Drawdown in Practice

jim8888

Great stuff, thanks for everyone's help! I've been following pension stuff closely (I thought) for about five years, and this is me just discovering how drawdown actually works. It make me wonder what else I don't know!

where_are_we

If your finances allow, remember to contribute £2880 net (grossed up to £3600 by HMRC) to your SIPP in tax year 21-22 and each subsequent tax year up to age 75. That is assuming you will have no earned income 21-22. A £16,760 UFPLS withdrawal in 21-22 will trigger MPAA which is £4000 at the moment but this will not concern you if you have stopped working. Again if your finances allow, consider deferring your SP so that you can maximise the number of years of £16,760 completely tax free withdrawals.

jim8888

Sorry if I'm being a bit thick here. I understand that if I take the 25% from a 500k fund in one go, then that's it: I've had my full tax free lump sum of £125k.
However, if I only take a £50K tax free lump sum in Year One, then the fund drops to £450k. Let's say in the next year it grows by 4% back to £468k and I decide to take another £50K tax free lump sum from it, reducing the fund back to £418k. I've now taken £100k tax free lump sum.
Repeat the following year, the fund grows by 4% again to £435k and I take another £50k lump sum. This now means that in 3 years I've taken £150k tax free and, if I did it again the following year, I'd have taken out £200k. But I'd still have over £300k of my pension pot left with 25% tax free lump sum available?
I'm sure that's not how the system works, so what am I missing here? 

Costabit

jim8888 said:

Sorry if I'm being a bit thick here. I understand that if I take the 25% from a 500k fund in one go, then that's it: I've had my full tax free lump sum of £125k.
However, if I only take a £50K tax free lump sum in Year One, then the fund drops to £450k. Let's say in the next year it grows by 4% back to £468k and I decide to take another £50K tax free lump sum from it, reducing the fund back to £418k. I've now taken £100k tax free lump sum.
Repeat the following year, the fund grows by 4% again to £435k and I take another £50k lump sum. This now means that in 3 years I've taken £150k tax free and, if I did it again the following year, I'd have taken out £200k. But I'd still have over £300k of my pension pot left with 25% tax free lump sum available?
I'm sure that's not how the system works, so what am I missing here? 

You’ve got it right.
That’s why this flexi access withdrawal method is most often ( not always but nearly ) touted on here , as the most efficient.

Croeso69

jim8888 said:

Sorry if I'm being a bit thick here. I understand that if I take the 25% from a 500k fund in one go, then that's it: I've had my full tax free lump sum of £125k.

Correct.

jim8888 said:

However, if I only take a £50K tax free lump sum in Year One, then the fund drops to £450k. Let's say in the next year it grows by 4% back to £468k and I decide to take another £50K tax free lump sum from it, reducing the fund back to £418k. I've now taken £100k tax free lump sum.

You have uncrystallised funds of £300k (with PCLS of £75k available) and crystallised funds of £150k (no PCLS available as £50k already taken).

With 4% growth these become £312k (with PCLS of £78k available) and £156k (with no PCLS) respectively.

Taking another £50k PCLS reduced your uncrystallised pot to £112k (PCLS of £28k available) and increases your crystallised pot by £150k to £306k (no PCLS).

jim8888 said:

Repeat the following year, the fund grows by 4% again to £435k and I take another £50k lump sum. This now means that in 3 years I've taken £150k tax free and, if I did it again the following year, I'd have taken out £200k. But I'd still have over £300k of my pension pot left with 25% tax free lump sum available?

A further 4% growth taxed your uncrystallised pot to £116.48K (max PCLS of £29.12K) and crystallised pot to £318.24K. So you cannot take another £50K tax free cash as only £29,120 is left.

jim8888 said:

I'm sure that's not how the system works, so what am I missing here? 

See above

Dazed_and_C0nfused

Once you take £50k TFLS you crystallise £200k of your £500k so another TFLS can only be taken from the remaining £300k (plus any growth on that £300k).

You effectively have two pots at that point, one with £150k which is all taxable (as you have had the TFLS) and a second with £300k which is yet to be crystallised.

If the £150k grows to say £180k then all £180k is taxable.

If the £300k grows to £360k then you can take 25% TFLS from the £360k.

Someone will no doubt correct me if I've got that wrong!

jim8888

Thanks guys, will digest this and your advice is much appreciated.

Albermarle

Once you get your head around uncrystallised and crystallised funds, then it will all start to become clear , hopefully

jamesd

jim8888 said:

if I only take a £50K tax free lump sum in Year One, then the fund drops to £450k. Let's say in the next year it grows by 4% back to £468k and I decide to take another £50K tax free lump sum from it, reducing the fund back to £418k. I've now taken £100k tax free lump sum.

When you take benefits from a portion of your pot you can choose to take from 0% to 25% as a tax free lump sum. You can do this only once for each chunk.

If you choose to take 50k tax free lump sum as benefit from a 500k pot, that's fine, you've elected to take just ten percent as your tax free lump sum and can never again take a tax free lump sum from this pot. You do not have 15% available for later use.

Alternatively, you could choose to take 50k as benefits from 200k of the pot, 25% of that, and leave 300k untouched, with a tax free lump sum of up to 25% still available from all or any portion of it.

The portion you haven't touched yet is called uncrystalised, the portion you have touched crystallised. Providers must track how much is in each part.

karenh

I have a small pension pot, this year like so many others, the profit has been tiny being completely dwarfed by the AMC charges and Ongoing advisor charges. I have just found out that I can "switch off" this advisor charge which I have been paying for 4 yrs although in the FA blur they do not recommend this(for obvious reasons). I want to switch it off straight away. but not sure what to do.I have another 2 yrs before having an annuity which means I would save £400 on their fees. Some advice would be helpful please