UFPLS vs. Flexi-drawdown

kered10

Expecting to retire in 18 months with about 80% of retirement income from a DB scheme. Just received the Pensionwise booklet from my other, DC, scheme. I will only want about 10% of the DC fund as cash at retirement, and no PCLS from the DB scheme. I have been mulling the differences between UFPLS and flexi-drawdown for a while, but I take from the Pensionwise booklet that the situation I've described, UFPLS gets me all the 25% tax-free (eventually, if I draw the whole amount over time), but flexi-drawdown allows only a one - off tax free sum, that is, I couldn't take 10% of the fund at retirement, the remaining 15% in 5% tax-free tranches, in each of the following three years. Our have I misunderstood?
Thanks for any help on this. I will be having a pensionwise interview, but I want to be well - informed from the start.
Derek

SonOf

I have been mulling the differences between UFPLS and flexi-drawdown for a while

Is that UFPLS in one go or phased UFPLS?

but I take from the Pensionwise booklet that the situation I've described, UFPLS gets me all the 25% tax-free (eventually, if I draw the whole amount over time)

You can only ever draw 25% out of your uncrystallised funds. However, you would get more out over the long term by phasing rather than all up front.

I will be having a pensionwise interview, but I want to be well - informed from the start.

You may be in for disappointment as they stick with generics and do not give advice. Plus, they do not cover combination scenarios well.

jamesd

kered10 wrote: »

flexi-drawdown allows only a one - off tax free sum, that is, I couldn't take 10% of the fund at retirement, the remaining 15% in 5% tax-free tranches, in each of the following three years. Our have I misunderstood?

You've misunderstood.

You can take any tranches you like and up to 25% of each can be tax free but for each tranche you must take all of the tax free bit that you want at the start.

For the particular tranche:

UFPLS is inflexible, it's always 25% tax free and 75% taxable and all paid at the same time.

PCLS (tax free lump sum) and drawdown is more flexible. You can take up to 25% tax free lump sum but all of the tax free lump sum you want to take must be taken at the start. It's fine to take just 10% tax free if you like and the 90% is then taxable, you don't get to take the missed 15% tax free later. If you try to take less than 25% tax free the pension firm may contact you to explain why it's a bad idea before doing it. You can then take any portion of the taxable part whenever you like.

What they were trying to do was explain the only at the start of each tranche aspect.

PCLS then drawdown gives you more flexible tax planning opportunities. You can take up to 25% of the whole pot tax free but can spread out taking the 75% over as many years as you like to avoid unnecessary income tax.

It's completely fine with say a million Pound pot to take out 25k tax free and 50k taxable each year with the remaining 25k taxable held in a drawdown account for later. That might avoid higher rate tax.

With UFPLS you'd have to choose 16.666k tax free and 50k taxable to just use the basic rate region. 25k tax free and 50k taxable not allowed with UFPLS.

It'd also be fine in the one year to do 16.666k+50k UFPLS and also 8.333k tax free PCLS with 25k going into a drawdown account to be taken later. Mix and match of the two ways like this is OK.

Albermarle

PCLS (tax free lump sum) and drawdown is more flexible. You can take up to 25% tax free lump sum but all of the tax free lump sum you want to take must be taken at the start. It's fine to take just 10% tax free if you like and the 90% is then taxable, you don't get to take the missed 15% tax free later.

Is this correct? I thought with flexi access drawdown , you could take the 25% PCLS in stages , as long as a corresponding amount ( 3 X what is taken tax free ) goes into drawdown ?

SonOf

Albermarle wrote: »

Is this correct? I thought with flexi access drawdown , you could take the 25% PCLS in stages , as long as a corresponding amount ( 3 X what is taken tax free ) goes into drawdown ?

It is correct in the context that James has written it.

If you crystallise 100% of the pot then you would take the 25% at the start. Failure to take the 25% by only taking 10% would mean you have lost the ability to take the rest later. You rarely see this being done on drawdown but some would do it with an annuity. Indeed, I am not sure a drawdown plan would allow you to make this mistake.

What James is saying is that if you had £100k pot and crystallised £100k (100%) then you could take £25k. However, if you only took £10k, then you would not be able to take the remaining £15k later.

However, if you only needed £10k lump sum, then you would crystallise £40k (30k going into the crystallised pot and £10k PCLS paid out). Leaving the other £60k uncrystallised allowing you to take further 25% PCLS later.

jamesd

Albermarle wrote: »

Is this correct? I thought with flexi access drawdown , you could take the 25% PCLS in stages , as long as a corresponding amount ( 3 X what is taken tax free ) goes into drawdown ?

Yes and so is what you wrote. UFPLS forces you to take 25% tax free. The other way lets you take 0% to 25% tax free at the start but if you take less than 25% you don't get to take the remainder later.

That's all done per tranche so a person with a million Pound pot can take benefits from say 100k without affecting their ability to take 25% tax free from the 900k later. But if only 10% of the 100k is taken tax free at the start, nothing more can be taken tax free from the 100k bit.

It's not normal to take less than 25% tax free and it's usually a mistake. SonOf gave one situation, which might come up if someone had a good guaranteed annuity rate but still wanted some immediate lump sum.

kered10

Many thanks to all the helpful replies. I think the point SonOf makes :

"However, if you only needed £10k lump sum, then you would crystallise £40k (30k going into the crystallised pot and £10k PCLS paid out). Leaving the other £60k uncrystallised allowing you to take further 25% PCLS later."

... Matches my expected situation most closely. I wonder if the next question arising from that explanation may depend on different SIPP providers' rules. That is, can the crystallised £30k still be invested in funds, or does it have to sit as cash waiting to be drawn down?
Derek

SonOf

I wonder if the next question arising from that explanation may depend on different SIPP providers' rules. That is, can the crystallised £30k still be invested in funds, or does it have to sit as cash waiting to be drawn down?

All providers would be expected to allow it to continue being invested. I havent seen one that doesnt but if they did, I would move away from them.