Keeping a pension pot as uncrystallised whilst drawing down

roytom2

The time is coming when I need to think about accessing my pension pot.

I have Stakeholder Pension Scheme and the provider has sent an info leaflet about options. Although it mentions moving the pot to a Drawdown product (that would naturally incur higher management fees) after 25% has been taken out tax free, nowhere do they state that the pot can be left in the current scheme and drawing down in stages - as I understand things each drawdown would be 25% tax free and the rest (75%) taxed at my marginal tax rate. This called uncrystallised funds pension lump sums (UFPLS)

Are they being crafty by not mentioning an uncrystallised option - presumably as this would be on the lower management fees the scheme has been enjoying?

Dazed_and_C0nfused

I don't think all providers offer UFPLS.

QrizB

... and there's no good reason for your "drawdown product" to incur higher management fees.

Albermarle

If you do not like the options offered by the scheme, then you can transfer it . For most pensions this is a straightforward process with no charges .

The issue is that some options are OK legally/taxation wise , but some providers just are not able or willing to offer them , especially on older pensions .

gm0

The UFPLS mechanism offers a series of events each of which "crystallises" a salami slice of which you receive 25% tax free and the 75% rest of it via your normal marginal rate of income tax - basic rate for most people one they reach the end of the nil rate band based on the amount and other income sources.  Year after year or as often as you choose to do the paperwork until you run out of LTA at which point the tax treatment changes (no more tax free cash element).  So the pension you take is crystallised and extinguished all at once.  The rest of it remains as you say uncrystallised.  This slicing mechanism suits some people very well.

Alternatively the drawdown can be via Flexible Access Drawdown FAD an option which also crystallises a slice - a little/some/all of the total fund - and you take the 25% but leave the rest in the pension - crystallised or "marked for drawdown" i.e. to be drawn when you choose as income.  You can't take the 25% without "marking the 75% for income - it moves in lockstep.  But you can choose how much to implement in each slice and vary the income taken from the 75% and growth however you want.

So slices of FAD (Phased FAD in the lingo) are more flexible than UFPLS on the income portion.

You can see in the limiting case of taking all the income at the begining - the two are essentially the same thing - a slice of pension getting crystallised and paid out partly tax free.  FAD offers more flexibility to manage the income stream leaving the 75% inside the pension wrapper and invested until drawn as needed.  But a similar cashflow can be generated with a series of UFPLS payments.  And the 25% tax free cash is the same - just upfront vs in stages.  Different tunes can be played on tax free cash, other income, SP, annual taxes.  And what suits one family in that regard won't suit another.

But both approaches can and are used to hold the same investments underneath.  Crystallised/Uncrystallised should make little difference to that.  The charges of the platform you use or existing schemes you are in may differ from other forum members and change over time.   And as you have discovered they may be different to legacy options and not always for the better.

My old occupational only offered full transfer out or whole fund as a single UFPLS (not attractive for a consolidated main pension - but ok for a small one).  Cheap but inflexible.  Later they added more options - thankfully in time for my retirement.

Nonetheless - I have used the new flexibility offered to keep some funds in the old scheme - it has a good platform charge (0), materially lower fund charges for the same investments that I still use.  So I only move out what I need to to the new scheme which supports drawdown.  This sort of carry on requires the source scheme to support partial transfer.

It is a mine field in terms of what's supported by who -  "legally allowed" > "regulator tolerated" > "supported by provider X business process" > "well automated in IT and efficiently administered" > "legal minimums from the legislation - such as full transfer out".  Just because something is possible in general terms in the overall market doesn't mean you can do it "here" or that you can successfully complain when they don't offer a feature you fancy using

Without seeing your documentation its hard to be precise but it doesn't sound like they are offering FAD (for the whole pot) or phased as I described it above.   Read up.  Chat to PensionWise - get up to speed. Decide on your approach.  Transfer (if you need to) to somewhere that does it the way you want with investments and prices you like.  Good luck

dunstonh

Although it mentions moving the pot to a Drawdown product (that would naturally incur higher management fees) 

Why would it naturally incur higher charges?   

Stakeholders are a niche option nowadays.  They went out-of-date (apart from a few niche areas) around 2005ish.  By out of date, I mean cheaper and better options came in.      On a like-for-like basis, you should be cheaper than stakeholder unless your stakeholder has large discounts.

Are they being crafty by not mentioning an uncrystallised option - presumably as this would be on the lower management fees the scheme has been enjoying?

Providers rarely mention all the options.  Often they just mention drawdown in generic and basic terms and that would cover all variations of drawdown.

Your presumption is wrong and most stakeholder providers expect to lose the pension at retirement as very few offer any form of drawdown functionality other than UFPLS or small pots and most need to be fully withdrawn or transferred by age 75.

What is the AMC you have had on the stakeholder as you seem to believe it is low compared to modern options?  Generically, that would be unusual (possible with some group schemes but not much on the individual side)

Malchester

My company pension provider (the Pension Trust) offered very limited choice on retirement - leave it invested, draw it all out or annuity, definitely no UFPLS. Transferred to PensionBee and began UFPLS. Simple transfer, easy and speedy to take money out each month (25% tax free and 75% taxable). This would be an option (there are other providers than PensionBee)

roytom2

gm0 said:

….

Alternatively the drawdown can be via Flexible Access Drawdown FAD an option which also crystallises a slice - a little/some/all of the total fund - and you take the 25% but leave the rest in the pension - crystallised or "marked for drawdown" i.e. to be drawn when you choose as income.  You can't take the 25% without "marking the 75% for income - it moves in lockstep.  But you can choose how much to implement in each slice and vary the income taken from the 75% and growth however you want.

…

You can see in the limiting case of taking all the income at the begining - the two are essentially the same thing - a slice of pension getting crystallised and paid out partly tax free.  FAD offers more flexibility to manage the income stream leaving the 75% inside the pension wrapper and invested until drawn as needed.  But a similar cashflow can be generated with a series of UFPLS payments.  And the 25% tax free cash is the same - just upfront vs in stages.  Different tunes can be played on tax free cash, other income, SP, annual taxes.  And what suits one family in that regard won't suit another.
…

Nonetheless - I have used the new flexibility offered to keep some funds in the old scheme - it has a good platform charge (0), materially lower fund charges for the same investments that I still use.  So I only move out what I need to to the new scheme which supports drawdown.  This sort of carry on requires the source scheme to support partial transfer.
…

With reference to the above selected paragraphs dealt with in the order above please would you clarify the following:-

1. FAD: does the rule of 25% and 75% also apply to any growth occurring to the fund in the remaining pension pot.
2. Does this mean that it is possible to take initially the 25% tax free in slices and then once used up take slices of 75% that are taxed
3. Please advise how I can find or discover alternative fund that has a 0% platform charge?
many thanks for all your help on this

Albermarle

1 FAD -- It is easiest to think in terms of crystallised and uncrystallised money in the pot .
To begin with it is all uncrystallised. Lets say you have £200K . If you crystallise £40K - this gives you £10K tax free and £30K is now crystallised- leaving £160K uncrystallised . Any money taken from the crystallised part is taxable ( if you actually pay any tax depends on your other income etc)
If you then leave it alone and it grows 10% , you will have £176 K uncrystallised from which you can take 25% tax free, either all at once or in slices. 
You can take all the tax free cash , without taking any taxable income from the crystallised part , or you can take both at the same time .
Two points 
Some pensions do not have this flexibility to slice and dice , especially older ones . For example they may only allow you to take all the tax free cash in one go at the beginning . You need to check and if necessary transfer the pension to a more modern one .This should have also answered your second question - yes you can with a modern pension.

For the third point - I am guessing but some traditional providers just charge for the investment funds and do not have a platform fee as such . However you will be limited in investment choices to their own in house funds .

owly1

Hi
what if you had a good DB plus state pension and didn’t need to touch your DC (which if crystallised today would in combination  exceed the LTA) -
would you avoid the LTA excess charge if you waited to after 75 to access the DC? 

Or is it that because you already retired and used some % with DB’s,  that at 75, HMRC would assess even non used / crystallised pensions ? 

Ie even if you don’t us your dc it will still be taxed at 75 

Albermarle

owly1 said:

Hi
what if you had a good DB plus state pension and didn’t need to touch your DC (which if crystallised today would in combination  exceed the LTA) -
would you avoid the LTA excess charge if you waited to after 75 to access the DC?   No 

Or is it that because you already retired and used some % with DB’s,  that at 75, HMRC would assess even non used / crystallised pensions ? 

Ie even if you don’t us your dc it will still be taxed at 75 

At 75 any uncrystallised funds will be counted against LTA ( effectively the same as if you crystallised them at 75) . Otherwise many people in your situation would never crystallise and avoid paying the tax . HMRC are a bit wiser than that.
I think if you die before 75 the same would happen .
The usual advice is to fully crystallise asap , pay some LTA if necessary and then make sure you spend any growth in the crystallised pot before age 75 , as the growth will be subject to LTA charge as well.
The downside of this is that , the tax free cash you receive on crystallisation , will have to be found a home and it will then be in your estate for IHT when you die .