Hl - SIPP : Tax Free Cash & Drawdown

dunstonh

Curious_Moose 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.

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.

Since personal pensions were introduced in 1988, both Labour and the Conservatives have increased the amount of tax free cash that can be taken.    Neither party has reduced it.  Of all the tax costs (either relief/rebate or lost revenue) in terms of pensions, tax free cash is the smallest hit.    The tax free cash is also used by many people at retirement to clear mortgages or debt.    Also, the tax-free-cash payments help the economy which generates taxation in other areas.     There has never been any political hint that tax-free-cash is under threat.

Also, it would need primary legislation.  It is not one of those things that can be amended overnight in a budget.  

Tax free cash already has a cap. 

There is no income tax, dividend tax of CGT whilst the funds are sitting in the pension (as well as being outside of your estate).   If you draw it all up front, you wont be able to put it all in an ISA.  So, next on the pecking order is GIA, which could see you suffer dividend and capital gains taxes.   Some of that may be managed out, but it would be unnecessary to do it in the first place.

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

Whilst virtually every provider that advisers use do.   On the DIY side, it seems virtually all of them do not.   Fidelity and AJB do on the adviser side.  I don't know if they do on the DIY side.

rickla13

Albermarle said:

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?

At the risk of being repetitive - do not forget about the IHT benefits of pensions. With house prices as they are - pension funds not being part of your estate for IHT purposes is a major differentiator compared to ISAs or a GIA.

Bravepants

Albermarle said:

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?

1. Agreed.
2. in my case I would be spending it down over 5 years, and having it in the ISA means I could draw the monthly interest earned.. Of course a big disadvantage of it being in the ISA is the discipline required not to spend such an easily accessible fund! 

Pat38493

dunstonh said:

Whilst virtually every provider that advisers use do.   On the DIY side, it seems virtually all of them do not.   Fidelity and AJB do on the adviser side.  I don't know if they do on the DIY side.

I guess the follow up question is whether it's easy to do this "manually" and what is the charging structure - if once you have done it the first time, it's just a matter of logging in each month and clicking a few buttons, with no transaction fee, I guess it's not an issue.  If you would incur a transaction fee for each UFPLS withdrawal it might be a different matter.

I'm not sure why DIY providers don't offer this as it feels like it would actually reduce their interactions with customers - any insights?

Albermarle

Pat38493 said:

dunstonh said:

Whilst virtually every provider that advisers use do.   On the DIY side, it seems virtually all of them do not.   Fidelity and AJB do on the adviser side.  I don't know if they do on the DIY side.

I guess the follow up question is whether it's easy to do this "manually" and what is the charging structure - if once you have done it the first time, it's just a matter of logging in each month and clicking a few buttons, with no transaction fee, I guess it's not an issue.  If you would incur a transaction fee for each UFPLS withdrawal it might be a different matter.

I'm not sure why DIY providers don't offer this as it feels like it would actually reduce their interactions with customers - any insights?

I think ( not 100% sure) it revolves around compliance issues. Normally a UFPLS has been seen as a way of taking a  lump sum ( or the whole lot). In this case the provider is obliged to ask you a number of questions and make sure you understand what you are doing. For example 'if you take out too much the pot might run out etc '
So each UFPLS payment is seen as a one off event and you have to go through this rigmarole every time. If you instead take the TFC up front and then regular taxable payments, this only needs to be set up once.
As Dunstonh says it is no problem when it is via an advisor, as it is their responsibility to make sure the client is acting responsibly.
I think ( again not 100% sure) some providers seem to be moving towards making regular UFPLS easier but there has been conflicting info on previous threads.

dunstonh

I guess the follow up question is whether it's easy to do this "manually" and what is the charging structure - if once you have done it the first time, it's just a matter of logging in each month and clicking a few buttons, with no transaction fee, I guess it's not an issue. 

Those that are DIYing, it just do it using a different frequency.  e.g. draw it once a year, stick it in a savings account and draw that amount divided by 12 each month.

zagfles

rickla13 said:

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.

Well it depends whether it's likely to be an issue, eg size of estate, whether married and both in good health (as no IHT between spouses, plus can transfer allowance), but yes it is an issue to consider.

zagfles

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.

They offer UFPLS but you I don't think you can set up regular monthly UFPLS payments can you? Don't you have to apply each time and do all the paperwork? So doing it monthly would be too bureaucratic.

zagfles

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 is exactly right. So many people come out with irrelavent stuff like "you'll get more tax free cash if phase it" or "you'll get taxed on the growth if you delay". Both are technically true but are irrelavant and misleading. If invested the same, end result is the same.

It's issues like IHT, LTA and benefit eligibility which could/should swing the decision

zagfles

Albermarle said:

Pat38493 said:

dunstonh said:

Whilst virtually every provider that advisers use do.   On the DIY side, it seems virtually all of them do not.   Fidelity and AJB do on the adviser side.  I don't know if they do on the DIY side.

I guess the follow up question is whether it's easy to do this "manually" and what is the charging structure - if once you have done it the first time, it's just a matter of logging in each month and clicking a few buttons, with no transaction fee, I guess it's not an issue.  If you would incur a transaction fee for each UFPLS withdrawal it might be a different matter.

I'm not sure why DIY providers don't offer this as it feels like it would actually reduce their interactions with customers - any insights?

I think ( not 100% sure) it revolves around compliance issues. Normally a UFPLS has been seen as a way of taking a  lump sum ( or the whole lot). In this case the provider is obliged to ask you a number of questions and make sure you understand what you are doing. For example 'if you take out too much the pot might run out etc '
So each UFPLS payment is seen as a one off event and you have to go through this rigmarole every time. If you instead take the TFC up front and then regular taxable payments, this only needs to be set up once.
As Dunstonh says it is no problem when it is via an advisor, as it is their responsibility to make sure the client is acting responsibly.
I think ( again not 100% sure) some providers seem to be moving towards making regular UFPLS easier but there has been conflicting info on previous threads.

Workplace pensions also offer the monthly UFPLS option, mine does, and without the need to pay an advisor 10-20% or so of your pension over your retirement.

But I don't think they offer the option of partial crystallisation, or if they do it's quite hard to set up, so for instance if you wanted a lump sum up front but not the full 25% then it's harder than with the likes of HL, where it's easy.

There are extra complications with some providers that support monthly UFPLS, some will insist you need to transfer your pension to a separate "spending" account to withdraw anything, even UFPLS, whether monthly or not.