Hl - SIPP : Tax Free Cash & Drawdown

Curious_Moose

Hi,

I have a SIPP with Hargreaves Lansdown and a DC pension pot with a former employer. I'm not currently working (and unlikely to do so again) and the LTA, if it is re-instated, is not likely to be an issue.

I'm planning on taking the 25% tax free cash from my HL SIPP and moving the remainder into drawdown. I will then start to withdraw money from the drawdown pension being mindful of tax allowances etc.

At some point in the future, I intend to move my DC pension pot with the former employer to a HL SIPP and repeat the process. I.e. take the 25% tax free cash and move the remainder into drawdown. I don't want to immediately do this for reasons of costs and having too many eggs in one basket. Though of course, if it looks like there may be adverse changes to the tax free cash allowance in the future, that may hasten the process.

1) Is there any reason why this may present a problem? I.e. you can have a drawdown pension pot and then set up another SIPP with HL using the DC pension pot from the former employer and repeat the process of taking 25% tax free cash and having another drawdown pot (or just adding the new drawdown pension pot to the existing one)

2) When you take the 25% tax free cash, do you actually need to do anything as far as HMRC is concerned? E.g. fill in a form that tells them it's the tax free cash so they don't come after you for any tax or amend your tax code thinking that the lump sum is an ongoing payment. Just looking out for any potential hiccups before they arise.

3) If anyone has had a SIPP with HL and then taken the 25% tax free cash with the remainder going into drawdown, did it all go reasonably smoothly or were there any admin issues along the way? Anything you wish you'd known before starting the process?

Thanks in advance

Dazed_and_C0nfused

2.  No, the 25% TFLS is exactly what it says on the fin and HMRC really aren't interested in non taxable income.

Do you think taking the 25% upfront is the right way to go?

zagfles

1) Should be fine. HL seperate crystallised and uncrystallised, so when you go into drawdown you'll get a new account called something like "HL SIPP Drawdown" and the orginal "HL SIPP" will still be there but with a zero balance if you crystallised the whole amount. Then you could transfer other uncrystallised pensions into the HL SIPP, and then crystallise taking tax free cash and moving the rest into the Drawdown account

2) No they just pay the tax free cash, it doesn't go via PAYE, you don't need to declare it to HMRC.

3) It was very smooth, a bit of paperwork with various silly questions they're required to ask, but straightforwards and pretty quick. You need to make sure you sell enough investments to raise the tax free cash.

Curious_Moose

To Dazed_and_C0nfused

Thanks for the reply. I'm looking to get the 25% tax free cash "out of the way" as soon as possible and drip feed it into an ISA, so I'm happy to take it all in one go and then withdraw money from the drawdown pot in the most tax efficient way.

I know this isn't the only method, but are there any clear advantages with the alternatives?              

Regards 

PS - Having a problem with the reply with quote facility for some reason!

Curious_Moose

To zagfles

Thanks for that. Very helpful to know

(Still having problems using reply with quote!)

Dazed_and_C0nfused

Taking the TFLS upfront can mean you pay more tax later.

For example if say you your pension fund is £100k.  You take £25k TFLS leaving £75k crystallised.  By the time you decide to take anymore from the pension that £75k has grown to £100k.  The whole £100k is taxable, not £75k.

If you aren't currently using your Personal Allowance another option would be to take 25% TFLS as part of each withdrawal.

For example with the same £100k fund if you took £15k then £3,750 would be TFLS and £11,250 taxable income.  But none of the remaining £85k would be crystallised so whatever it grows to you can take more tax free cash.

Curious_Moose

Thanks for that, definitely food for thought.

The plan is to take the maximum up to my tax free allowance each year from my drawdown pot (after taking the initial 25% tax free cash)  so would there be no tax liability there even if there is some later growth in the drawdown pot?

zagfles

Dazed_and_C0nfused said:

Taking the TFLS upfront can mean you pay more tax later.

For example if say you your pension fund is £100k.  You take £25k TFLS leaving £75k crystallised.  By the time you decide to take anymore from the pension that £75k has grown to £100k.  The whole £100k is taxable, not £75k.

So what? If you left it uncrystallised the £100k would have grown to £133k and £100k of it would still be taxable! Same if you partially crystallise. Makes no difference to the amount that'll be taxable.

Aside from peripheral issues like inheritance, benefits etc and assuming no LTA issues, it makes no difference whether you take the TFLS up front and shove it in an ISA or whether you take the TFLS in stages. Obviously need to watch ISA limits.

dunstonh

The plan is to take the maximum up to my tax free allowance each year from my drawdown pot (after taking the initial 25% tax free cash)  so would there be no tax liability there even if there is some later growth in the drawdown pot?

Do you need the TFC upfront?
If not, then taking it on drip with the taxable element will be better in the long run.

zagfles

dunstonh said:

The plan is to take the maximum up to my tax free allowance each year from my drawdown pot (after taking the initial 25% tax free cash)  so would there be no tax liability there even if there is some later growth in the drawdown pot?

Do you need the TFC upfront?
If not, then taking it on drip with the taxable element will be better in the long run.

For a start, HL don't offer that option. OP could crystallise a chunk periodically eg once a year, which would achieve much the same, but anyway the idea that it "will be better in the long run" as if that's some sort of certainty is a myth we keep seeing here. It might be, for instance if there's too much to fill an ISA, or if inheritance tax or benefits are an issue. Equally if LTA (or rather the associated TFLS cap which still exists) might even be an issue, it may be better to crystallise fully. But for many/most people, it won't make a difference either way.

rickla13

zagfles said:

Dazed_and_C0nfused said:

Taking the TFLS upfront can mean you pay more tax later.

For example if say you your pension fund is £100k.  You take £25k TFLS leaving £75k crystallised.  By the time you decide to take anymore from the pension that £75k has grown to £100k.  The whole £100k is taxable, not £75k.

So what? If you left it uncrystallised the £100k would have grown to £133k and £100k of it would still be taxable! Same if you partially crystallise. Makes no difference to the amount that'll be taxable.

Aside from peripheral issues like inheritance, benefits etc and assuming no LTA issues, it makes no difference whether you take the TFLS up front and shove it in an ISA or whether you take the TFLS in stages. Obviously need to watch ISA limits.

To be fair I don't agree that IHT is a "peripheral" issue here. If you have sufficient non-pension savings such as ISAs, then I would not be withdrawing any more from my SIPP than needed for fairly short-term requirements - the IHT benefits of pension savings are too good to lose without thinking.