Defined contribution pension fund - Drawdown

Tax_Slave

Hi - I have several final salary pensions and a pension pot via contributions worth £200,000 approx.
Im 57 years old and living off savings until pensions kick in when I’m 60.
I have asked about taking 25% tax free lump sum from pension pot and I find the options a bit confusing in reply.
To go straight to the point ;
At the moment if I die any money invested foes to my wife tax free aka £200,000.
If I take out £50,000 (25% tax free) they say remaining money goes into a FAD (drawdown fund) that can be same investments I had prior.
If I die say aged 62 , does the money I left in the FAD go to my wife tax free (£150,000) ?
or does this money die with me , like an annuity might.

Thanks

coyrls

The 75% left goes tax free to your wife if you die before 75.

Tax_Slave

coyrls said:

The 75% left goes tax free to your wife if you die before 75.

Thanks for the quick reply.
I have Myeloma so probability of death within next 10 years is 66%.
Why I got confused was they offer drawdown in two tranches as they put it ;
- Take £200k into drawdown FAD , take £50,000 tax free and £150,000 goes  into a FAD that can be same investments as prior.
or
- Take say £100,000 into drawdown , take £25,000 tax free and £75,000 goes into FAD that can be same investments as prior.
£100,000 stays invested and you can convert for drawdown in future.
My confusion is ; Well if the investments stay the same , why is FAD different to having it invested normally ?

Ie The £75,000 in FAD and the £100,000 I didn’t put into FAD.

dunstonh

You should be deciding what you drawdown and what method used.  Not the provider.    
Is it possible that you have just been given examples of what you could do but they are not the only options?

why is FAD different to having it invested normally ?

There is no need to have it invested differently.  However, your pension pot must differentiate between uncrystallised funds and crystallised funds.   The differing methods of drawdown use them in different ways.  So, having a clear split is required.  But you can invest the same with both.

Tax_Slave

dunstonh said:

You should be deciding what you drawdown and what method used.  Not the provider.    
Is it possible that you have just been given examples of what you could do but they are not the only options?

why is FAD different to having it invested normally ?

There is no need to have it invested differently.  However, your pension pot must differentiate between uncrystallised funds and crystallised funds.   The differing methods of drawdown use them in different ways.  So, having a clear split is required.  But you can invest the same with both.

Ah ok that makes sense.
Whats the difference between a FAD crystallised fund that says invests in say FTSE 100 shares and a uncrystallised fund that’s has same investments (FTSE100) ?
aka They word it in my plan as e.g. I have £200k that I take £50,000 from tax free and £150,000 goes into what they call a FAD (same investments as prior).

Thanks

Albermarle

At the moment your £200K pot is uncrystallised
If you want to say take £20K tax free cashthen £80K has to be crystallised- £20K goes to you tax free and £60K is left crystallised .
Anything you take from this 60K is taxable .
The say later you want to take another £20k tax free, the same happens again.
So then you would have £120K crystallised and £40K left uncrystallised .
If you had the same investments in the  two funds then they would perform exactly the same . It is more connected with the tax treatment . 

Tax_Slave

Albermarle said:

At the moment your £200K pot is uncrystallised
If you want to say take £20K tax free cashthen £80K has to be crystallised- £20K goes to you tax free and £60K is left crystallised .
Anything you take from this 60K is taxable .
The say later you want to take another £20k tax free, the same happens again.
So then you would have £120K crystallised and £40K left uncrystallised .
If you had the same investments in the  two funds then they would perform exactly the same . It is more connected with the tax treatment . 

Ah I get it now ....penny drops.
One final question and thanks for explaining this so far, very helpful.
If i crystallise Fund of £200k and take £50K (25%) tax free, the remaining £150,000 remains invested.
Can this £150K now only be used for drawdown (aka pay tax when it pushes my income over my tax allowance) 

Or can I in a few years use the £150K to buy an annuity ?

Albermarle

Normally there is the flexibility to convert it to an annuity . I think maybe it has to be before age 75.
Most people take a regular income from the drawdown fund . If the withdrawals are kept at a reasonably low level and the investments do OK , it may never actually run out . Anything left can go to your heirs, whereas with an annuity it will die with you.

zagfles

Tax_Slave said:

Albermarle said:

At the moment your £200K pot is uncrystallised
If you want to say take £20K tax free cashthen £80K has to be crystallised- £20K goes to you tax free and £60K is left crystallised .
Anything you take from this 60K is taxable .
The say later you want to take another £20k tax free, the same happens again.
So then you would have £120K crystallised and £40K left uncrystallised .
If you had the same investments in the  two funds then they would perform exactly the same . It is more connected with the tax treatment . 

Ah I get it now ....penny drops.
One final question and thanks for explaining this so far, very helpful.
If i crystallise Fund of £200k and take £50K (25%) tax free, the remaining £150,000 remains invested.
Can this £150K now only be used for drawdown (aka pay tax when it pushes my income over my tax allowance) 

Or can I in a few years use the £150K to buy an annuity ?

You can buy an annuity any time with it. The income from the annuity would be taxable.

Tax_Slave

Thanks for everyone’s replies, all a lot clearer now.
I worked in IT for 38 years and managed a team if developers in low latency trading.
Getting a 35 page PDF from pension fund today with forms and full of acronyms was ...errr ok a new subject to understand via a few hours crash course.

jamesd

Tax_Slave said:
Whats the difference between a FAD crystallised fund that says invests in say FTSE 100 shares and a uncrystallised fund that’s has same investments (FTSE100) ?

Tax while you're alive.

Considering only the death before 75 case:
1. take maximum 25% tax free lump sum and your beneficiaries get what's left of the 75% taxable tax free.
2. take less than maximum tax free and some of your spending will be taxable that wouldn't have been if you used tax free. They still get the remainder tax free but it's a smaller remainder because to get the same after tax income took more money out of the pot.

You're probably best served by using your full income tax personal allowance each year and covering the rest of spending with tax free lump sum money until you've taken all available tax free. That way if you die early you won't have paid any income tax on it and nor will they.

You also need to consider for each defined benefit pension whether transferring it might be better. If you transfer:
1. reduced life expectancy is quite likely to get you more guaranteed annuity income or
2. wife inherits pot and gets to buy a single life annuity.

Or some combination. Yours is one of the situations where even transfers from public sector schemes with low multiples could turn out best. Or a scheme might have great death benefits and be worth keeping. Depends on the specifics.