Investments in crystallised and uncrystallised parts of pension

cfw1994

dunstonh said:

michaels said:

If the two pots have different tax treatment might that impact on what investment choice you make for each pot?

Potentially, depending on your investment strategy and drawdown strategy.
Some people phase their investments into short term, medium-term and long term.   Depending on your drawdown strategy, you may have more in the crystallised or uncrystallised segment that is long term than the other (or short term or medium term).

Different tax treatment?
Are you referring to the fact that the uncrystallised portion can still have 25% taken as TFLS (or indeed in lumps with 25% of it being tax-free), whilst the crystallised portion is all taxable, or is there some other arcane wizardry that has passed me by?

saver_ali

Ceme3000 said:

I'm interested in this too. Does the crystallised pot initially get set up with cash from funds sold in the uncrystallised pot and then it's up to you how you re-invest or will the provider sell and re-purchase immediately so that you are not out of the market. I'm with HL.

My husband partially crystallised in an HL SIPP. They guided us through the process. There was a form to sign, and you could enclose a letter with your instructions as to what funds to transfer to the crystallised pot and what to leave on the SIPP. I think we had to sell the funds to make sure the actual cash was there for the TFLS. For the funds that were transferred across, they were never sold and repurchased, so we stayed invested at all times. I like the fact that there are two separate pots/accounts because it’s easy to manage. I can keep track of how the Flexible drawdown is affecting the crystallised pot. 

dunstonh

cfw1994 said:

dunstonh said:

michaels said:

If the two pots have different tax treatment might that impact on what investment choice you make for each pot?

Potentially, depending on your investment strategy and drawdown strategy.
Some people phase their investments into short term, medium-term and long term.   Depending on your drawdown strategy, you may have more in the crystallised or uncrystallised segment that is long term than the other (or short term or medium term).

Different tax treatment?
Are you referring to the fact that the uncrystallised portion can still have 25% taken as TFLS (or indeed in lumps with 25% of it being tax-free), whilst the crystallised portion is all taxable, or is there some other arcane wizardry that has passed me by?

Tax comes into the equation when deciding which method of drawdown to use.   However, an investment strategy is a choice. There are multiple valid ways to invest and the time weighted segmenting is a valid strategy.
If you have someone that crystallised £x of their pot to realise a smaller initial lump sum but are then using phased drawdown on the rest, the crystallised pot may not be required to be used again for a long time (or possibly never).   Whereas the remaining uncrystallised pot is being drawn on with phased drawdown.  So, that will have funds that are needed earlier.   So, the person may hold x% of their uncrystallised pot in short term, y% in medium term and z% in long term.   Whereas the crystallised pot that is not needed would be 100% in long term.     
Even if an investor doesn't use a time weighted strategy, they are likely to hold more cash to cover short term withdrawals.  However, you only need to do that on the segment you are drawing from.  i.e. with phased drawdown, you are drawing from the uncrystallised chunk but not the crystallised chunk.  So, you only need to hold extra cash in the uncrystallised chunk.

zagfles

cfw1994 said:

dunstonh said:

michaels said:

If the two pots have different tax treatment might that impact on what investment choice you make for each pot?

Potentially, depending on your investment strategy and drawdown strategy.
Some people phase their investments into short term, medium-term and long term.   Depending on your drawdown strategy, you may have more in the crystallised or uncrystallised segment that is long term than the other (or short term or medium term).

Different tax treatment?
Are you referring to the fact that the uncrystallised portion can still have 25% taken as TFLS (or indeed in lumps with 25% of it being tax-free), whilst the crystallised portion is all taxable, or is there some other arcane wizardry that has passed me by?

There's that of course, but a few other differing tax treatments such as LTA - the uncrystallised part is tested against the LTA on crystallisation or age 75, the crystallised part is tested again at age 75 on any growth since crystallisation. If you're looking at death benefits, there is virtually no difference in tax treatment between crystallised and uncrystallised (except LTA treatment for death under 75 - only uncrystallised counts for LTA, and differences if the funds aren't designated for over 2 years), so it would likely be more tax efficient to leave crystallised funds rather than uncrystallised (as you'd have got the PCLS out)

hyperhypo

Very interested to read dunstonh's comments on drawdown strategy above, and the relative time weightings given to the crystallised and uncrystallised elements. This challenges my initial thoughts on how to manage flexible phased drawdown...although my uncrystallised element was given a recent boost from a final employer pension contribution, so unexpectedly need to work out how best to manage both elements. I've taken no income yet, and not likely to until next tax year, but it seemed at first pass to me more sensible to draw the full personal allowance from the crystallised side , which might contain more short/medium term elements, and that the longer term funds might best be left untouched on the uncrystallised side.  I find it quite difficult to get my head around drawdown strategy ...something that's been made more complicated (for  me) by the unexpected benefit of a final contribution into the uncrystallised side.

jamesd

hyperhypo said:

it seemed at first pass to me more sensible to draw the full personal allowance from the crystallised side

Using your full personal allowance every tax year is unlikely to be wrong provided triggering the MPAA isn't a problem. Reducing means tested benefits is a potential niche case.

At the moment I think that withdrawing the full basic rate band is likely to be a good move because I think that tax increases are a bit more likely but this is arguable personal opinion. It's what I'm looking to do myself. S&S ISA gets the excess  money, identically invested, or some other investment that's appropriate.

hyperhypo said:

ithe crystallised side , which might contain more short/medium term elements, and that the longer term funds might best be left untouched on the uncrystallised side.

Sufficient low volatility needs to be available to draw on if needed but you can easily do one or more of:

1. crystallise a bit more
2. sell some low volatility uncrystallised and buy same crystallised. Funding from other sales if needed. It's easy to buy/sell to adjust.

For people potentially subject to the lifetime allowance it'll usually be best to have equities dominate the crystallised pot and those are long term. That's because you don't want high growth uncrystallised where it's increasing lifetime allowance use but crystallised means you can withdraw growth to avoid lifetime allowance charge at 75. Pretty much the opposite of what you might expect without recognising the ability to do 2 to create some low volatility to draw from. Inheritance or perhaps other considerations might change this.

hyperhypo

LTA isn't a consideration in my case, nor inheritance considerations. Uncrystallised is c. 15% of overall amount. In view of this i need to work out whether i need a separate strategy for both sides. My first thoughts were that i would be sensible to take some more risk on the uncrystallised side to afford some future tax free amount at a later crystallisation point, perhaps 5-10 years on from now.