Ufpls or Flexi Access Drawdown

woody190388

My wife and I are  59 and retiring fully at the end of September. We will be taking income from Sipps, Isa's, Cash savings and we also have a small BTL income. For the next 7 years (up to State pension age) we would each like to take £16,760 per annum from our Sipps. (Tax free allowance plus 25%) I know that we can do this using UFPLS. Can we achieve the same result using Flexi access drawdown? I should add that we are both expected to breach the lifetime allowance before 75. If we can is there any advantage of using one or the other drawdown method. The Sipps are with Interactive Investor.

Thanks in advance for any guidance.

Albermarle

I know that we can do this using UFPLS. Can we achieve the same result using Flexi access drawdown

Yes, although the mechanics may be different , especially if you want regular monthly payments as opposed to annual ones.

Each provider can handle things a bit differently so a chat with II is probably the next step.

jamesd

Since you're both expecting to breach the lifetime allowance but haven't yet, an alternative approach seems useful: take 100% of your core basic rate band income plus gross value of any new pension contributions plus sufficient tax free cash to get that much. The purpose of this is to get money out of the pension and hopefully avoid breaching the lifetime allowance. Pension contributions increase the basic rate band by the gross value of the pension contribution.

Depending on how close you are to the allowance you might want to crystallise more by taking more tax free lump sum than required to get the taxable income. This is to freeze the lifetime allowance value used at today's valuations. There's another test on just growth in drawdown accounts at age 75 and full basic rate drawing is intended in part to avoid having any growth still inside the pension.

You don't have to spend the money you take out. You can start with ISA investing in exactly what you were using in the pension and put the excess in a general investment account, where growth and dividends are taxable. To control the capital gains tax issue you sell enough of things that have grown each tax year to just use your whole CGT allowance.

Flexi-access drawdown lets you take 25% of all or part of any uncrystallised pot (one you haven't taken 25% tax free from) then place the 75% into a flexi-access drawdown account and take out from that taxable income which exactly matches your tax planning needs. It allows greater control as well as taking more tax free cash without having to also take the whole matching 75% as income immediately.

Unless you have some significant reason for doing it I suggest taking money from the pension before ISA and savings. That's because the ISA is a vey good tax reducing wrapper that you can use to hold money coming out of the pension that you don't want to spend.

It's a pretty crude approximation but if desired people who are around the lifetime allowance when retiring can often safely take out and spend the whole basic rate band and and still have money left when they die. That can be used to do things like lifetime giving to families and charities. Of course you don't have to, it's just very roughly how the numbers tend to work out.

woody190388

Albermarle said:

I know that we can do this using UFPLS. Can we achieve the same result using Flexi access drawdown

Yes, although the mechanics may be different , especially if you want regular monthly payments as opposed to annual ones.

Each provider can handle things a bit differently so a chat with II is probably the next step.

Thanks Albemarle,

We can handle either Monthly or annual. I will be contacting II soon. As with all these things it pays off to do some homework first.

woody190388

jamesd said:

Since you're both expecting to breach the lifetime allowance but haven't yet, an alternative approach seems useful: take 100% of your core basic rate band income plus gross value of any new pension contributions plus sufficient tax free cash to get that much. The purpose of this is to get money out of the pension and hopefully avoid breaching the lifetime allowance. Pension contributions increase the basic rate band by the gross value of the pension contribution.

Depending on how close you are to the allowance you might want to crystallise more by taking more tax free lump sum than required to get the taxable income. This is to freeze the lifetime allowance value used at today's valuations. There's another test on just growth in drawdown accounts at age 75 and full basic rate drawing is intended in part to avoid having any growth still inside the pension.

You don't have to spend the money you take out. You can start with ISA investing in exactly what you were using in the pension and put the excess in a general investment account, where growth and dividends are taxable. To control the capital gains tax issue you sell enough of things that have grown each tax year to just use your whole CGT allowance.

Flexi-access drawdown lets you take 25% of all or part of any uncrystallised pot (one you haven't taken 25% tax free from) then place the 75% into a flexi-access drawdown account and take out from that taxable income which exactly matches your tax planning needs. It allows greater control as well as taking more tax free cash without having to also take the whole matching 75% as income immediately.

Unless you have some significant reason for doing it I suggest taking money from the pension before ISA and savings. That's because the ISA is a vey good tax reducing wrapper that you can use to hold money coming out of the pension that you don't want to spend.

It's a pretty crude approximation but if desired people who are around the lifetime allowance when retiring can often safely take out and spend the whole basic rate band and and still have money left when they die. That can be used to do things like lifetime giving to families and charities. Of course you don't have to, it's just very roughly how the numbers tend to work out.

Thanks jamesd.

You raise a really good point. We are caught between using our Sipps to protect investments from inheritance tax and paying lifetime allowance charges at 75. I think I may need to do some modelling to work out (guesstimate) the least worst option. I think I am guilty of thinking too short term with my tax planning and just storing up problems for later.

Albermarle

woody190388 said:

jamesd said:

Since you're both expecting to breach the lifetime allowance but haven't yet, an alternative approach seems useful: take 100% of your core basic rate band income plus gross value of any new pension contributions plus sufficient tax free cash to get that much. The purpose of this is to get money out of the pension and hopefully avoid breaching the lifetime allowance. Pension contributions increase the basic rate band by the gross value of the pension contribution.

Depending on how close you are to the allowance you might want to crystallise more by taking more tax free lump sum than required to get the taxable income. This is to freeze the lifetime allowance value used at today's valuations. There's another test on just growth in drawdown accounts at age 75 and full basic rate drawing is intended in part to avoid having any growth still inside the pension.

You don't have to spend the money you take out. You can start with ISA investing in exactly what you were using in the pension and put the excess in a general investment account, where growth and dividends are taxable. To control the capital gains tax issue you sell enough of things that have grown each tax year to just use your whole CGT allowance.

Flexi-access drawdown lets you take 25% of all or part of any uncrystallised pot (one you haven't taken 25% tax free from) then place the 75% into a flexi-access drawdown account and take out from that taxable income which exactly matches your tax planning needs. It allows greater control as well as taking more tax free cash without having to also take the whole matching 75% as income immediately.

Unless you have some significant reason for doing it I suggest taking money from the pension before ISA and savings. That's because the ISA is a vey good tax reducing wrapper that you can use to hold money coming out of the pension that you don't want to spend.

It's a pretty crude approximation but if desired people who are around the lifetime allowance when retiring can often safely take out and spend the whole basic rate band and and still have money left when they die. That can be used to do things like lifetime giving to families and charities. Of course you don't have to, it's just very roughly how the numbers tend to work out.

Thanks jamesd.

You raise a really good point. We are caught between using our Sipps to protect investments from inheritance tax and paying lifetime allowance charges at 75. I think I may need to do some modelling to work out (guesstimate) the least worst option. I think I am guilty of thinking too short term with my tax planning and just storing up problems for later.

Just to add to that, although you do not want to pay more tax than necessary , avoiding tax should not become your Number One priority . Sometimes the desire to minimise tax bills can skew thinking on investments and other long term financial and life planning.
If you have to pay a bit more tax than you would like , it is not the end of the world. 
In fact having to worry about LTA and Inheritance tax is really a luxury problem. 

woody190388

Albermarle said:

If you have to pay a bit more tax than you would like , it is not the end of the world. 
In fact having to worry about LTA and Inheritance tax is really a luxury problem. 

Agreed. This is definitely a first world problem.

jamesd

woody190388 said:

You raise a really good point. We are caught between using our Sipps to protect investments from inheritance tax and paying lifetime allowance charges at 75. I think I may need to do some modelling to work out (guesstimate) the least worst option. I think I am guilty of thinking too short term with my tax planning and just storing up problems for later.

In general you might think like his:

1. No lifetime allowance issues after age 75, so that's the age at which you start to just leave the money in the pension to compound until death to avoid inheritance tax.

2. Until then you have in the basic rate band some 33k each more than your desired income and this will probably rise by around 43k at state pension age. Even putting 20k each into an ISA for use from age 75 that's 13k then 23k that you can give away each year while alive (assuming that's safe for your total assets and planning horizon). That can be quite helpful for children and grandchildren or charities while you're still alive to see them enjoying the benefits. In effect it can be a transfer of lots of compound growth out of your estate long before death.

Albermarle

Until then you have in the basic rate band some 33k each more than your desired income and this will probably rise by around 43k at state pension age. 

I follow the idea OK but not sure where the exact figures come from ?

If the OP was planning to take take taxable income up to their personal allowance , then they could take another approx £37K before hitting higher rate tax threshold , not £33k ?

Then when the SP comes along this will add to their income, but will mean the £33K will have to be reduced by the same amount or they will pay HRT on the SP? 

Or am I missing something ?

Dazed_and_C0nfused

Albermarle said:

Until then you have in the basic rate band some 33k each more than your desired income and this will probably rise by around 43k at state pension age. 

I follow the idea OK but not sure where the exact figures come from ?

If the OP was planning to take take taxable income up to their personal allowance , then they could take another approx £37K before hitting higher rate tax threshold , not £33k ?

Then when the SP comes along this will add to their income, but will mean the £33K will have to be reduced by the same amount or they will pay HRT on the SP? 

Or am I missing something ?

I suspect the £33k is accidentally including the TFLS i e. £50,270 less £16,760 = £33,510.

But the correct calculation is £50,270 less £12,570 = £37,700.  Or £41,300 if the basic rate band has been increased by contributing £3,600 via relief at source.

And yes, when SP starts that will use up about 25% of the basic rate band for most people.

jamesd

Albermarle said:

Until then you have in the basic rate band some 33k each more than your desired income and this will probably rise by around 43k at state pension age. 

I follow the idea OK but not sure where the exact figures come from ?

If the OP was planning to take take taxable income up to their personal allowance , then they could take another approx £37K before hitting higher rate tax threshold , not £33k ?

Then when the SP comes along this will add to their income, but will mean the £33K will have to be reduced by the same amount or they will pay HRT on the SP? 

Or am I missing something ?

I'd earlier mentioned that for those around the lifetime allowance at retirement it is typically found to be safe to withdraw their whole basic rate band as income.

Use that approximation and completely ignore income tax to get the crude approximate before tax figures I'm using. Or if you fancy it be more precise but since we don't know actual capital I've so far thought that in this particular discussion crude approximation was sufficient, since we actually lack the information needed for precision. But no harm for you to be more precise if you like, for whatever starting capital level and state pension you want to assume.