Please could I have a Noddy guide to drawdown?

Clueless56

I have a DC pension that I would like to put into drawdown in the future and want to be sure I understand how it works.  Every time I think I have got there, I see comments from posters on the forum that I don't understand so it's clear I have more to learn.  An example is this from JamesD (hope you don't mind James): "Say you have 100k to start and take 10k tax free lump sum, the other 30k being placed into flexi-access drawdown and 60k still untouched. You can then take 12.57k from the drawdown account to use the allowance."

Please could someone explain why in this example, to draw down £10k from £100k 'the other £30k' is placed in flexi drawdown?  Use of the words 'the other' implies there is some sort of requirement to crystallise a certain percentage of the pot in order to draw down a lesser amount - is that the case?  What am I not understanding please?

eskbanker

When crystallising, 25% of the crystallised amount is taken tax-free and the other 75% is placed into drawdown.  The whole crystallised amount can be accessed if desired, but 75% of it would be subject to tax....

Clueless56

Ah, I see what I hadn't caught on to before - thank you so much eskbanker!

Albermarle

Please could someone explain why in this example, to draw down £10k from £100k 'the other £30k' is placed in flexi drawdown? 

So in this case £10K would be a tax free payment , £30K would be crystallised and £60K would remain uncrystallised ( so later you could crystallise this and take another £15K tax free. If it grew to say £66K you could take £16.5K tax free.

Clueless56

Thank you, Albermarle.  I thought that flexi drawdown was where each amount withdrawn was 25% tax free and 75% taxed and therefore more tax efficient.  I seem to get muddled very easily with drawdown, hence why I am trying to make sure I understand long before I intend to do this.  I'm hoping that when one applies, the form (or whatever the process is) makes options and taxation clear.

Albermarle

With Flexi drawdown , you can take out 25% tax free and 75% taxable but you do not have to in those exact proportions .

More accurately you can take 25% tax free and the other 75% becomes taxable when you withdraw it , but you can take the 25% tax free and leave the other 75% for later , or take some of it.

Probably a free telephone discussion with Pensionwise ( or even your pension provider may help ) 
Pension Wise (moneyhelper.org.uk)

Clueless56

Thank you.  I think I will have to when I get closer to wanting to do this.  Perhaps best to leave it until then in case there's a change of rules in the meantime.  I just don't like not understanding things.  

jamesd

There are a range of ways to do drawdown, including:

1. Uncrystallised Funds Pension Lump um (UFPLS, say ufpluss). This is always exactly 25% tax free and 75% taxable and both parts have to be taken at the same time.

2. Take 25% tax free lump sum and place the remaining 75% into a "flexi-access drawdown" account, same place will do both bits. You can then withdraw all or just part of the taxable 75%, so it makes tax planning easier in many cases.

Both can be used for only part of a pot if desired. Pension firms don't have to offer all options and a transfer might be needed, particularly for older plans.

Built on top of those forms of flexible access are things like "phased drawdown" which just means taking some tax free and some taxable each year, instead of say lots of tax free at the start then only taxable later.

For more niche cases there are things like small pot rule, lifetime allowance, money purchase annual allowance and more mainstream lifetime annuity (the usual type) buying at some age, as well as assorted other things. People replying here are often aware of those things and will typically mention them when they are potentially relevant or useful but for core planning concentrate on just the two I mentioned, since they deliver most of what's useful for most people. I've been posting here for around fifteen years and there's no need to expect to know all of the nuances that I and others end up considering and rejecting as irrelevant most of the time... The posts here have a pretty high proportion of the nuanced situations just because they are less mainstream and people are more likely to need help understanding and using them.

CloesUnc

jamesd said:

There are a range of ways to do drawdown, including:

1. Uncrystallised Funds Pension Lump um (UFPLS, say ufpluss). This is always exactly 25% tax free and 75% taxable and both parts have to be taken at the same time.

2. Take 25% tax free lump sum and place the remaining 75% into a "flexi-access drawdown" account, same place will do both bits. You can then withdraw all or just part of the taxable 75%, so it makes tax planning easier in many cases.me 

Both can be used for only part of a pot if desired. Pension firms don't have to offer all options and a transfer might be needed, particularly for older plans.

Built on top of those forms of flexible access are things like "phased drawdown" which just means taking some tax free and some taxable each year, instead of say lots of tax free at the start then only taxable later.

For more niche cases there are things like small pot rule, lifetime allowance, money purchase annual allowance and more mainstream lifetime annuity (the usual type) buying at some age, as well as assorted other things. People replying here are often aware of those things and will typically mention them when they are potentially relevant or useful but for core planning concentrate on just the two I mentioned, since they deliver most of what's useful for most people. I've been posting here for around fifteen years and there's no need to expect to know all of the nuances that I and others end up considering and rejecting as irrelevant most of the time... The posts here have a pretty high proportion of the nuanced situations just because they are less mainstream and people are more likely to need help understanding and using them.

Good morning, a very interesting thread for me, so I hope no-one minds my asking a question too...

So if I had a sum of money in my SIPP and I know I can drawdown £16,760 or so each year tax free (assuming no other income) then would I need to ask my provider to put the pot into "phased drawdown" so that I can draw a "salary" of £1396.66 per month?

Malchester

I currently am accessing a small pot pension through UFPLS. Each month I take out the same amount of money of which 25% is tax free and the remaining 75% is taxable (although as I am not paying tax at the moment nothing is taken off). This pot is helping me with retirement income until I reach state retirement age and I can draw defined benefit pensions and state pension. As a non earner I can also add £2880 to the pot each tax year and, even though I am not paying tax, HMRC top the addition up with £720 to make a total of £3660. As I am not liable for tax at the moment this £720 top up is totally free money. However, not all pension providers have the option of UFPLS. Also note that if you take UFPLS it will trigger the MPAA whereby only a maximum of £4000 can be put into a pension each year.

CloesUnc

Malchester said:

I currently am accessing a small pot pension through UFPLS. Each month I take out the same amount of money of which 25% is tax free and the remaining 75% is taxable (although as I am not paying tax at the moment nothing is taken off). This pot is helping me with retirement income until I reach state retirement age and I can draw defined benefit pensions and state pension. As a non earner I can also add £2880 to the pot each tax year and, even though I am not paying tax, HMRC top the addition up with £720 to make a total of £3660. As I am not liable for tax at the moment this £720 top up is totally free money. However, not all pension providers have the option of UFPLS. Also note that if you take UFPLS it will trigger the MPAA whereby only a maximum of £4000 can be put into a pension each year.

Hi, OK thanks. Did you set up your UFPLS drawdowns as a kind of standing order with your provider, or do you have to do a manual request each month?

Thanks