Drawdown in Practice

jim8888

I intend to start drawing down from a SIPP this year that I have with Fidelity. I'm thinking at the moment that I'm going to take the maximum tax free withdrawal of £16,666 (so £4,166 comes from my 25% tax free allowance.)
For argument's sake, let's say my SIPP is worth £500k when I crystallise it. In Year One, I'll then have taken £4,166 from the 25% free lump sum of £125k.
Is it my responsibility to keep track of any subsequent tax free lump sum withdrawals from that £125K and monitor it ongoing so that I know what's left? Or does Fidelity also track it in a pension statement?

jamesd

It appears that you intend to take it as a single uncrystalised funds pension lump sum (UFPLS) payment. This is 25% tax free and 75% taxable. It uses up all of the tax free allowed from the amount taken. The remaining pot is untouched and still has 25% available so no tracking is needed.

The way things are set up there's never a need to track 25%s. A fund is uncrystalised with 25% available on whatever is taken from it of it's crystallised and no more tax free is allowed. From each portion as you take it you say how much tax free up to 25% you want from that portion and then the rest is either paid to you or goes into a crystallised chunk.

dunstonh

For argument's sake, let's say my SIPP is worth £500k when I crystallise it. In Year One, I'll then have taken £4,166 from the 25% free lump sum of £125k.

Do you need the £125k to spend in one go like that? - that doesn't seem to fit what you plan to do for the rest of your post.

Is it my responsibility to keep track of any subsequent tax free lump sum withdrawals from that £125K and monitor it ongoing so that I know what's left?

You wont have any more tax free lump sums as you have taken it all up front.

However,  if you stick with drawing enough 75% to use your personal allowance with the 25% on top then you will not have any crystallised funds as you will be drawing all the crystallised funds each month.   You will only have uncrystallised. 

Albermarle

I'll then have taken £4,166 from the 25% free lump sum of £125k.

As an example at that moment of time you take the payment ,you will have £500K minus £16666 left = £483,334 

However by the time you next take the same payment . This sum will not be the same . It will have grown or reduced depending on how your investments have performed. Whatever this new figure is you can still take 25% of that . It is only a fixed sum of £125K if you take it out all at once when your pension is worth exactly £500K .

green_man

I intend to start drawing down from a SIPP this year that I have with Fidelity. I'm thinking at the moment that I'm going to take the maximum tax free withdrawal of £16,666

If you are going to do it this tax year you need to get your skates on as there is under 2 working weeks left, you may already be too late.     If you mean you are going to start the next tax year then maybe look at withdrawing £16760  to tax acco7nt of 12570 tax allowance next year.

Thrugelmir

Do you have sufficient cash in your account to effect the withdrawal ?  As @green_man has said. Time is limited. 

Albermarle

From the Fidelity website >
Please note: If you already hold a Fidelity SIPP and would like to arrange a new income withdrawal, we are facing unprecedented demand at present and there may be delays in our service. If you would like to take income before 5th April, we cannot guarantee this at this time.

jim8888

Thanks for all responses. Just to clarify it would be next tax year I'd be taking the pension. I don't want to draw the full £125k in one go, I just want to draw enough to keep me from paying any tax which, I believe is the £16,666 number (£16,666 x 25% = £12,500. The additional £4,166 therefore comes from my 25% tax free lump sum in that same pension fund.) I thought that as soon as I exercised drawdown, the fund was crystallised at £500k and therefore the lump sum element is calculated at £125k and is frozen there. It seems I've got that wrong though. From what I now understand above, the tax free lump sum is calculated at the time I make a withdrawal, so the next time I make a withdrawal in the following tax year, the fund has £500K minus the £16666 l took = £483,334 (plus or minus any growth). I can then take another £16,666 because 25% of £483,334 is available as a tax free lump sum. Is that correct?

Albermarle

 I can then take another £16,666 because 25% of £483,334 is available as a tax free lump sum. Is that correct?

Yes , although the £483,334 is very unlikely to stay at that figure due to investment growth or loss in the meantime .

Probably a good idea before you start to have a chat with your provider. Some have their own restrictions on what their system can do, especially for older pensions. Sometimes to do exactly what you want you have to transfer to a more modern pension either with the same provider , or a different one.

Thrugelmir

Have you utilised your full ISA allowance for 20/21?  Although some basic rate tax maybe payable depending on your personal circumstances. The annual ISA allowance if not used is lost. Who knows what the income tax rates may be in the future. . 

Dazed_and_C0nfused

jim8888 said:

Thanks for all responses. Just to clarify it would be next tax year I'd be taking the pension. I don't want to draw the full £125k in one go, I just want to draw enough to keep me from paying any tax which, I believe is the £16,666 number (£16,666 x 25% = £12,500. The additional £4,166 therefore comes from my 25% tax free lump sum in that same pension fund.) I thought that as soon as I exercised drawdown, the fund was crystallised at £500k and therefore the lump sum element is calculated at £125k and is frozen there. It seems I've got that wrong though. From what I now understand above, the tax free lump sum is calculated at the time I make a withdrawal, so the next time I make a withdrawal in the following tax year, the fund has £500K minus the £16666 l took = £483,334 (plus or minus any growth). I can then take another £16,666 because 25% of £483,334 is available as a tax free lump sum. Is that correct?

The figures need updating slightly for the 2021:22 tax year.
If you wish to crystallise just enough to pay no tax at all using UFPLS (assuming no other taxable pension or earnings in the same tax year) then your starting point would be £16,760.
£4,190 TFLS

£12,570 taxable income