Maximising Tax Free Cash in Drawdown

Dazed_and_C0nfused

Ciprico said:

After reading this post, I'd be greatful if someone could clarify the below:

Aim: to take £12,570 (taxable) from HL Sipp for wife who has no other income, to optimise her zero tax band

On the application do we simply put down put withdraw £12,750 as taxable, and HL automatically apply the
£4,192 (25% tax free element) on top.

Or do we apply to withdraw £16,760 and HL assume it includes the tax free element.

Thanks for any guidance

No experience of HL's process  but you might find it useful to be 100% sure of your numbers first.

Hoenir

Ciprico said:

After reading this post, I'd be greatful if someone could clarify the below:

Aim: to take £12,570 (taxable) from HL Sipp for wife who has no other income, to optimise her zero tax band

On the application do we simply put down put withdraw £12,570 as taxable, and HL automatically apply the
£4,190 (25% tax free element) on top.

Or do we apply to withdraw £16,760 and HL assume it includes the tax free element.

Thanks for any guidance

HL will do what you instruct them to do. They wont make any assumptions. Suggest you speak to them and fully understand the options on offer. 

zagfles

Ciprico said:

After reading this post, I'd be greatful if someone could clarify the below:

Aim: to take £12,570 (taxable) from HL Sipp for wife who has no other income, to optimise her zero tax band

On the application do we simply put down put withdraw £12,570 as taxable, and HL automatically apply the
£4,190 (25% tax free element) on top.

Or do we apply to withdraw £16,760 and HL assume it includes the tax free element.

Thanks for any guidance

What are you applying for, drawdown or UFPLS?

If you're applying for drawdown you'd specify an amount to crystallise, of which you'd take 25% tax free. The rest will be moved to a drawdown account (this is a separate account in HL) and you can then withdraw as you like from it. So, you could crystallise £16760 each year, take £4190 as tax free cash and £12570 into a drawdown account which you could draw over the tax year. Then repeat next tax year. Or it might be easier to crystallise in bigger lumps, for instance say around £80k which would give a £20k tax free lump sum which could go into an ISA if allowance unused, then draw the £60k over 5 years or so and when it runs out crystallise another chunk. 

If you apply for a UFPLS then you'd get 25% tax free and the rest as a taxable lump sum, you'll probably end up getting overtaxed on it and have to claim back from HMRC. 

Ciprico

Thanks Zagfles,

We don't "need" the money, we simply want to take advantage of her tax free allowance, so drawing down the £16760 seems to be the way to go, and repeat every year until the allowance changes, and leave the rest in the sipp to grow. 

molerat

Ciprico said:

Thanks Zagfles,

We don't "need" the money, we simply want to take advantage of her tax free allowance, so drawing down the £16760 seems to be the way to go, and repeat every year until the allowance changes, and leave the rest in the sipp to grow. 

If you don't need the money then you pay £2880 back in and the taxman adds £720 so £13880 in your pocket at a cost of £13160 to your SIPP, that is really taking advantage of the tax system.

QrizB

Ciprico said:

Aim: to take £12,570 (taxable) from HL Sipp for wife who has no other income, to optimise her zero tax band

Just checking - this is your wife's SIPP?

It's just that you've said "we" a couple of times and you might be thinking your wife can draw from *your* SIPP, which would be a no-no.

Ciprico

it's 100% her sipp...

Dazed_and_C0nfused

Ciprico said:

Thanks Zagfles,

We don't "need" the money, we simply want to take advantage of her tax free allowance, so drawing down the £16760 seems to be the way to go, and repeat every year until the allowance changes, and leave the rest in the sipp to grow. 

If you aren't a higher rate payer then an alternative strategy might be worth considering.

She could apply for Marriage Allowance, saving you £252 each year, and that gives her a reduced Personal Allowance of £11,310.

Using UFPLS she could then take £15,080 out each year (split £11,310 taxable and £3,770 TFLS).

This would eke out her pension a little.

And it wouldn't stop her adding the  £2,880 each year as @molerat mentioned.

dashnine

The title of the thread fits, but not sure the question matches what’s gone before.

While the obvious answer (to reduce tax) for a £32K income is to take £12,570 drawdown (hence using the full personal tax allowance) and topping up (£20K per annum) from uncrystallised funds.  

But is that the best for the future in term of efficient use of my uncrystallised funds?  Use them up first, and pay tax on all crystallised funds when the uncrystallised is used up..

The opposite, is to use crystallised funds up to £32K paying only 20% tax means paying more tax in the short term but having ‘tax free’ cash as backup should I need it.

I have taken £60K of lump sums in the last few years so have a chunk of crystallised funds to ‘use up’.  I get the state pension in just over 5 years time.

Or somewhere between the two, and that’s where I’m struggling (and yes, the examples are deliberately at extremes and not necessarily the only alternatives)?