Flexi access drawdown - what is income and what is a Lump Sum

BPL

Apologies for this basic question but i have read everything i can find but no clarity ( and it's a horrible rainy day) so....
Could anyone explain clearly in FAD what is classed as income and what is classed as a lump sum? It doesn't look like it matters if you just keep selling units to drawdown with TFLS to a crystallised pot for later cash withdrawal (can thus be done in specie if it needs to sit there for a bit?) .
Now if you're tested as over LTA and a 20% tax payer it's better to crystallise as income i think so how do you do this in FAD
hope that makes sense....

Linton

There are two different environments - the pension environment and the outside world.  What you do within the pension environment  ie hold cash or funds is irrelevent in the outside world.  Crystallisation (aka taking the TFLS) means taking cash out of the pension environment into the outside world.  What you do with it there eg hold as cash, reinvest in an S&S ISA, spend is irrelevent to the pension.

Drawdown is another way of taking cash out of the pension environment into the outside world, but unlike the TFLS it is taxed as income.

I will leave LTA to someone else - I dont have the problem.

xylophone

Had you thought of consulting an Independent Financial Adviser?

https://adviserbook.co.uk/  Tick "confirmed independent" and "pensions" when the menu comes up.

BPL

xylophone said:

Had you thought of consulting an Independent Financial Adviser?

https://adviserbook.co.uk/  Tick "confirmed independent" and "pensions" when the menu comes up.

I talked to 6 face to face via unbiased. Only one appeared to provide what i was looking for. fixed fee planning and evidence based passive investment using my own platform Some were appalling some didn't even get back to me one was SJP a lovely guy but £££££ in hidden charges.

BPL

Linton said:

There are two different environments - the pension environment and the outside world.  What you do within the pension environment  ie hold cash or funds is irrelevent in the outside world.  Crystallisation (aka taking the TFLS) means taking cash out of the pension environment into the outside world.  What you do with it there eg hold as cash, reinvest in an S&S ISA, spend is irrelevent to the pension.

Drawdown is another way of taking cash out of the pension environment into the outside world, but unlike the TFLS it is taxed as income.

I will leave LTA to someone else - I dont have the problem.

Thanks for your answer. I'm still a bit confused as to what is income and what is a taxable lump sum. So is the only lump sum in drawdown TFLS? Even i if i take out a PCLS or drawdown a large sum ie TFLS+ Sum then the taxable element is still income and not a lump sum? 

BPL

 Crystallisation (aka taking the TFLS) means taking cash out of the pension environment into the outside world.  

Isn't benefit crystalisation applicable fto taxable / non taxable lump sums, income withdrawal, annuity purchases etc as well , not just TFLS?

dunstonh

I talked to 6 face to face via unbiased. Only one appeared to provide what i was looking for. fixed fee planning and evidence based passive investment using my own platform Some were appalling some didn't even get back to me one was SJP a lovely guy but £££££ in hidden charges.<br>

Most of the decent IFA firms I know have long given up on using unbiased for anything other than the default no-cost entry.   Those are actually filtered out by default as you have to deselect the option that is pre-selected to show only paying adviser firms.  They have also moved to being a lead generation site rather than being a directory and they no longer include only IFAs.    They include restricted FA firms and they tend to hog the entries now.     One of the methods, if you do contact via unbiased, is that the adviser firm has to pay unbiased for them to release the contact details.    If the adviser firm doesn't pay, they dont release the details and you dont get contacted.    How SJP contacted you is strange as they are too restricted to be on unbiased. 

<br><span>I'm still a bit confused as to what is income and what is a taxable lump sum.&nbsp;</span>

Anything you draw from the 25% tax free element is lump sum.  Anything you draw from the 75% taxable element is income.   The frequency how you draw it (ie. one off, monthly, yearly or whatever) is irrelevant.  If you draw out £10,000 as a single withdrawal using UFPLS then £7500 is income and £2500 is lump sum.  If you draw out £1000 a month using phased FAD then £250 is tax free lump sum and £750 is income.

jamesd

BPL said:

Could anyone explain clearly in FAD what is classed as income and what is classed as a lump sum? It doesn't look like it matters if you just keep selling units to drawdown with TFLS to a crystallised pot for later cash withdrawal (can thus be done in specie if it needs to sit there for a bit?) .
Now if you're tested as over LTA and a 20% tax payer it's better to crystallise as income i think so how do you do this in FAD

Depends on context but:

For lifetime allowance UFPLS is lump sum, money from a flexi-access drawdown pot is income: "The tax rate depends on whether the excess is paid as a lump sum - called a Lifetime allowance excess lump sum and charged at 55% - or if retained to pay pension benefits, charged at 25% (tax is then payable on the income the member receives at their marginal rates)." There's a planning opportunity: taking 25% tax free during a market downturn can reduce LTA usage and save a lot of tax.

For means tested state benefits it's whether the amounts and frequency have the character of income. Same UFPLS each month probably called income even though the LS is "lump sum".

Will probably be in specie since it's just a different "arrangement" within the same pension.

BPL

dunstonh said:

I talked to 6 face to face via unbiased. Only one appeared to provide what i was looking for. fixed fee planning and evidence based passive investment using my own platform Some were appalling some didn't even get back to me one was SJP a lovely guy but £££££ in hidden charges.

Most of the decent IFA firms I know have long given up on using unbiased for anything other than the default no-cost entry.   Those are actually filtered out by default as you have to deselect the option that is pre-selected to show only paying adviser firms.  They have also moved to being a lead generation site rather than being a directory and they no longer include only IFAs.    They include restricted FA firms and they tend to hog the entries now.     One of the methods, if you do contact via unbiased, is that the adviser firm has to pay unbiased for them to release the contact details.    If the adviser firm doesn't pay, they dont release the details and you dont get contacted.    How SJP contacted you is strange as they are too restricted to be on unbiased. 

Anything you draw from the 25% tax free element is lump sum.  Anything you draw from the 75% taxable element is income.   The frequency how you draw it (ie. one off, monthly, yearly or whatever) is irrelevant.  If you draw out £10,000 as a single withdrawal using UFPLS then £7500 is income and £2500 is lump sum.  If you draw out £1000 a month using phased FAD then £250 is tax free lump sum and £750 is income.

Thanks for your reply and patience!
I think i also used a similar scheme to unbiased possibly? You know those find an independent financial adviser in your area... SJP was via a friend - good for perspective ££££.

I think I've got it. What i think you are saying is In drawdown the ONLY lump sum is TFLS. TAXABLE lump sums of whatever size or frequency are regsrded as income. So if over LTA i don't know what sort of lump sum you could withdraw to be pinged with 55% tax unless it's stupidly unused TFC. Maybe an LTA exist will comment.

jamesd

BPL said:

I think I've got it. What i think you are saying is In drawdown the ONLY lump sum is TFLS. TAXABLE lump sums of whatever size or frequency are regsrded as income. So if over LTA i don't know what sort of lump sum you could withdraw to be pinged with 55% tax unless it's stupidly unused TFC. Maybe an LTA exist will comment.

Right conceptually but you  missed a key fact: there is no tax free lump sum from the part of the money that's above the lifetime allowance. For lifetime allowance calculations lump sums always come from an uncrystallised pot is a better way to put it.

Linton

BPL said:

Linton said:

There are two different environments - the pension environment and the outside world.  What you do within the pension environment  ie hold cash or funds is irrelevent in the outside world.  Crystallisation (aka taking the TFLS) means taking cash out of the pension environment into the outside world.  What you do with it there eg hold as cash, reinvest in an S&S ISA, spend is irrelevent to the pension.

Drawdown is another way of taking cash out of the pension environment into the outside world, but unlike the TFLS it is taxed as income.

I will leave LTA to someone else - I dont have the problem.

Thanks for your answer. I'm still a bit confused as to what is income and what is a taxable lump sum. So is the only lump sum in drawdown TFLS? Even i if i take out a PCLS or drawdown a large sum ie TFLS+ Sum then the taxable element is still income and not a lump sum? 

You can call the cash you withdraw from your pension "income" or a "lump sum" - income is merely a lump sum paid regularly.  The TFLS is a specific lump sum that is not taxed, all other transfer of cash out of your pension is taxed as income.