UPFLS deferring tax free take / switch to fixed tax free limit

sofm

Random question after some googling / reading other threads...

With the removal of LTA the tax free amount becomes limited to fixed amount £268,275.  With UPFLS does one always need to take the tax free element, or is there a choice (perhaps instead through FAD)?

If it has to be taken, then I guess the tax free element will stop once the limit is reached (which IIRC happened with LTA in place anyway) - i.e. at some point a UPFLS withdrawal will be fully taxable.

Reason I was wondering whether the tax free element can be preserved till later in life is that then the income tax personal allowance can be better used wrt e.g. SP.  Keep a constant net income but avoiding higher rate tax bands when the SP kicks (though not done any calcs yet as maybe moot).

From an ABJBell article on unanswered-questions-around-removal-lifetime-allowance (too newbie to post links )... seems like plenty of knowns around the LTA abolition - IDK if there is something more authoritative yet?

NoMore

With UFPLS withdrawal, 25% of it will be tax free and 75% liable to tax.

With FAD, you get 25% tax free (has to be taken, I believe, not taking it at this point would mean its lost) and the other 75% goes into crystallised state within the pension to be drawn as and when you want but liable to tax.

Neither option do you have to take the whole pension at once, so you can save some Tax free cash by only taking your pension in chunks using either/both methods.

Albermarle

You need to understand the concept of pension pot crystallisation.

When you have made no withdrawals at all, your pension pot is uncrystallised.
To take any money from it you have to crystallise part of it.
So for example if you have £250K and you take a UFPLS payment of £40K, then £40K is crystallised and paid out. 25% is tax free and 75% is taxable and £210 K remains uncrystallised.
If instead you went down the FAD route with the same amount, £40K would be crystallised. £10K would be paid as tax free cash. £30K would be crystallised and would be taxable when  you withdraw it ( maybe later or in regular smaller amounts)

So you can see from this that it is not possible to take taxable income, without first ( or at the same time) taking the corresponding amount of tax free cash.

sofm

Okay - thanks.

Summary for my simple case is: an amount is crystallised.  It is paid out as a mix of tax free and tax liable, automatically calculated. 

I guess once total of tax free paid out has reached £268,275, then the automatic calculation just states all future withdrawals are taxable. ('Automatic' might need some manual notification if withdrawing from multiple SIPPs, assuming there is no central HMRC aggregation)

(I have seen reference to exceptions to 25%, but don't apply for my case.  The one where you could achieve something similar is "where an individual's total tax free cash rights were valued at more than £375,000 at 5 April 2006 and they registered for primary protection...the tax free cash can be taken from different pension schemes at different times and in different proportions") 

Albermarle

Summary for my simple case is: an amount is crystallised.  It is paid out as a mix of tax free and tax liable, automatically calculated

It is possible ( not with UFPLS) just to take the tax free cash and leave the rest crystallised in the pension. It will only be potentially taxable if you actually withdraw some of it.

I guess once total of tax free paid out has reached £268,275, then the automatic calculation just states all future withdrawals are taxable. ('Automatic' might need some manual notification if withdrawing from multiple SIPPs, assuming there is no central HMRC aggregation)

As the announcement of abolishing LTA, but instead just having a tax free cap, was unexpected, the mechanics of how it is working in practice will probably be varying from provider to provider.

With LTA every time you crystallised an amount, ( or started taking a DB pension) you would be notified of the % LTA used. If you had multiple pensions you were withdrawing from it was up to you to keep on top of it. The idea is that this system is now being used to monitor the max tax free cash. I have no idea how well it is working.

There are quite a few situations where it is not clear how they will be handled in future and there is a government working party on the case ahead of the actual LTA legislation going to the House of Commons.

Pipthecat

Worth noting that you can with FAD you can crystalise more and just take a bigger chunk of tax free e.g. you could take all the£40k tax free by crystallising £160k and leaving the £160k invested.  Can't think of many situations where you would do this other than needing the cash and not wanting to trigger the MPAA

BoxerfanUK

Pipthecat said:

Worth noting that you can with FAD you can crystalise more and just take a bigger chunk of tax free e.g. you could take all the£40k tax free by crystallising £160k and leaving the £160k invested.  Can't think of many situations where you would do this other than needing the cash and not wanting to trigger the MPAA

One way I can think of..... if its allowed!

Say for example you've just retired, are below state pension age and have no earned income. You want to drawdown using FAD by drawing an amount up to the personal allowance + the tax free 25% so that you pay zero tax on your pension income
So, £12570 + £4,190 total = £16,760 per annum tax free.

Then, you reach state pension age and your untaxed income from that is, say, 11K per annum.  That only leaves £1,570 per annum of personal allowance with which to drawdown the taxable element of you DC pension.  Fad would (I think) allow you to crystallise £16,760 of your DC but only actually draw the £1,570 taxable element but also take the £4,190 tax free amount too.  Someone please correct me if I'm wrong.

Hope that makes sense.

Albermarle

BoxerfanUK said:

Pipthecat said:

Worth noting that you can with FAD you can crystalise more and just take a bigger chunk of tax free e.g. you could take all the£40k tax free by crystallising £160k and leaving the £160k invested.  Can't think of many situations where you would do this other than needing the cash and not wanting to trigger the MPAA

One way I can think of..... if its allowed!

Say for example you've just retired, are below state pension age and have no earned income. You want to drawdown using FAD by drawing an amount up to the personal allowance + the tax free 25% so that you pay zero tax on your pension income
So, £12570 + £4,190 total = £16,760 per annum tax free.

Then, you reach state pension age and your untaxed income from that is, say, 11K per annum.  That only leaves £1,570 per annum of personal allowance with which to drawdown the taxable element of you DC pension.  Fad would (I think) allow you to crystallise £16,760 of your DC but only actually draw the £1,570 taxable element but also take the £4,190 tax free amount too.  Someone please correct me if I'm wrong.

Hope that makes sense.

You are right, if the provider can manage it with their admin/IT processes.
Of course the tax free cash is not inexhaustible. You maybe be swopping a lower tax bill now for a higher one later.