Flexi draw down

Beaneymcs

I have had advise from a financial advisor on starting my pension in November. She said the tax free lump sum was not always the best option to start with. She went on to explain about a flexi draw down pension that has the whole pot in it and when not earning enough to pay tax draw from the taxable portion. Only take from the tax free part when over the threshold and paying tax. I can not find any such thing on line and nobody I have spoken to has heard of it. Any advise? Thanks in advance.

Albermarle

It is often discussed on this forum and is a good way of drawing down a pension for many people. Taking all the tax free cash upfront is a common mistake, especially if you have no immediate need for the money.

The only comment I would make that is not clear from your description;  is that you can not draw taxable income just on its own without first ( or at the same time ) taking  some tax free cash. The two are linked.

Also once you take some taxable income, you are limited to how much you can contribute to a pension in future, in vase this might be an issue.

dunstonh

 She said the tax free lump sum was not always the best option to start with.

That is correct.  We find the majority of cases we deal with do not take the TFC up front.

 Only take from the tax free part when over the threshold and paying tax. I can not find any such thing on line and nobody I have spoken to has heard of it. Any advise? 

That is a very popular method and consistent with what we do as well (or variations of it depending on income need). It is also often discussed on this site.

Have you spoken to anyone that actually knows about all of the options and variations and combinations available?  Information you get from people is only as good as what they know.   If they are in dark, then what they tell you will reflect that.  

squirrelpie

Further to what dunstonh said, is your financial adviser an IFA - i.e. an independent financial adviser? If not, you may not be getting impartial advice.

gm0

You need to do the equivalent of a full fact find, goals, circumstances, pot sizes, current needs, future needs, inheritance plans, bank of mom and dad questions, State Pension and it's potential deferral, spouse pensions etc. whether this process is with or without an adviser to move from generalities to specifics. On this design point along with many others. Such as risk capacity (financial) + appetite (emotional) as inputs to portfolio design. 

The "rule of thumb" don't take the TFC unless you need it is indeed correct for a lot of people but it is not true for everyone.  A forumite or an adviser who has yet to do diligence on you and your situation will not truly know if it applies.  Yes - most of the time the "guess" will be correct in terms of tax planning

Yet there are situations where either Lifetime Allowance (LTA) tests on uncrystallised + crystallised growth BCE5a,5B at age 75 or goals around helping children earlier than death can make the rule of thumb inapplicable or plain wrong.  Attitude to regulatory change and wealth sharing across family can also play in.  This is entirely subjective - you can lock in current rules in certain respects - you can't predict what the treasury will do in 20 years time. 

You can't move a pension from spouse to spouse to balance out provision.  But extracted TFC as cash is transferable freely to spouse allowing the returns on that money to then accrue as income to the 2nd taxpayer in an ISA (subject to IHT) or general account (subject to CGT and IHT). This can be relevant where one partner has a much larger pension provision than the other but the expectation is that both pensions will support both of you in retirement and that these provisions will be either a care cost provision or just run down over retirement as income leaving the pension fund bigger and the ISA smaller as the mortality risk increases later on.

These are just a few of the considerations that may apply.

dunstonh

The "rule of thumb" don't take the TFC unless you need it is indeed correct for a lot of people but it is not true for everyone.  

I would position it more as a "don't take the TFC unless there is justification for doing so".  That way you cover the various other events that could occur.

ian16527

If you crystalise, say £10k into drawdown, £2.5k is paid out as tax free straight away, so how do you stop this to only take the taxable income.

Or have I misunderstood which is quite possible

gm0

Taking TFLS (tax free lump sum) also referred to as tax free cash or Pension Commencement Lump Sum (PCLS) at different times and contexts is generally a one off thing for a pension or (important) a slice of a pension. 

If you don't take it at the point it is offered for a given slice of benefits (crystallisation) then the right to take it later effectively disappears.  You can elect not to have it. Which most of the time is not a rational choice given the options that do exist to achieve any given income goal and the income tax efficiency of the lump sum offer.

UFPLS

You can take slices of 25% tax free and 75% taxable with UFPLS - adhoc one offs or monthly though many retail providers don't (yet) offer the last of these (which means they do compliance tasks for each crystallisation - dull).  So with those you could do it once a year with 1x rather than 12x sets of compliance forms or just use another method.

FAD

You can do much the same income stream with Flexible Access Drawdown (FAD) i.e. to a "slice" of a pension fund or the whole fund.  Crystallise a chunk. Take 25% tax free.  Take no income.  Then at any time you can then setup a monthly, quarterly or annual income on the matching 75% which remains invested inside the pension wrapper meanwhile - marked as crystallised.

In fact both of these routes can be used to generate very similar cashflows to suit your needs preserving investment inside the pension until needed.  In both cases you get 25% tax free of the crystallised amount over time unless you actively chose not to take it. 

Nibbled a bit at a time with UFPLS. Or at the size of the chunk you chose with a phase of FAD.  C
learly a small FAD and a UFPLS crystallisation of equal size are very close to the same thing.
The practical difference being that the UFPLS pays all the taxable income out straight away (can only take all together). And the FAD only pays the income portion if you ask for it.

What actually matters in practice is whether your provider automates particular flavours of these options efficiently.  Not everything which exists as a legal choice and in regulator rules is supported by all providers.  Most have sufficient a selection to achieve what you may want as income stream so it doesn't pay to obsess over this.

The other point to check (MSE threads ibid) is where the cash taken comes out of - this may affect portfolio setup, rebalancing etc.  Providers will take instructions and have default rules to take cash first (most), then from largest fund, smeared across all, a nominated fund etc. when cash is meant to come out but there is no "cash" in the pension just investments.

gm0

Oops - small recall bell ringing - actually the rules on tax free cash timing elapsing are a bit more complex than I have stated in the above post.  Investigate them more thoroughly if exact timing of its arrival would matter for some odd set of circumstances

Long term though - my statement stands - it "effectively" disappears if not taken at commencement or thereabouts.

ian16527

gm0 said:

UFPLS

You can take slices of 25% tax free and 75% taxable with UFPLS - adhoc one offs or monthly though many retail providers don't (yet) offer the last of these (which means they do compliance tasks for each crystallisation - dull).  So with those you could do it once a year with 1x rather than 12x sets of compliance forms or just use another method.

FAD

You can do much the same income stream with Flexible Access Drawdown (FAD) i.e. to a "slice" of a pension fund or the whole fund.  Crystallise a chunk. Take 25% tax free.  Take no income.  Then at any time you can then setup a monthly, quarterly or annual income on the matching 75% which remains invested inside the pension wrapper meanwhile - marked as crystallised.

In fact both of these routes can be used to generate very similar cashflows to suit your needs preserving investment inside the pension until needed.  In both cases you get 25% tax free of the crystallised amount over time unless you actively chose not to take it. 

I understand with what you have said above,  but looking at the first post, they are putting all of it in flexi drawdown, but leaving the Tax free part untouched in there to take piecemeal whenever.

I thought you could not do this, and had to take the Tax Free cash immediately. This is the part that's confusing me

"She went on to explain about a flexi draw down pension that has the whole pot in it and when not earning enough to pay tax draw from the taxable portion. Only take from the tax free part when over the threshold and paying tax"

Albermarle

ian16527 said:

gm0 said:

UFPLS

You can take slices of 25% tax free and 75% taxable with UFPLS - adhoc one offs or monthly though many retail providers don't (yet) offer the last of these (which means they do compliance tasks for each crystallisation - dull).  So with those you could do it once a year with 1x rather than 12x sets of compliance forms or just use another method.

FAD

You can do much the same income stream with Flexible Access Drawdown (FAD) i.e. to a "slice" of a pension fund or the whole fund.  Crystallise a chunk. Take 25% tax free.  Take no income.  Then at any time you can then setup a monthly, quarterly or annual income on the matching 75% which remains invested inside the pension wrapper meanwhile - marked as crystallised.

In fact both of these routes can be used to generate very similar cashflows to suit your needs preserving investment inside the pension until needed.  In both cases you get 25% tax free of the crystallised amount over time unless you actively chose not to take it. 

I understand with what you have said above,  but looking at the first post, they are putting all of it in flexi drawdown, but leaving the Tax free part untouched in there to take piecemeal whenever.

I thought you could not do this, and had to take the Tax Free cash immediately. This is the part that's confusing me

"She went on to explain about a flexi draw down pension that has the whole pot in it and when not earning enough to pay tax draw from the taxable portion. Only take from the tax free part when over the threshold and paying tax"

I noticed this and replied already as follows:
The only comment I would make that is not clear from your description;  is that you can not draw taxable income just on its own without first ( or at the same time ) taking  some tax free cash. The two are linked.

I suspect either the advisor has not explained it clearly enough, or the OP has misunderstood a little what they have been told.
It is 100% the case that to take any taxable income, you have to take some tax free cash first/at the same time.