Please could I have a Noddy guide to drawdown?

sevenhills

Malchester said:

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 this seems to be a thread for dummies, why do people state the tax relief is 20%?

If I put £4,000 into a SIPP, the added tax relief would be £1,000 which is 25% of £4,000

Are my sums correct?

eskbanker

sevenhills said:

Malchester said:

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 this seems to be a thread for dummies, why do people state the tax relief is 20%?

If I put £4,000 into a SIPP, the added tax relief would be £1,000 which is 25% of £4,000

Are my sums correct?

The tax relief is expressed as a percentage of the higher grossed up figure....

Clueless56

sevenhills said:

As this seems to be a thread for dummies, why do people state the tax relief is 20%?

Oi!! 

If I put £4,000 into a SIPP, the added tax relief would be £1,000 which is 25% of £4,000

Are my sums correct?

Isn't it because the £1k in your example is 20% of the eventual amount?

Albermarle

Clueless56 said:

sevenhills said:

As this seems to be a thread for dummies, why do people state the tax relief is 20%?

Oi!! 

If I put £4,000 into a SIPP, the added tax relief would be £1,000 which is 25% of £4,000

Are my sums correct?

Isn't it because the £1k in your example is 20% of the eventual amount?

Yes , but many people make the mistake of taking the net contribution and adding 20%.

Albermarle

CloesUnc said:

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?

Every provider seems to have a slightly different system and some older pensions do not support drawdown at all .
So you will need to speak to your provider . In fact some insist on it before you go into drawdown, as they want to make sure you understand what you are doing and do not come back later claiming you have run out of money or whatever.

Malchester

CloesUnc said:

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

No. I was with PensionBee and, despite them promising it would be introduced they never did and lately said they were not going to do it. I have been requesting a withdrawal each month but it was not too difficult, took about 6 or 7 dys from request to receipt. Transferred recently from PensionBee to Penfold who say they can do this but have only just received my first monthly withdrawal and will be checking with them on Monday about September's withdrawal.

YellowCarBlueCar

jamesd said:

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

...

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 
....

Another noddy question then please.  Is there a reason that the tax free part has to be taken first?
For many it would be beneficial to take the taxable income first before SPA when more personal allowance is available, but I never see this option being discussed. 

EdSwippet

YellowCarBlueCar said:

Another noddy question then please.  Is there a reason that the tax free part has to be taken first?

For many it would be beneficial to take the taxable income first before SPA when more personal allowance is available, but I never see this option being discussed. 

In practice, yes, there is. In order to gain access to taxable income from a pension, a portion of that pension has to be 'crystallised', and this 'crystallisation event' is the only point at which you can take the 25% tax free part (in HMRC parlance, the 25% tax free "may only be paid where an entitlement to certain pension benefits arises"). Example in Scenario 1 of this paper, from James Hay.

When setting up drawdown, it is possible to request less than 25% tax free, even 0%, but ... you cannot then take it later on. So in every case I can think of(*), not taking the full 25% as part of crystallising a chunk of pension would be a mistake.


(*) Somebody will doubtless now chip in with a scenario that is an exception ...

Madrick

I suppose one option is to 
 take the tax free 25%
Stick it in a tax free S&S ISA for later use 🤔

Albermarle

Madrick said:

I suppose one option is to 
 take the tax free 25%
Stick it in a tax free S&S ISA for later use 🤔

Yes you can do that if it suits your circumstances, such as wanting to take taxable income now and use the tax free income later .