Drawdown - 25% Tax-Free Options/Rules

wary

I have a SIPP and am at an age where I can commence drawdown.  I don’t envisage finding any more work, but haven’t totally given up on this and for that reason, I’d like to access part/all of the 25% tax-free element first in order to avoid the £4000 limit on further contributions.

If I understand my IFA correctly, I have various options.  The obvious one is to withdraw the full 25%, with the remainder being crystallised and for which I can defer withdrawals.  Or I can take part or none of the 25% up front, but can make regular withdrawals of just the tax-free element from the crystallised pot should I so choose.

Is this correct?  If so, as the value of the overall pot will vary then presumably the 25% allowance would be variable too, unless it is fixed based on the initial value of the pot?  

From previous research, I got the impression that there were broadly only two options - either to take the full 25% up-front, or to take nothing up-front and any withdrawals would be treated as 75%-taxable/25%-exempt.

Being someone who is not particularly pension-savvy, I’d appreciate some assistance with getting my head around how this aspect of drawdown works and what exactly are my options, please.

Thanks

dunstonh

Is this correct?

Yes.   (you can also combine both methods as well - which partly answers a later question you make)

 If so, as the value of the overall pot will vary then presumably the 25% allowance would be variable too, unless it is fixed based on the initial value of the pot?  

It will be up to 25% of the uncrystallised fund and 0% of the crystallised fund.

jamesd

wary said:

Or I can take part or none of the 25% up front, but can make regular withdrawals of just the tax-free element from the crystallised pot should I so choose.

Is this correct?  

That part isn't. There is no tax free withdrawing from (the part of) a pot that is crystallised. You take it from the part being crystallised when you do that or not at all.

The 25% varies in Pound value as the value of the uncrystallised pot does. Nothing in pension law forces you to do it all at the same time.

You can get some taxable money  out by using the small pot rule up to three times in your life. This lets you take the whole of a crystallised or uncrystallised pot worth up to 10k. It doesn't trigger the MPAA. You can move money to create the small pot. You could crystallise say 13333 taking 25% tax free then use the small pot rule on the crystallised almost 10k. If using the rule on an uncrystalised pot 25% is tax free.

Don't neglect making gross 3600 a year contributions until your 75th birthday.

Albermarle

So to give an example .
You have an uncrystallised pot of £200K . You want to take out £10K tax free , so £40K is crystallised , you take 25% ( £10K ) tax free and £30 K remains as  crystallised and taxable if you withdraw it . This leaves £160K uncrystallised. Lets say you wait two years and it grows 10% so you now have £176 K uncrystallised which you can take 25% of tax free , either all at once or carry on taking it in smaller chunks . Each time you take a tax free sum , three times that goes into the crystallised pot , until eventually you will have crystallised all of it .

wary

Thanks all for the responses, which is certainly helping me to get my head around it.

So when one goes into drawdown (in preparation for making withdrawals), would they ordinarily have to (or be advised to) transfer their SIPP to a drawdown account?  I thought such an account is what is known as the “crystallised pot”, but it appears not?  I think this was the source of much of my confusion.

I envisaged that once one chooses to go into drawdown, the whole of their SIPP would typically be moved to a crystallised pot minus any portion of the 25%-tax-free element that they choose to take up-front (hence a combination of taxable & non-taxable funds) … however, from the info provided, it seems that whenever someone makes a withdrawal, 25% is paid tax-free and only the 75% is put into a separate crystalised pot (from which they can withdraw at any time, subject to PAYE & the usual rules).  Correct?

Presumably each time one makes a partial withdrawal of their 25%-tax-free element, the 75%-taxable will ordinarily be moved to same crystallised as the previous withdrawals?  … and the remainder of the funds will stay in the drawdown account (or SIPP), into which further contributions (subject to annual limits) can be made?  And presumably the crystallised pot will be subject to market forces, albeit invested following a low-risk profile?

Thanks

NottinghamKnight

Yes, your last post is broadly correct, though is handled in different ways by different providers.
Once part of the non tax free part of the pension pot is taken then future contributions are limited to £4k gross.

Sea_Shell

Albermarle said:

So to give an example .
You have an uncrystallised pot of £200K . You want to take out £10K tax free , so £40K is crystallised , you take 25% ( £10K ) tax free and £30 K remains as  crystallised and taxable if you withdraw it . This leaves £160K uncrystallised. Lets say you wait two years and it grows 10% so you now have £176 K uncrystallised which you can take 25% of tax free , either all at once or carry on taking it in smaller chunks . Each time you take a tax free sum , three times that goes into the crystallised pot , until eventually you will have crystallised all of it .

In this example, the £30k crystallised, if it remains invested can grow too, can't it?   

smokey01

Sea_Shell said:

In this example, the £30k crystallised, if it remains invested can grow too, can't it?   

Yes it continues to grow (or fall in value) dependant on what you are invested in

Albermarle

hough is handled in different ways by different providers.

Yes you need to be careful as some older pensions in particular are restricted in what they can do due to the way they were set up/old IT systems. In this case a transfer to a more modern pension can increase the flexibility of drawdown options.

wary

Thanks for confirming.  I think I understand it sufficiently now, as my IFA has asked me how I want to proceed with regards to withdrawals etc.

I am currently claiming contribution-based JSA which will expire soon, and it may be useful to know how my pension would impact my entitlement to UC, if anyone can clarify please.  (I’ve looked into it but am still not certain either way.)  In particular, for the purpose of UC entitlement, would:

> tax-free withdrawals count as income?

> any funds in my crystallised pot, drawdown account or SIPP even (now that I’m over 55) count as savings or unearned income?

Thanks

NottinghamKnight

It's probably a question for the benefits board. I believe any income from pensions would count against your UC entitlement but the value of pensions wouldn't. I think an assumed income would be attributed against your pension where you are over state pension age or the normal retirement age for that pension.