Crystallisation - must you take the 25% cash?

artyboy

zagfles said:

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.

Yes exactly... if we are already at LTA when 57 (or 55 in Mrs Artys case), the issue with part crystallisation is that any further growth in the uncrystallised part would push into LTA penalty territory. 

Hence why on balance, full crystallisation seems a better option for us - take the 25% and invest it through ISA/GIAs, use it gradually, give some away to family and good causes, plus maybe other options such as Dunstonh previously suggested for estate planning etc etc.

If we then both take at least our personal allowance of £12,570 annually out of the taxable 75%, that should further ensure that at 75 we don't end up over LTA (although it would be yet another nice problem to have if it did grow that much, and I'm really not going to worry about it!).

Once again, this has been really helpful so thank you all!

Arty

EdSwippet

artyboy said:
If we then both take at least our personal allowance of £12,570 annually out of the taxable 75%, that should further ensure that at 75 we don't end up over LTA ...

... and if it doesn't, then take out more, even if pushing into 20% or 40% tax brackets. These standard income tax rates are still well below the 40% or 55% effective rates you would face from exceeding the LTA at age 75.

Because flexi-drawdown exists, paying an LTA penalty at age 75 is broadly voluntary.

MallyGirl

artyboy said:

If we then both take at least our personal allowance of £12,570 annually out of the taxable 75%, that should further ensure that at 75 we don't end up over LTA (although it would be yet another nice problem to have if it did grow that much, and I'm really not going to worry about it!).

Once again, this has been really helpful so thank you all!

Arty

I suspect that you will need to take more than just the 0% allowance out to keep the crystallised pot under the LTA at 75.
2% growth on £750k is £15k. We have worked on taking closer to the top of the 20% bracket out in the early years when we will be doing more travelling - subject to an adjustment in approach if the markets aren't being our friends

coyrls

MallyGirl said:

artyboy said:

If we then both take at least our personal allowance of £12,570 annually out of the taxable 75%, that should further ensure that at 75 we don't end up over LTA (although it would be yet another nice problem to have if it did grow that much, and I'm really not going to worry about it!).

Once again, this has been really helpful so thank you all!

Arty

I suspect that you will need to take more than just the 0% allowance out to keep the crystallised pot under the LTA at 75.

Agreed, that's been my experience.

Albermarle

EdSwippet said:

artyboy said:
If we then both take at least our personal allowance of £12,570 annually out of the taxable 75%, that should further ensure that at 75 we don't end up over LTA ...

... and if it doesn't, then take out more, even if pushing into 20% or 40% tax brackets. These standard income tax rates are still well below the 40% or 55% effective rates you would face from exceeding the LTA at age 75.

Because flexi-drawdown exists, paying an LTA penalty at age 75 is broadly voluntary.

Is inflation taken into account in this situation ? I suspect not but just checking.
For example if you have £750K crystallised at age 60. You take no income but the pot only grows with inflation( so no real growth) and at age 75 has become say £1.1 Million. Will you be charged LTA on £450K even though the pot has not grown in real terms at all?

In this case you might be better off not crystallising at 60 ( if you are not going take any/enough income) as at least then at 75 the LTA will have ( hopefully) increased with inflation ( to some extent anyway) ?

EdSwippet

Albermarle said:
For example if you have £750K crystallised at age 60. You take no income but the pot only grows with inflation( so no real growth) and at age 75 has become say £1.1 Million. Will you be charged LTA on £450K even though the pot has not grown in real terms at all?

Yes.

Albermarle said:

In this case you might be better off not crystallising at 60 ( if you are not going take any/enough income) as at least then at 75 the LTA will have ( hopefully) increased with inflation ( to some extent anyway) ?

Perhaps. But really only in the pathological case of gains that are below or at inflation, a highly atypical case.

Also, historically somewhat of a non-starter. For example, a retiree aged 60 in 2006 (the year in which the govt ginned up the whole LTA nonsense) had an LTA of £1.5mm. By age 75, their LTA had fallen to just over £1mm if unprotected, or at best still £1.5mm under fixed protection (none of the protection regimes have inflation uplifts). Aside from a short period, 2007 to 2011, the trajectory of the LTA has been nothing but downwards, both in nominal and in real terms. In real terms, it is currently less than half the value it was when introduced.

Based on the past, taking this option would be a huge gamble. I wouldn't. (I didn't.)

LHW99

Is it still possible to take out an insurance policy in trust that covers at least part of the expected IHT? I seem to remember that used to be suggested.

Albermarle

EdSwippet said:

Albermarle said:
For example if you have £750K crystallised at age 60. You take no income but the pot only grows with inflation( so no real growth) and at age 75 has become say £1.1 Million. Will you be charged LTA on £450K even though the pot has not grown in real terms at all?

Yes.

Albermarle said:

In this case you might be better off not crystallising at 60 ( if you are not going take any/enough income) as at least then at 75 the LTA will have ( hopefully) increased with inflation ( to some extent anyway) ?

Perhaps. But really only in the pathological case of gains that are below or at inflation, a highly atypical case.

Also, historically somewhat of a non-starter. For example, a retiree aged 60 in 2006 (the year in which the govt ginned up the whole LTA nonsense) had an LTA of £1.5mm. By age 75, their LTA had fallen to just over £1mm if unprotected, or at best still £1.5mm under fixed protection (none of the protection regimes have inflation uplifts). Aside from a short period, 2007 to 2011, the trajectory of the LTA has been nothing but downwards, both in nominal and in real terms. In real terms, it is currently less than half the value it was when introduced.

Based on the past, taking this option would be a huge gamble. I wouldn't. (I didn't.)

Thanks for confirming the first point .

The second point was only to use as an example . Probably coloured by the current economic situation, with investments keeping up with inflation not being the current reality, and probably will take some time to catch up. If the LTA was increasing with inflation it might be more of a coherent potential strategy though.

artyboy

LHW99 said:

Is it still possible to take out an insurance policy in trust that covers at least part of the expected IHT? I seem to remember that used to be suggested.

I think that's what is called Whole of Life insurance - but it's very expensive - a quick quote for the two of us for 500k of insurance comes out at £650/month in premiums!

artyboy

Albermarle said:

EdSwippet said:

Albermarle said:
For example if you have £750K crystallised at age 60. You take no income but the pot only grows with inflation( so no real growth) and at age 75 has become say £1.1 Million. Will you be charged LTA on £450K even though the pot has not grown in real terms at all?

Yes.

Albermarle said:

In this case you might be better off not crystallising at 60 ( if you are not going take any/enough income) as at least then at 75 the LTA will have ( hopefully) increased with inflation ( to some extent anyway) ?

Perhaps. But really only in the pathological case of gains that are below or at inflation, a highly atypical case.

Also, historically somewhat of a non-starter. For example, a retiree aged 60 in 2006 (the year in which the govt ginned up the whole LTA nonsense) had an LTA of £1.5mm. By age 75, their LTA had fallen to just over £1mm if unprotected, or at best still £1.5mm under fixed protection (none of the protection regimes have inflation uplifts). Aside from a short period, 2007 to 2011, the trajectory of the LTA has been nothing but downwards, both in nominal and in real terms. In real terms, it is currently less than half the value it was when introduced.

Based on the past, taking this option would be a huge gamble. I wouldn't. (I didn't.)

Thanks for confirming the first point .

The second point was only to use as an example . Probably coloured by the current economic situation, with investments keeping up with inflation not being the current reality, and probably will take some time to catch up. If the LTA was increasing with inflation it might be more of a coherent potential strategy though.

With the LTA frozen until at least 2026, it's fair to say that inflation is going to take a big chunk out of its value. And even though the inflationary environment has massively changed since the freeze decision was taken, I very much doubt the government will change its position.