Hl - SIPP : Tax Free Cash & Drawdown

Curious_Moose

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.

Thanks for the reply

I don't need it for day to day living expenses, but was thinking of taking it all in one go so the TFC part is "done and dusted" and then I can take from the drawdown pot each year up to my personal allowance.

The affect on claiming benefits is unlikely to be an issue as I'll probably always (touch wood) have savings above the cut-off for universal credit etc. Another reason to get the TFC out of the way is in case any government, current or future, decides to change the rules as regards TFC by capping it in some way.

Albermarle

 Another reason to get the TFC out of the way is in case any government, current or future, decides to change the rules as regards TFC by capping it in some way.

It is capped already, but at a high level ( over a Quarter of a Million Pounds) . It is very unlikely that the basic idea of taking 25% tax free will be changed though, as it is too popular and would affect too many voters.

sheslookinhot

zagfles said:

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.

HL do offer that option. It’s what my wife does. Allowing her to take out over 16.7k (25% tax free) rather than 12.57k.

Curious_Moose

sheslookinhot said:

zagfles said:

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.

HL do offer that option. It’s what my wife does. Allowing her to take out over 16.7k (25% tax free) rather than 12.57k.

What are the advantages of doing that rather than taking the 25% tax free cash all in one go and then 12.57k each year which is the personal tax allowance amount. Does it make the admin easier in some way or is there a financial benefit? Regards.

OldMusicGuy

sheslookinhot said:

HL do offer that option. It’s what my wife does. Allowing her to take out over 16.7k (25% tax free) rather than 12.57k.

Agree they do, we have also done this with my wife's HL SIPP. UFPLS is definitely the way to go IMO if you are trying to minimise tax but don't have a good reason for taking the full 25% tax free. 

Bravepants

zagfles said:

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.

I've been thinking about this issue too, as I too have a decision to make regarding this.

This is my thinking, and I may be wrong, so I'm hapopy to be corrected BEFORE I make my decision! ...

Imagine if one splits a SIPP's value into taxable and taxfree components. If we then imagine taking the tax free component and placing it into an ISA with the same investment product as in the SIPP you would expect both the tax free amount in the ISA and the remaining crystalised pot in the SIPP to grow proportionately by the same percentage as though they both remained in the SIPP. The components would grow in proportion to their original size in both cases. So the tax free amount in the ISA would grow exactly the same as the tax free component had it been left in the SIPP. The same principle applies to any magnitude of tax free sum taken from the SIPP, be it the whole amount or a smaller proportion of it.

There WILL be a difference though, in the longish term, if a tax free component is NOT invested in exactly the same product in the ISA as ther SIPP. The best example being if one takes a tax free component and keeps it as cash in an ISA or a savings account, while any remaining SIPP tax free component is invested in higher risk growth products.

In my case I would be investing it in an ISA in the same product as my SIPP, so in my case it makes no difference whether I take the full tax free completely up front. It would make a different though if I later decide to invest the remaining crystalised amount in a product with higher expected growth than the original product from which the tax free amount was taken.

Pheeww! I really hope that came across properly, I'm still on my first coffee of the day. Would welcome further dicussion on this if needed. 

Albermarle

Bravepants said:

zagfles said:

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.

I've been thinking about this issue too, as I too have a decision to make regarding this.

This is my thinking, and I may be wrong, so I'm hapopy to be corrected BEFORE I make my decision! ...

Imagine if one splits a SIPP's value into taxable and taxfree components. If we then imagine taking the tax free component and placing it into an ISA with the same investment product as in the SIPP you would expect both the tax free amount in the ISA and the remaining crystalised pot in the SIPP to grow proportionately by the same percentage as though they both remained in the SIPP. The components would grow in proportion to their original size in both cases. So the tax free amount in the ISA would grow exactly the same as the tax free component had it been left in the SIPP. The same principle applies to any magnitude of tax free sum taken from the SIPP, be it the whole amount or a smaller proportion of it.

There WILL be a difference though, in the longish term, if a tax free component is NOT invested in exactly the same product in the ISA as ther SIPP. The best example being if one takes a tax free component and keeps it as cash in an ISA or a savings account, while any remaining SIPP tax free component is invested in higher risk growth products.

In my case I would be investing it in an ISA in the same product as my SIPP, so in my case it makes no difference whether I take the full tax free completely up front. It would make a different though if I later decide to invest the remaining crystalised amount in a product with higher expected growth than the original product from which the tax free amount was taken.

Pheeww! I really hope that came across properly, I'm still on my first coffee of the day. Would welcome further dicussion on this if needed. 

That all makes sense but two points
1) If the TFC sum is rather large it might take some years to salt away in a S&S ISA, so some of it may attract Capital gains and dividend tax.
2) Although overall it begs the question, if it makes no difference  why not just leave it in the SIPP in the first place?

Albermarle

OldMusicGuy said:

sheslookinhot said:

HL do offer that option. It’s what my wife does. Allowing her to take out over 16.7k (25% tax free) rather than 12.57k.

Agree they do, we have also done this with my wife's HL SIPP. UFPLS is definitely the way to go IMO if you are trying to minimise tax but don't have a good reason for taking the full 25% tax free. 

I think @zagfles, was probably meaning that HL do not facilitate monthly UFPLS, as most retail providers do not, although I do not know for sure which do.

LHW99

Curious_Moose said:

sheslookinhot said:

zagfles said:

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.

HL do offer that option. It’s what my wife does. Allowing her to take out over 16.7k (25% tax free) rather than 12.57k.

What are the advantages of doing that rather than taking the 25% tax free cash all in one go and then 12.57k each year which is the personal tax allowance amount. Does it make the admin easier in some way or is there a financial benefit? Regards.

If you don't need the initial lump sum, it means you can have £16.7k tax free income each year rather than £12.5k as sheslookinhot says. An extra £4k income pa is likely to be useful, if its all you have (which it may well be if you have 100% personal allowance left)

Sharktail

So does|can HL process monthly UFPLS payments on a rolling basis without the need to contact them for every payment ?