Filling the gap tax efficiently

jamesd

Purely theoretically, it doesn't get you more. That's because if you keep the money in the pension uncrystalised it can grow inside the pension and be taken out tax free.

But ISA costs tend to be lower and there can be more choices of investments sometimes. Also tends to be easier to get money out.

There is another optimisation possible when it comes to drawdown costs. A place like HL has no direct drawdown cost but it has quite a high 0.45% fee. Transferring from a place with low holding costs to one with law drawdown costs can save money. Not to HL in this case because the uncrystalised funds will be held for too long and incurring that 0.45% for too long.

I actually am using HL for drawdown in that way because I'm following a different approach: draw down my full basic rate band as rapidly as possible until it's clear that the remaining taxable income will be tax free within the personal allowance when I take it. That's part of an approach to use VCTs to eliminate most of the direct income tax cost of this drawing at basic rate. The bulk of my pension money in this case isn't at HL but to be transferred in when needed. I'm doing this as fast as possible so the VCT five year holding periods end as soon as possible and because I have a pessimistic view of future income tax rates, so I want it in exempt or free allowance places as rapidly as sensible.

jamesd

Retireinten said:

I have some years to go before drawdown, but has anyone found a  'Drawdown for Idiots' guide that may be of use to those of us still trying to get our heads round drawdown options and crystallised and uncrystalised pots etc.

Drawdown: safe withdrawal rates is my own main resource. It doesn't cover the detailed how to so much, though.

Albermarle

Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 

It does still benefit but only by £180 per year, unless you are lucky enough to have LTA issues then it actually gives a negative result.

SouthCoastBoy

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

I always thought there are two choices to access the tax free amount  either 25% of pot or 25% of the drawdown amount. From the explanation above it appears the two can be mixed I.e. take 16k from drawdown so 4k tax free and also take another 20k tax free?

zagfles

jamesd said:

Purely theoretically, it doesn't get you more. That's because if you keep the money in the pension uncrystalised it can grow inside the pension and be taken out tax free.

But ISA costs tend to be lower and there can be more choices of investments sometimes. Also tends to be easier to get money out.

Well that's a relief. It sounded like you were trying to dispute the mathematical theory that multiplication is commutative

So it's all about costs. OK. But other issues to consider are IHT treatment, benefits etc, could make a significant difference holding money inside or outside a pension, possibly more than trivial charge savings (if any, a lot of providers have the same charges). 

There is another optimisation possible when it comes to drawdown costs. A place like HL has no direct drawdown cost but it has quite a high 0.45% fee. Transferring from a place with low holding costs to one with law drawdown costs can save money. Not to HL in this case because the uncrystalised funds will be held for too long and incurring that 0.45% for too long.

I actually am using HL for drawdown in that way because I'm following a different approach: draw down my full basic rate band as rapidly as possible until it's clear that the remaining taxable income will be tax free within the personal allowance when I take it. That's part of an approach to use VCTs to eliminate most of the direct income tax cost of this drawing at basic rate. The bulk of my pension money in this case isn't at HL but to be transferred in when needed. I'm doing this as fast as possible so the VCT five year holding periods end as soon as possible and because I have a pessimistic view of future income tax rates, so I want it in exempt or free allowance places as rapidly as sensible.

Transferring has risks - eg out of market risk, or if in-specie, potential long delays. 

Also where does P2P fit in? You're a fan of P2P as well as VCTs aren't you?

Dansmam

zagfles said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Why do you think that gets you more?

Because it does? 🙄

zagfles

SouthCoastBoy said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

I always thought there are two choices to access the tax free amount  either 25% of pot or 25% of the drawdown amount. From the explanation above it appears the two can be mixed I.e. take 16k from drawdown so 4k tax free and also take another 20k tax free?

No, there's 3. The other option is phased drawdown, where you crystallise part of the pot and take 25% of that part tax free.

Not all flexibilities are available (or easily available) from all providers. For instance, my workplace provider will do full drawdown (ie take full 25% and then all drawdowns are taxable), or they'll do monthly UFPLSs (ie 25% of each month's payment is tax free), but I don't think they do phased drawdown.

Whereas most retail SIPPs will do phased drawdown or full drawdown, but only do UFPLS's on a one-off basis, ie you have to apply each time, I don't think you can usually ask for a regular monthly UFPLSs

SouthCoastBoy

zagfles said:

SouthCoastBoy said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

I always thought there are two choices to access the tax free amount  either 25% of pot or 25% of the drawdown amount. From the explanation above it appears the two can be mixed I.e. take 16k from drawdown so 4k tax free and also take another 20k tax free?

No, there's 3. The other option is phased drawdown, where you crystallise part of the pot and take 25% of that part tax free.

Not all flexibilities are available (or easily available) from all providers. For instance, my workplace provider will do full drawdown (ie take full 25% and then all drawdowns are taxable), or they'll do monthly UFPLSs (ie 25% of each month's payment is tax free), but I don't think they do phased drawdown.

Whereas most retail SIPPs will do phased drawdown or full drawdown, but only do UFPLS's on a one-off basis, ie you have to apply each time, I don't think you can usually ask for a regular monthly UFPLSs

Thanks for the clarification. I have a sipp and a workplace dc pension which I need to move before drawdown so will most probably end up with two sipps.Good to known about the 3rd option.

sheslookinhot

Albermarle said:

Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 

It does still benefit but only by £180 per year, unless you are lucky enough to have LTA issues then it actually gives a negative result.

Why do you only benefit by £180 ?

zagfles

sheslookinhot said:

Albermarle said:

Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 

It does still benefit but only by £180 per year, unless you are lucky enough to have LTA issues then it actually gives a negative result.

Why do you only benefit by £180 ?

You put £2880 net in. It gets grossed up to £3600.

25% of that £3600, ie £900, is tax free when you take it out (usual PCLS) for everyone unless above LTA.

The other £2700 is taxable.

If the £2700 is within the personal allowance it's not taxed, so you get £2700 plus £900 PCLS = £3600 out for a cost of £2880.

If the £2700 is in the basic rate band, you get charged 20% tax so only get £2160 out after tax, plus the £900 PCLS = £3060 for a cost of £2880.