0

If you search the older MSE LTA threads you will find occasional commentary on the dreaded subject of market timing value at crystallisation and the LTA allowance. People do keep their heads down - first world problems etc. A lot more people below LTA but with material DC pots (me included) are concerned about understanding what LTA means when you project that drawdown pot forward 20+ years - investment return including inflation - 55-75 (and then beyond).

As others have posted here it is clear this is a very material LTA ~250k+(25% x 20 year excess return partly over CPI) penalty tax scenario (this not exact as a protected LTA doesn't index until the other one catches up). Linked to BCE % tests at crystallisation to LTA exhaustion and ultimately at age 75 for the rest. Broad brush - IFA can do the calcs for the access scenario + protection.

IHT issues and plans of pension wrapped or unwrapped funds which could push in different directions to work on or ignore this issue.

Clearly if your friend can find a way to meet his cashflow needs then crystallising pension equity investments (designating for drawdown) during the next "down" cycle of substantial market correction and recovery could help make the most of the LTA - subject to extracting crystallised growth thereafter and paying the marginal rate income tax on it. This requires investments structured in a way that permits this + the cashflows wanted as well as the long view on the equity heavy investment. Tax optimisation may have some investment return opportunity costs to be factored in.

So essentially market timing by crystallising in "nibbles" rather than all at once - likely Phased FAD (or less likely UFPLS) as two access scenarios under discussion.

As it's a 20 year view ROI, inflation and on correction cycle(s) to 75 - it's both a very very comfortable place to be and a speculative gamble around market and political risks - pensions, tax free cash, LTA, ISA, IHT etc etc. Known unknowns.

The DIY received wisdom (be it good or bad) seems to be that if you don't need to draw out your pension as consumption then the IHT pension wrapper benefit is often the key driver (if it lasts the upcoming IHT reform lifetime giving cycle).

But if you do intend to largely extract and consume over 40 years the tipping point is "at LTA" where crystallise the lot and draw the growth/pay the income tax seems to be a position a number of DIY folk have reached to deal with the LTA and the risk of further meddling with it.

IFAs do often seem to recommend the phased FAD route over the "all in one go".

In this edge case of edge cases - once the personal LTA 25% tax free is exhausted there doesn't seem to be any advantage in excess crystallisation ahead of need. How and when to exhaust it is a valid discussion to have.

We can all speculate but the only certainty is that the rules will be different (and not necessarily in a friendly way) in 2 years time let alone 20.

username12345678

Thanks all, he had his meeting today and got a similar reply.

Unless you take taxable income there is no way of taking your PA...which makes sense.

And i'll pass all on all the other good info...after i've printed it out.

gm0

Not sure that's quite right as reported - either my consumer grade understanding is wrong or it may still be a simplification. Based on what I have read. My current provider doesn't do phased or any FAD but I am looking at it in terms of where to go to.

You can designate up to the personal LTA for drawdown and take the 25% tax free cash (all at once or as several chunks over several years of phased FAD if your provider does phased FAD). All without LTA penalties at the time (then manage the growth to 75) *without* taking the designated for drawdown taxable income unless you want or need to. It is designated for drawdown and it is in crystallised state but it can stay invested until drawn flexibly to suit your plans. You set the level. In fact you likely do need to draw some over the 20 years 55-75 to keep the crystallised funds topped down below the 25% penalty level. More return = more income = more income tax as you go but still no penalty tax if you do that. Taxed money moved to inside your IHT estate under current rules unless consumed.

The value when you do the crystallisation (typically 3x the tax free cash taken) locks in the % of LTA consumed. 100% in the case where you take £1.25m into drawdown leaving £1m untouched for the scenario offered (This latter portion is then hit for 25% of the investment inflated value at 75 as a backstop or earlier when it is touched with no LTA left or whatever the rules are at the time). This is where the scenario modeling is needed.

Or you can take UFPLS nibbles with 25% of each tax free and 75% income taxable each time taking a % of personal LTA each time. Or you can do a series of phased FAD's for portions of the total fund) to extract the 25% to the limit.

If you do it "over time" - the fund value in the markets each time impacts the % LTA used vs the % of the fund moved across into crystallisation i.e. has been first tested for LTA. In a crash you could get more of the current £2.25m of equities at a short term depressed value (say 30-40% down) into the £1.25m allowance before hitting 25% penalties. Clearly if markets continue strongly into the period of interest to crystallise and draw tax free or otherwise then you should have done the maximum earlier as you now have more uncrystallised growth above the line.

While all these scenarios exist not all platforms do (or choose to offer them). Your friend's IFA may be filtering by existing/recommended platform capabilities and what is "normal" for the client base (whether he/she should do that for an edge case is a debate for another day).

You will read other threads on the IT deficiencies of particular providers and their ability to distinguish crystallised and uncrystallised funds and investments and their returns and report on them which no doubt makes them wary of getting too fancy and it should. Your friends mileage may vary. None of this is advice etc.

Malthusian

I too am struggling to understand the question.

If the question is "can he use his personal allowance without having any taxable income" then the answer is no by definition. Unless he gets a part time job or something.

If he takes £52,083.33 as tax free cash he will have crystallised £208,333.33 and moved £156,250 to flexi-access drawdown. There is nothing stopping him taking £12,500 taxable income from that £156,250 drawdown fund.

Except of course if he is worried about the MPAA or Inheritance Tax liability if it will just sit there.

MK62

How old is your friend?


While I get the question about PA, I don't understand what he is trying to achieve by not touching the drawdown funds......

username12345678

I will speak to him this evening and ask him to expand on what he's trying to achieve.

From the previous conversation my understanding was he was trying to minimize the tax payable as he drew down his pension (in whatever way). I'm not sure IHT is a consideration, just the payable tax while he's alive.

He is 51 I think and expects to stop work in 2 or 3 years.

Malthusian

username12345678 wrote: »

He is 51 I think and expects to stop work in 2 or 3 years.

So he's four years away from being able to crystallise his pension anyway?

With a Lifetime Allowance issue like that he should definitely be taking professional advice, even if there's little to be done at this stage.