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

BPL

jamesd said:

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.

That makes sense - thanks. So what is taxed at 55% when over LTA? It says lump sums but from what you say there aren't any in FAD when over LTA. Must be from some other arrangements?

BPL

Linton said:

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.

Just to get it right in my head then what's the LTA 55% tax on lump sums for? It's less for income. Obviously a 20% Tax payer would want to take as income i would have thought.

BPL

Linton said:

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.

Sorry to be a pain but what's the definition of "regular" and who defines it HRMC? Makes a bit of s mockery of FLEXIBLE access drawdown when over LTA. doesn't seem to make any difference when there's still a pot to crystallise as far as i can see from what you say :-(

Linton

BPL said:

Linton said:

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.

Sorry to be a pain but what's the definition of "regular" and who defines it HRMC? Makes a bit of s mockery of FLEXIBLE access drawdown when over LTA. doesn't seem to make any difference when there's still a pot to crystallise as far as i can see from what you say :-(

Beyond the initial 25% tax free there is no difference between a lump sum and income. Both are simply amounts of money you take from your pension.  You can take it never, all in one go, monthly, once a year, as much as you want whenever you want etc etc.  That is what flexi-access means.

jamesd

BPL said:

jamesd said:

...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.

That makes sense - thanks. So what is taxed at 55% when over LTA? It says lump sums but from what you say there aren't any in FAD when over LTA. Must be from some other arrangements?

Taking money from an uncrystallised pot is what gets the 55% rate.

For many discussions here we can write that uncrystallised is one that hasn't had the 25% tax free taken but that doesn't work when writing about the lifetime allowance.

You can't say call it money for which a lifetime allowance calculation hasn't been done because that's done at age 75 on uncrystallised pots and they remain uncrystallised.

To possibly clarify something: any money withdrawn from a flexi-access drawdown account is defined and taxed as income (not for benefits calculations).

Portugal has an opt-in rate of 0% for foreign private pension income and the tax treaty says such income is taxed by the country of residence. So reside in Portugal and you can take £750k with no tax from a crystallised pot. There are clauses in UK tax law to tax amounts above £100k if you return to Britain within a few years.

BPL

Portugal has an opt-in rate of 0% for foreign private pension income and the tax treaty says such income is taxed by the country of residence. So reside in Portugal and you can take £750k with no tax from a crystallised pot. There are clauses in UK tax law to tax amounts above £100k if you return to Britain within a few years.

Obrigado!

BPL

Aaa

Taking money from an uncrystallised pot is what gets the 55% rate.


///So if I'm over LTA due to FAD before 75 and i draw from the uncrystsllised pot i pay 55% or is that just for lump sums and "regular" income it's the lower ?% rate and income tax at marginal rate on that?

hyperhypo

If someone is sailing close to the LTA in a DC scheme, at e.g. at £1 million in UK, can they avoid this LTA by crystallising a chunk of the pension via UPFLS and reinvesting the 25% in e.g. unused  ISA allowances going forward, g up spouses or siblings allowances if they wish to attempt to keep everything invested. But once someone has gone over LTA this isn't possible, ie it's the total uncrystallised amount that is significant re LTA.

I always wondered how this mechanism works in practice and what folk do about it , but it hardly  applies to me.

BPL

hyperhypo said:

If someone is sailing close to the LTA in a DC scheme, at e.g. at £1 million in UK, can they avoid this LTA by crystallising a chunk of the pension via UPFLS and reinvesting the 25% in e.g. unused  ISA allowances going forward, g up spouses or siblings allowances if they wish to attempt to keep everything invested. But once someone has gone over LTA this isn't possible, ie it's the total uncrystallised amount that is significant re LTA.

I always wondered how this mechanism works in practice and what folk do about it , but it hardly  applies to me.

Thanks for that idea. I'm not sure how UFPLS helps here though. Do you have any more detail? I understand people remove cash from an uncrystallised pot Early to avoid the investment growing inside. Surely FAD would also achieve this? Especially if you try not to take other income in that year (s)

jamesd

BPL said:

Taking money from an uncrystallised pot is what gets the 55% rate.


///So if I'm over LTA due to FAD before 75 and i draw from the uncrystsllised pot i pay 55% or is that just for lump sums and "regular" income it's the lower ?% rate and income tax at marginal rate on that?

Yes re uncrystallised pot.

If already over the allowance you can either pay 55% and no income tax or 25% and using 0% tax free lump sum put 100% of the bit being crystallised into flexi-access drawdown.

You might wonder why 25% instead of 55% leaving 45%. 80% (after 20% income tax) of 75% leaves 60%, 60% leaves 45% and 55% leaves 41.25%. Might also be some personal allowance left. On death before age 75 the LTA charge has been paid and the crystallised pot can be inherited with no income tax payable by the recipient when withdrawing money so they get the 755% and it's outside the estate.

The small pot rule doesn't use any LTA and is always 25% tax fee and 75% taxable when taken from an uncrystallised pot.