FAD vs UFPLS - which is most likely to minimise the Income Tax payable?

Peterrr

Approaching squeaky bum time and trying to understand the likely differences in cash flows and taxation between these two methods of extracting my DC pension. Comments/advice appreciated:
I'll have ~£350k in my pension and effectively zero other savings or investments. I'll have no requirement for a tax free lump sum and will want to withdraw £20k/year after stopping work (a few years prior to state pension age). This will be my only source of income so I don't expect to ever be a higher rate tax payer once retired.
My understanding is that the FAD route would provide me with £87.5k of up-front tax free withdrawals followed about 4 years later (once that initial TFLS has been used up) with ongoing drawdowns attracting income tax at my marginal rate - so after applying my £12,570, I'd pay tax on the other £7,430.
If I took the UFPLS route, I could utilise my personal allowance from the first year of retirement (lets assume I retire April 5th), and a further £5k (of the annual £20k withdrawn) is also tax free, meaning £2,430 is subject to income tax.
Assuming steady investment growth on pension funds (whether crystallised or uncrystallised), the total tax free element would be larger using the UFPLS model right?
And furthermore, it appears the total tax paid over the duration until the funds are depleted appears to be lower using the UFLS model too? (as I'm actually utilising my personal allowance in each of the early years of retirement).
For anyone concerned I'll be penniless and destitute after closing it all too quickly, my wife's pension and a house downsize along with 2 full state pensions will keep us warm and dry thereafter.
Thanks in advance for helping clear my mind-fog!

Doctor_Who

And furthermore, it appears the total tax paid over the duration until the funds are depleted appears to be lower using the UFLS model too? (as I'm actually utilising my personal allowance in each of the early years of retirement).

This is what I'm doing between 55 and 65 (when DB pension starts). Taking UFPLS each year to use the personal allowance and some of the basic rate bands (19% and 20%, I'm a Scottish tax payer) is very tax effective for me. If I don't do this I'm effectively losing my PA for ~10 years (~£125,000). Taking the TFLS upfront and living off that whilst not utilising the PA made no sense to me (I don't need the TFLS).

Edit: once the DB pension starts I'll be a HR tax payer in Scotland, so any taxable income from my SIPP will be taxed at 42%!

Albermarle

My understanding is that the FAD route would provide me with £87.5k of up-front tax free withdrawals followed about 4 years later (once that initial TFLS has been used up) with ongoing drawdowns attracting income tax at my marginal rate -

Some providers will only allow all the TFLS to be paid in go, some will do as you say, pay it instalments.

As far as I know some will let you take some TFLS, and some taxable income ( so before all the TFLS has run out) In this case the difference to UFPLS is that you are not forced to take an exact 25:75 split each time. Although you can not just take taxable income without taking a minimum corresponding TFLS.

The main point is that what is allowed legally, and what your pension provider can actually offer, are often not the same. Older pensions in particular can be less flexible and often it is necessary to transfer out to a more modern one. Probably a good idea to check with your current provider what they can actually arrange before making any final decisions.

gm0

Historically UFPLS slices along the way has been viewed as superior and indeed used by many with advice and DIY. 

It is just FAD but annually/quarterly/monthly and for smaller amounts each time with all income taken immediately. Crystallisation events generate documentation.  Set and forget income within FAD doesn't (as much). 
Investments same.  Growth same. Income tax is the main issue to manage to your context. 

But you need to be with the right provider who doesn't make the process of doing each UFPLS painful.  There are good and bad in this respect.

It has spread out your tax free cash into multiple tax years for income tax.  And has broadly the impact you describe.  

The second issue was/is LTA, TFC limits and such.

There has been a group for whom UFPLS made less sense than a chunky FAD up front at retirement.
This was the around the LTA value DC pot group £1m/35k income - where the growth of uncrystallised funds during the years of drawdown was going to attract a 25% penalty levy - if it happened inside the pension. 

With TFC on offer only up to LTA.  The 25% charge applied on excess at age 75 if untouched - so slow UFPLS slices creates this situation. And a levy on any undrawn crystallised growth not taken as income from when FAD happened. 

The advantage of UFPLS below the LTA is indeed of more growth before crystallisation happens so that it generates more TFC.  Became it became a penalty above it.  TFC gone. New tax. Thus requiring analysis of initial pot size and growth assumptions to make a subjective judgement about whether the tax tail is or is not wagging the dog.

But for those people with high growth assumptions and/or larger pots - 25% could be removed from an LTA trap with FAD and placed in S&S ISA.  And the 25% charge on any growth of that sum has vanished.  But all the nominal growth as income on the 75% must be drawn or it still attracts the levy at age 75. 

World moves on - LTA is midflight its abolition change - again with the TFC limit separated out. 
The above logic would not now apply as it used to about the age 75 tests.  There is still a TFC limit so any modelling of when that runs out needs to take account of that. 

But there is a lack of clarity until tax years roll around and finance bills settle.  With an election and who knows what after that. 

Any strategy is a bet at a point in time on rules as is.  And on the regulatory risk of future changes happening if you don't transact.  And whether they are retroactive - if you do act (less common).

Thirdly there was a historic difference on crystallised vs uncrystallised and death age and inheritance which also made if attractive to remain uncrystallised. Gone I believe but my recall is incomplete.

ader42

As you have noticed the difference other than the LTA charge issue gm0 explained is that it is optimal to make sure you use your personal allowance.

Some providers allow you to be very flexible, so you could for example crystallize 60% of a £350k pot and take a £52.5k TFLS, and in the same year take £12,500 chargeable at zero income tax (personal allowance).

Using TFLS like this can be a good approach if you want to de-risk a little bit by putting some or all into mainstream savings accounts or an ISA.

If you took that 25% £87.5k lump sum and got 6% in savings interest on it and took enough out each year to top a £12,570 taxable withdrawal to £20k, it would last about 19 years and the taxable crystallized pot would last about 21 years. Getting 6% as savings might be a big ask of course but it might be worth trying to get it all out tax free or zero-rated. Of course you could just re-invest it in a S&S ISA trying to get more than you can get in a savings account… risk/reward.

It might depend how long you need your £20k per year - how many years to State Pension for example. 

Peterrr

Many thanks for the comments so far. Per my initial post, the LTA is not a consideration as I will have circa £350k in my pension.
Good points about selecting a flexible drawdown provider, so I will have to investigate my current pension provider (Aegon) though I read that Interactive Investors offer low fees so I may consider moving my pot there upon retirement if they offer the flexible options described.
I don't think it's particularly relevant but I'm looking at retiring at 60, so 7 years to SPA, and comfortable with front-loading my spending in the go-go years.

Doctor_Who

Peterrr said:

Many thanks for the comments so far. Per my initial post, the LTA is not a consideration as I will have circa £350k in my pension.
Good points about selecting a flexible drawdown provider, so I will have to investigate my current pension provider (Aegon) though I read that Interactive Investors offer low fees so I may consider moving my pot there upon retirement if they offer the flexible options described.
I don't think it's particularly relevant but I'm looking at retiring at 60, so 7 years to SPA, and comfortable with front-loading my spending in the go-go years.

I've used Interactive Investor for the past ~10 years for ISA, SIPP and GIA and haven't had any major issues. I've recently started making UFPLS withdrawals and these can be done online (some form filling/box ticking) and the money appears in my current account within 10 days. I haven't used FAD, but they also offer that.

https://www.ii.co.uk/ii-accounts/sipp/retirement

Albermarle

Peterrr said:

Many thanks for the comments so far. Per my initial post, the LTA is not a consideration as I will have circa £350k in my pension.
Good points about selecting a flexible drawdown provider, so I will have to investigate my current pension provider (Aegon) though I read that Interactive Investors offer low fees so I may consider moving my pot there upon retirement if they offer the flexible options described.
I don't think it's particularly relevant but I'm looking at retiring at 60, so 7 years to SPA, and comfortable with front-loading my spending in the go-go years.

Just remember that II is just an investment platform and their low fees are for operating that. You still have to pay for the investments you choose. That can be anything from 0.1% to 1.8% .
A typical low cost multi asset fund will cost around 0.2%

MK62

It depends on exactly what you mean by "minimise tax"........does that mean minimise it at the start of drawdown, or minimise the total paid over say 30 years.

Anyway, you'd need to run some data model testing, but you might find that combining the two approaches could lead to the best outcome in this respect, but at £20000 net income, using UFPLS alone means you'll be paying tax from the get go......

An alternative might be eg......crystallise £80000 in year 1, put the £20000 TFC into a S&S ISA (invested in a similar/same way as pension), leave the £60000 crystallised pot alone, and then take a £16760 UFPLS from the uncrystallised pot......and £3240 from the S&S ISA to make up your £20k annual income.

Rinse and repeat annually, until the whole pot is crystallised, then switch pension withdrawals to the crystallised pot....along with the annual withdrawal from the S&S ISA.