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Uncrystallised Pension Funds Above Lifetime Allowance - Tax Free Lump Sum question

I am considering accessing my pension funds for the first time by taking a Tax Free Lump Sum and investing this predominately in fixed term bank/building society accounts to provide me with an ongoing monthly income. As I don't have any other ongoing income from any source then in effect I would be able to take most or all of any interest/income generated by the TFLS tax free by using up my Personal Allowance, £5,000 Starting Savings Rate taxed at 0%, and Personal Savings Allowance of £1,000 for basic rate taxpayers. 

All of my pension funds are Money Purchase funds and they amount in total to just over the current Lifetime Allowance of £1,073,100. I have no LTA protection on my funds. 

My question is, other than keeping my pension funds uncrystallised so that they don't form part of my estate on death, is there any reason not to take a 25% TFLS up to the LTA (ie take a TFLS of £268,275 just now) and use my available tax allowances to invest this in alternative vehicles for growth and/or income?

My thinking here is that if I leave my pension funds invested and uncrystallised and don't take the TFLS just now, then as my funds are already above the LTA I will therefore be subject to a tax charge on any future growth when I access the funds above the LTA & therefore I might as well take 25% of £1,073,100 just now and invest it elsewhere.  

Does this make sense or are there any other reasons I am missing (apart from the potential Inheritance Tax implications if I took the TFLS & died without spending it or hoping that when the LTA increases again it does so at a rate that exceeds the value of my pension funds) as to why I wouldn't just take a TFLS of £268,275 just now?   
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  • Pat38493Pat38493 Forumite
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    Based on my understanding and the limited information that you have provided this sounds fairly reasonable and I've seen similar comments elsewhere on other threads  - the only other reason I could think of would be if you expect the LTA to be increased in future years (many people on this forum would say that they expect it to be frozen or even go down) and you have quite a lot of years until you are 75.  If you crystalize the fund now you will effectively have used 100% of your LTA even if the LTA was increased later.  You might have to hold your breath a long time for LTA increases though.

    The only other thought I had would be that depending on your age and expected annual spend, using fixed term accounts might not be the best investment outside of the pension - for this you would need to provide some more info about your expected spending per year and expected length of retirement.
  • edited 24 November at 3:52PM
    MarconMarcon Forumite
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    edited 24 November at 3:52PM
    I am considering accessing my pension funds for the first time by taking a Tax Free Lump Sum and investing this predominately in fixed term bank/building society accounts to provide me with an ongoing monthly income. As I don't have any other ongoing income from any source then in effect I would be able to take most or all of any interest/income generated by the TFLS tax free by using up my Personal Allowance, £5,000 Starting Savings Rate taxed at 0%, and Personal Savings Allowance of £1,000 for basic rate taxpayers. 

    All of my pension funds are Money Purchase funds and they amount in total to just over the current Lifetime Allowance of £1,073,100. I have no LTA protection on my funds. 

    My question is, other than keeping my pension funds uncrystallised so that they don't form part of my estate on death, is there any reason not to take a 25% TFLS up to the LTA (ie take a TFLS of £268,275 just now) and use my available tax allowances to invest this in alternative vehicles for growth and/or income?

    My thinking here is that if I leave my pension funds invested and uncrystallised and don't take the TFLS just now, then as my funds are already above the LTA I will therefore be subject to a tax charge on any future growth when I access the funds above the LTA & therefore I might as well take 25% of £1,073,100 just now and invest it elsewhere.  

    Does this make sense or are there any other reasons I am missing (apart from the potential Inheritance Tax implications if I took the TFLS & died without spending it or hoping that when the LTA increases again it does so at a rate that exceeds the value of my pension funds) as to why I wouldn't just take a TFLS of £268,275 just now?   
    You can take up to 3 'small pots' of no more than £10,000 each at the time you encash each one (can be in the same or different tax years). If you specify to the provider that you are using the small pots regime, each pot will use 0% of the LTA and won't trigger the Money Purchase Annual Allowance (probably not relevant for you but may be helpful for others reading this thread).

    Making partial transfers to 3 different personal pension contracts (SIPPs or otherwise, provided they support withdrawal under the small pots regime) is worth considering. Usual tax position for a DC pension - 25% tax free, 75% taxed at your marginal rate.
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • dunstonhdunstonh Forumite
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    I am considering accessing my pension funds for the first time by taking a Tax Free Lump Sum and investing this predominately in fixed term bank/building society accounts to provide me with an ongoing monthly income.
    Generally, that is not a good idea unless you are talking about short periods or you are managing the lifetime allowance.

    . As I don't have any other ongoing income from any source then in effect I would be able to take most or all of any interest/income generated by the TFLS tax free by using up my Personal Allowance, £5,000 Starting Savings Rate taxed at 0%, and Personal Savings Allowance of £1,000 for basic rate taxpayers. 
    Alternatively, you can draw the 75% element upto the personal allowance that year and only draw the excess 25%.  That way you dont waste your 25% unnecessarily.

    My question is, other than keeping my pension funds uncrystallised so that they don't form part of my estate on death, is there any reason not to take a 25% TFLS up to the LTA (ie take a TFLS of £268,275 just now) and use my available tax allowances to invest this in alternative vehicles for growth and/or income?
    You effectively have IHT on the one hand or LTA on the other.  You need to run the comparisons between the two and your expected draw to see which one is more favourable.






    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • AlbermarleAlbermarle Forumite
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    Couple of points to be aware of.
    As the value of your pensions is over the LTA , you will incur a charge on the excess if you crystallise 100% ( unless the small pots route is enough to get you under the LTA, although with the pensions value changing all the time, you can't be sure how it will work out.
    Any growth in the 75% crystallised, which is not taken as income , will also incur an LTA charge at age 75.

  • wtiasa1997wtiasa1997 Forumite
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    dunstonh said:
    I am considering accessing my pension funds for the first time by taking a Tax Free Lump Sum and investing this predominately in fixed term bank/building society accounts to provide me with an ongoing monthly income.
    Generally, that is not a good idea unless you are talking about short periods or you are managing the lifetime allowance.

    . As I don't have any other ongoing income from any source then in effect I would be able to take most or all of any interest/income generated by the TFLS tax free by using up my Personal Allowance, £5,000 Starting Savings Rate taxed at 0%, and Personal Savings Allowance of £1,000 for basic rate taxpayers. 
    Alternatively, you can draw the 75% element upto the personal allowance that year and only draw the excess 25%.  That way you dont waste your 25% unnecessarily.

    My question is, other than keeping my pension funds uncrystallised so that they don't form part of my estate on death, is there any reason not to take a 25% TFLS up to the LTA (ie take a TFLS of £268,275 just now) and use my available tax allowances to invest this in alternative vehicles for growth and/or income?
    You effectively have IHT on the one hand or LTA on the other.  You need to run the comparisons between the two and your expected draw to see which one is more favourable.






    Thanks for taking the time to respond and for your helpful comments. My further thoughts/comments are -

    The fixed term deposits I am considering would be over 1 year & would provide interest of circa 4.4% pa. As any interest generated would be within my Personal Allowance/Starting Savings Rate/PSA, I feel that a guaranteed return of 4.4% over 1 year with no risk (other than inflation risk) is a good return - other people may think differently. If interest rates were to reduce a year or further down the line then I would need to reassess my investment strategy and could then look to utilise any TFLS taken in different ways to generate growth and/or income. 

    In terms of taking income via a combination of phased TFLS & drawdown then this certainly has its merits as an alternative. In terms of this would mean that I would not waste my 25% unnecessarily then I guess it depends on your outlook & confidence that the ability to take 25% of your pension fund as a TFLS remains as a constant indefinitely. As the 25% TFLS is not a contractual right & instead is a right under current pensions legislation which may or may not change in the future, me being a "bird in the hand" type person means that there is a part of me saying to myself I should take the 25% TFLS while I can. Who knows if and when if it will ever get changed, but if it does then my money would be on it being changed detrimentally rather than positively!

    The weighing up of the IHT vs LTA tax charge is a very valid point. I am married with 2 adult children & my wife & I have mirror wills - on the first death the estate is left to the survivor & on the second death goes to the 2 children. As the surviving spouse will inherit the other's Nil Rate Band on the first death & there is also the Residence Nil Rate Band of £350,000 as my wife & I own our house jointly (valued at roughly £350,000) then it means - assuming no previous gifts etc - that on the second death we will need to be leaving in excess of £1m to the kids before IHT becomes an issue for the kids. If taking the £268,275 TFLS doesn't push me/my wife's total estate including the house over £1m then IHT becomes less of a consideration.
                    
  • zagfleszagfles Forumite
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    Generally if you're at around the LTA, taking the max PCLS of  25% of the LTA is sensible. This is because as you say any uncrystallised growth (above the growth in the LTA if any) will incur LTA charge, and any drop won't save you any (as you'll be below the LTA).
    The downside is growth/interest/dividends on the PCLS will be taxable and it'll be in your estate for IHT, and recent budget changes have increased dividend & CGT (by reducing allowances). But note that your crystallised pension (ie the 75%) is still outside the estate, it's just what you've taken out ie the PCLS (and income if any) that's in the estate.
    You'll have to do the sums but usually the tax on unwrapped growth will be less than the LTA charge from uncrystallised growth.
    Note also that there's the age 75 test on crystallised growth, but you can avoid that by drawing down enough so the crystallised pot is the same or less than it was at crystallisation. This will probably mean you'd need to draw taxable income from the pension as well as interest etc from the PCLS. 


  • edited 24 November at 6:30PM
    zagfleszagfles Forumite
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    edited 24 November at 6:30PM
    dunstonh said:
    . As I don't have any other ongoing income from any source then in effect I would be able to take most or all of any interest/income generated by the TFLS tax free by using up my Personal Allowance, £5,000 Starting Savings Rate taxed at 0%, and Personal Savings Allowance of £1,000 for basic rate taxpayers. 
    Alternatively, you can draw the 75% element upto the personal allowance that year and only draw the excess 25%.  That way you dont waste your 25% unnecessarily.
    What does that mean? The OP won't be "wasting" the 25% by taking the whole 25% it up front, they'd more likely waste it by not taking it (as 25% could become 20% or 15% if the pot grows relative to the LTA, or if it shrinks the 25% would be a smaller actual amount).
    Of course unwrapped taxes and IHT need considering. 

  • dunstonhdunstonh Forumite
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    In terms of taking income via a combination of phased TFLS & drawdown then this certainly has its merits as an alternative. In terms of this would mean that I would not waste my 25% unnecessarily then I guess it depends on your outlook & confidence that the ability to take 25% of your pension fund as a TFLS remains as a constant indefinitely. 
    25% tax free cash was introduced in 1988 and has been with us ever since.   In 2006 the labour government extended it to plans that didnt have that ability.    In 2015, Conservative government extended it even more.     The 25% TFC is a very small cost to the treasury.   Remember that the average pension fund value (by plan) is around £19,000.    You can place £20,000 in an ISA tax free by comparison.    Governments have never even hinted at removing the 25% TFC. 

    It is a pretty safe bet it will remain.   Salary sacrifice or higher rate relief are more obvious targets.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • wtiasa1997wtiasa1997 Forumite
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    zagfles said:
    Generally if you're at around the LTA, taking the max PCLS of  25% of the LTA is sensible. This is because as you say any uncrystallised growth (above the growth in the LTA if any) will incur LTA charge, and any drop won't save you any (as you'll be below the LTA).
    The downside is growth/interest/dividends on the PCLS will be taxable and it'll be in your estate for IHT, and recent budget changes have increased dividend & CGT (by reducing allowances). But note that your crystallised pension (ie the 75%) is still outside the estate, it's just what you've taken out ie the PCLS (and income if any) that's in the estate.
    You'll have to do the sums but usually the tax on unwrapped growth will be less than the LTA charge from uncrystallised growth.
    Note also that there's the age 75 test on crystallised growth, but you can avoid that by drawing down enough so the crystallised pot is the same or less than it was at crystallisation. This will probably mean you'd need to draw taxable income from the pension as well as interest etc from the PCLS. 


    Many thanks for the reply.

    I am aware of the age 75 test on crystallised drawdown growth, but I wondered how this works in practice where multiple drawdown pots are involved as this is the position I am in as my uncrystallised funds are spread across a number of providers. 

    Let's say that I have 5 pension pots with different pension providers that I crystallise by taking a 25% TFLS from each. At the point of crystallisation, after taking the relevant TFLS, I have £750,000 that goes into drawdown. This is split £550,000 in Pension Pot 1 & £50,000 in each of the 4 other pension pots. Let's assume I only take drawdown withdrawals up until age 75 from Pot 1, and that at age 75 the remaining fund in Pot 1 is £200,000 but that Pots 2, 3, 4, & 5 have grown to £100,000 each as no withdrawals have been taken from these pots.

    Is it the total remaining drawdown amount of £600,000 at age 75 that is assessed to see if an LTA tax charge applies (& as this is less than the total £750,000 at inception then there is no LTA charge to pay) or is the growth on each pot looked at individually (& therefore Pots 2, 3, 4, & 5 would be subject to an LTA charge?)     

    Also, if pre-age 75 I do drawdown to drawdown transfers of my crystallised pension funds a number of times to different providers, how is the information gathered so that at age 75 the test to check for any crystallised growth can be done? (ie if I have transferred my post-crystallisation pot say 3 times between when I originally took benefits & age 75, then how does the pension provider that my pot is with at age 75 know what the size of my drawdown pot was at the date of the original crystallisation? Is it my responsibility to keep or obtain this information?) 
  • edited 24 November at 11:12PM
    zagfleszagfles Forumite
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    edited 24 November at 11:12PM
    My understanding is that the pots are treated separately, and if one grows but the other shrinks by the same or more that they don't cancel, so there's a BCE for the growth in the one(s) that grows. Not sure about transferring pots in drawdown but see this thread https://forums.moneysavingexpert.com/discussion/6079468/testing-growth-in-multiple-drawdown-accounts-at-second-lta-test-at-75/p1

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