Crystallisation - must you take the 25% cash?

Linton

QrizB said:

EdSwippet said:

zagfles said:
... for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

What could these be?

Perhaps one examplke is as described by dunstonh, for intergenerational asset transfers?

dunstonh said:

When the children inherit the pension, they will have a chunk of pension money that is never calculated against the LTA again and not subject to IHT and can be passed from generation to generation with no future tax.

Or you could take the TFLS and use Gifts from Income?  I think it would be more tax efficient assuming you live to 75.

zagfles

EdSwippet said:

zagfles said:
... for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

What could these be?

I'm not asking only to be argumentative, by the way. It is just that I genuinely cannot think of a scenario where crystallising a DC pension but taking less than the maximum tax-free, or even nothing tax-free, could be useful. In every case for crystallising I can conjure up, it seems that taking the maximum tax-free beats other options, at least based on reasonable assumptions about the future.

There are definitely some unfortunate cases where crystallising at all will with hindsight turn out as a mistake. For example, crystallise on Monday and get hit by a beer truck on Tuesday, leaving an entire PCLS subject to IHT that would otherwise have escaped. For that pathological case, I suppose crystallising but taking no PCLS would save IHT. But then again, so would simply not crystallising the pension.

If rather than crystallising Monday and getting hit by a beer truck Tuesday, you crystallise at the LTA at age 55 and get hit by the beer truck at age 74, then if you'd crystallised there'd be no LTA tax to pay, if you'd left it uncrystallised there would be, assuming growth exceeds any rise in the LTA.

So, genuine (not rhetorical) question: if there are situations in which crystallising a DC pension and taking less than 25% tax-free are sensible, what are they?

Another (admittedly unlikely) scenario but with no hindsight of dying under 75, would be someone whose pot is at the LTA who loses their job at 55, and is happy to live off means tested benefits for a few years. Taking the TFLS would eliminate entitlement to most means tested benefits eg UC, HB, mortgage interest support etc. Leaving the pension uncrystallised would mean LTA tax on growth. Not sure if deprivation would be an issue but unlikely I think as the usual rule is pensions don't have to be considered before state pension age.

Actually I'm not sure this scenario is stretching credibility too much. Consider someone who's never meaningfully saved in their life, but has had a good DB pension for most of their working life. The scheme closes, and they get tempted to transfer it out at some vast multiplier eg 35x. They manage to find an IFA to sign it off (it was easier a few years ago). It's hit the LTA. They lose their job at 55 with the pension as their only asset. They are renting. It could make sense to fully crystallise to avoid LTA charge and to not take the TFLS because it'd lose UC including getting the rent paid.

zagfles

QrizB said:

EdSwippet said:

zagfles said:
... for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

What could these be?

Perhaps one examplke is as described by dunstonh, for intergenerational asset transfers?

dunstonh said:

When the children inherit the pension, they will have a chunk of pension money that is never calculated against the LTA again and not subject to IHT and can be passed from generation to generation with no future tax.

The "no future tax" only applies if the member dies under 75. If over 75 it's taxable on the beneficiaries (of course it could be taken within personal allowances). Also the "generation to generation" bit assumes no future govt will change the rules, considering how often govt changes pension rules assuming they'll stay the same for several generations seems a bit optimistic!

artyboy

And there I was thinking it was a fairly simple question 

Anyway, again... thank you all for your comments. I'm not going to try my luck with quoting again but safe to say that I'm clearer in my mind now as to what might be best, namely:


1) As a starting point, full crystallisation and take TFLS might be best for me and Mrs Arty, assuming we are at/around LTA 
2) Figure out best thing to do with said TFLS
3) Get an IFA to help with/validate the above - possibly even start with the Costco recommended one, as my needs are more slanted towards estate planning than general investment advice.

One (hopefully) final question on this subject if that's ok. Dunstonh - I'm aware that pensions can be passed down generations (treated differently if you die before or after 75). But if our children have their own pensions, does what they inherit count towards their own LTA or does it stand separately? 

If so, the obvious conclusion is that if you have several generations of financially prudent offspring, you could end up with cumulative inherited pensions worth many millions, and with no IHT to pay (just some likely element of income tax presumably...)

zagfles

artyboy said:

And there I was thinking it was a fairly simple question 

Anyway, again... thank you all for your comments. I'm not going to try my luck with quoting again but safe to say that I'm clearer in my mind now as to what might be best, namely:


1) As a starting point, full crystallisation and take TFLS might be best for me and Mrs Arty, assuming we are at/around LTA 
2) Figure out best thing to do with said TFLS
3) Get an IFA to help with/validate the above - possibly even start with the Costco recommended one, as my needs are more slanted towards estate planning than general investment advice.

One (hopefully) final question on this subject if that's ok. Dunstonh - I'm aware that pensions can be passed down generations (treated differently if you die before or after 75). But if our children have their own pensions, does what they inherit count towards their own LTA or does it stand separately? 

If so, the obvious conclusion is that if you have several generations of financially prudent offspring, you could end up with cumulative inherited pensions worth many millions, and with no IHT to pay (just some likely element of income tax presumably...)

No it's separate, the LTA is only assessed against the orginal pension. So inheriting a pension doesn't affect your own LTA.

EdSwippet

zagfles said:
Actually I'm not sure this scenario is stretching credibility too much. Consider someone who's never meaningfully saved in their life, but has had a good DB pension for most of their working life. The scheme closes, and they get tempted to transfer it out at some vast multiplier eg 35x. They manage to find an IFA to sign it off (it was easier a few years ago). It's hit the LTA. They lose their job at 55 with the pension as their only asset. They are renting. It could make sense to fully crystallise to avoid LTA charge and to not take the TFLS because it'd lose UC including getting the rent paid.

Interesting.

Presumably, for this to continue to work though, the person would have to leave the pension entirely untouched. (Otherwise, taking income from it will reduce or eliminate their UC payments?)

In which case, unless they arrange for zero investment income over the period, then the penalty from the second forced LTA test at age 75 -- if they live that long -- is likely to loom pretty large.

artyboy said:
And there I was thinking it was a fairly simple question

When it comes to the LTA, there is no such thing!

zagfles

EdSwippet said:

zagfles said:
Actually I'm not sure this scenario is stretching credibility too much. Consider someone who's never meaningfully saved in their life, but has had a good DB pension for most of their working life. The scheme closes, and they get tempted to transfer it out at some vast multiplier eg 35x. They manage to find an IFA to sign it off (it was easier a few years ago). It's hit the LTA. They lose their job at 55 with the pension as their only asset. They are renting. It could make sense to fully crystallise to avoid LTA charge and to not take the TFLS because it'd lose UC including getting the rent paid.

Interesting.

Presumably, for this to continue to work though, the person would have to leave the pension entirely untouched. (Otherwise, taking income from it will reduce or eliminate their UC payments?)

In which case, unless they arrange for zero investment income over the period, then the penalty from the second forced LTA test at age 75 -- if they live that long -- is likely to loom pretty large.

Yes, for the period they're claiming the benefits. But that might just be for a few years. For instance, he has kids of around 13 or so, he's either a single parent, or has a wife who has a disability so she doesn't have to seek work. Then he develops a disability which means he doesn't need to seek work. With rent and child elements, UC plus added stuff like council tax benefit, free school meals, prescriptions, dentist etc could come to around £25k pa while the children are still children. So over 5 years till they're 18, £125k in means tested benefits.

So then, at around age 60, when benefits drop due to loss of all child related stuff, he could start drawing the pension. So he's created a tax liability on £250k by not taking the TFLS, so probably will pay £50k extra tax assuming basic rate, but has gained £125k in benefits.

OK it's a bit contrived. But this sort of situation will arise occasionally...

MallyGirl

zagfles said:

artyboy said:

I'm possibly being thick - and I do have a habit of tying myself in knots over financial stuff - but i seem to be getting different answers to the same question - this is what it boils down to:

If I have a £1m pension and I fully crystallise it at age 57, do I have to immediately take the £250k tax free cash outside of the pension wrapper (and therefore into my 'estate' for IHT purposes)? Or can I leave it within the pension/outside my estate, and withdraw it more gradually as needed?

People are talking at cross purposes.

When you crystallise, you have the option of taking up to 25% of the amount you crystallise as tax free cash. If you choose not to take the tax free cash, then you never get the option again. If you choose not to take the full 25% at crystallisation, the opportunity is lost. The crystallised pension, after whatever tax free cash you've chosen to take, is then taxable when you draw it.

There is the option of partial crystallising, where you only crystallise part of the pot. Then you can take 25% of that part, leaving the rest of the pension uncrystallised. You can then crystallise another part, taking 25% of that part as tax free cash.

What you can't do is crystallise all or part of a pot and leave some of the tax free cash of the crystallised part for later. You have to take it when you crystallise, or lose the option.

People get confused by the way some providers describe it. Some imply that taking tax free cash causes crystallisation or part crystallisation. That is wrong. Crystallisation give the option of taking 25% of whatever you crystallise as tax free cash, take the option or lose it. As Ed says, for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

So if you want to fully crystallise, you can take up to 25% tax free cash (up to the LTA), if you don't take 25%, the rest will be taxable when you draw it.

That was how I understood it but I was told I was wrong so I deleted my post.

zagfles

MallyGirl said:

zagfles said:

artyboy said:

I'm possibly being thick - and I do have a habit of tying myself in knots over financial stuff - but i seem to be getting different answers to the same question - this is what it boils down to:

If I have a £1m pension and I fully crystallise it at age 57, do I have to immediately take the £250k tax free cash outside of the pension wrapper (and therefore into my 'estate' for IHT purposes)? Or can I leave it within the pension/outside my estate, and withdraw it more gradually as needed?

People are talking at cross purposes.

When you crystallise, you have the option of taking up to 25% of the amount you crystallise as tax free cash. If you choose not to take the tax free cash, then you never get the option again. If you choose not to take the full 25% at crystallisation, the opportunity is lost. The crystallised pension, after whatever tax free cash you've chosen to take, is then taxable when you draw it.

There is the option of partial crystallising, where you only crystallise part of the pot. Then you can take 25% of that part, leaving the rest of the pension uncrystallised. You can then crystallise another part, taking 25% of that part as tax free cash.

What you can't do is crystallise all or part of a pot and leave some of the tax free cash of the crystallised part for later. You have to take it when you crystallise, or lose the option.

People get confused by the way some providers describe it. Some imply that taking tax free cash causes crystallisation or part crystallisation. That is wrong. Crystallisation give the option of taking 25% of whatever you crystallise as tax free cash, take the option or lose it. As Ed says, for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

So if you want to fully crystallise, you can take up to 25% tax free cash (up to the LTA), if you don't take 25%, the rest will be taxable when you draw it.

That was how I understood it but I was told I was wrong so I deleted my post.

Sounds like you were right then although I didn't see your post so can't comment. It's probably another case of providers and others trying to oversimplify.

"You can take the 25% tax free cash in stages" is true, but only by partially crystallising and so leaving part of the pot uncrystallised from which further tax free cash can be taken.

The OP is talking about full crystallistion. With full crystallistion, you have the option to take up to 25% tax free cash up front, if you decline the option or don't take the full 25%, the rest remains in the pension and will be taxable when drawn.

EdSwippet

MallyGirl said:

That was how I understood it but I was told I was wrong so I deleted my post.

From recollection, I think the problem may have been that your deleted post could have been read more than one way. I remember understanding it as confirming how things work, but I guess not everyone did.

The LTA is not just a tax minefield, but unfortunately also a semantic one.