How to take tax free amount in flexi drawdown

NJWG

Having just turned 55 I'm considering moving my SIPP in to flexi drawdown so I can take a lump sum out for various projects. This would be less than half of the maximum 25% tax free amount permitted and ideally I would like to nibble away at the rest of this allowance over the next few years to supplement my current income before retiring. As my investments yield a decent dividend income I could do this without reducing my overall pot of money. However I am unclear if this is allowed and if it would cause any income tax issues as I would essentially be using these smaller tax free portions as additional income. Can whatever remains of my 25% tax free allowance remain invested in my drawdown pension until I want to take it? Appreciate any guidance if anyone has been in a similar situation.

dunstonh

However I am unclear if this is allowed

it is

and if it would cause any income tax issues as I would essentially be using these smaller tax free portions as additional income. 

Accessing the tax free cash doesn't result in tax.   Although it does remove the ability to use the tax free cash in retirement which could result in greater tax efficiency in the long term.

Can whatever remains of my 25% tax free allowance remain invested in my drawdown pension until I want to take it?

it won't be in drawdown as it would still be uncrystallised.    Drawdown is the act of crystallising your funds.   So, any money that remains uncrystallised, is not in drawdown but available to use drawdown from it later on.

Dazed_and_C0nfused

With the right provider you should be able to do it.

Just remember each time you take a TFLS you crystallise the other 75% so no further TFLS can be taken from that element.

For example total fund is £200k.

You crystallise £40k by taking £10k TFLS and leaving the other £30k invested.

You have £30k crystallised and £160k uncrystallised.

Your funds increase in value by 20% so you have £36k crystallised and £192k uncrystallised.

You cannot take anymore tax free cash from the £36k, it is all taxable.

But you can take some tax free from the uncrystallised £192k

Albermarle

You need to check with your provider that they offer this flexibility . Some do not have the right IT systems to support it .With an  older pension they probably will not, and you will have to transfer it, either to a new pension with the same provider ot a new provider altogether.
Normally with drawing from a pension in this way is not at the click of a button . In many cases you will have to go through an admin procedure , so would not be sensible to withdraw numerous very small amounts .

NJWG

Thanks for taking the time to reply.

Would the uncrystallised part of tax free amount still be part of the flexi-drawdown product or need to stay separate?

I've just been looking at the guide on the site, which says: "With this option you take your 25% tax-free lump sum all at once. Then with the remainder you buy a product called a flexible income drawdown." 

Albermarle

Would the uncrystallised part of tax free amount still be part of the flexi-drawdown product or need to stay separate?

How it is handled varies from provider to provider .

Just to be clear if you have say £100K of the pension pot left uncrystallised , then if you crystallise it then you only get £25K of it tax free . The £75K is added to the previously crystallised amounts  and then all your pot is crystallised and no more tax free cash is possible ( unless you add more contributions ) 

've just been looking at the guide on the site, which says: "With this option you take your 25% tax-free lump sum all at once. Then with the remainder you buy a product called a flexible income drawdown." 

Sounds like you will have to transfer if you want to take the TFC out in stages . . Luckily it is a relatively straightforward process nowadays, as long as you have a standard DC pension with no specific guarantees .

dunstonh

Would the uncrystallised part of tax free amount still be part of the flexi-drawdown product or need to stay separate?

It is unusual to use a drawdown product nowadays.    Today, most SIPPs can handle drawdown functionality within them.   The SIPP will be made up of uncrystallised funds and crystallised funds.     Providers/platforms handle that in different ways.  Such as having two subaccounts.  Others have one but pro-rata it

I've just been looking at the guide on the site, which says: "With this option you take your 25% tax-free lump sum all at once. Then with the remainder you buy a product called a flexible income drawdown."

I would pretty much ignore that.   As I mentioned above, there are not many income drawdown plans nowadays as most modern plans include functionality.    This site has never been that good when it comes to investment and pension articles.

You mention you are in a SIPP.   So, it's likely that drawdown functionality already exists with that SIPP and no need to move it anywhere.   If you wanted to have the whole 25% out up front, you would crystallised the whole fund and they would pay 25% to you and the other 75% would move from uncrystallised to crystallised.      If you only wanted half your tax free cash, then you would crystallise 50% of the fund.   

zagfles

Dazed_and_C0nfused said:

With the right provider you should be able to do it.

Just remember each time you take a TFLS you crystallise the other 75% so no further TFLS can be taken from that element.

For example total fund is £200k.

You crystallise £40k by taking £10k TFLS and leaving the other £30k invested.

You have £30k crystallised and £160k uncrystallised.

Your funds increase in value by 20% so you have £36k crystallised and £192k uncrystallised.

You cannot take anymore tax free cash from the £36k, it is all taxable.

But you can take some tax free from the uncrystallised £192k

You need to be careful, this is technically the wrong way round. Taking a TFLS doesn't cause a crystallisation, it's crystallisation that creates the option of up to a 25% TFLS. It's possible to fully crystallise a pension and take less than 25% TFLS, or indeed no TFLS. So it is possible to fully crystallise without taking the full 25% TFLS, and if you don't take it, you've lost the option forever.

The way round this is to partially crystallise, but you need to make that clear. So you don't tell your provider that you want to crystallise your pension and take 12.5% TFLS, instead you tell them you want to crystallise half your pot and take the max 25% TFLS from that half. That will leave the other half uncrystallised and so you can fully or partially crystallise that later and get further TFLS(s).

NJWG

Again thanks to all for chipping in with advice, all very helpful. My SIPP is with Interactive Investor who I think can offer the drawdown flexibility I need. As far as I can see if I want to take a lump sum and then use additional bits of the tax free amount as a monthly top up I would just crystallise the appropriate amount every time I needed to without actually have to move any funds around.

Albermarle

NJWG said:

Again thanks to all for chipping in with advice, all very helpful. My SIPP is with Interactive Investor who I think can offer the drawdown flexibility I need. As far as I can see if I want to take a lump sum and then use additional bits of the tax free amount as a monthly top up I would just crystallise the appropriate amount every time I needed to without actually have to move any funds around.

Yes that should be OK. Just be aware that II do not have two seperate pots ( crystallised and uncrystallised) . Just one pot and somewhere there is a % figure of how much is crystallised.

Chickereeeee

Also, II do not allow you to say e.g. "I want 50% of my pot crystallised". You have to give them a £ amount. This could be around 50% when you initiate the process, but could be a bit more or less, depending on market movements, when crystallisation  actually occurs.