Flexi Access Drawdown - tax implications

older_and_no_wiser

I will be 55 soon and still working in full time employment and contributing to a DC SIPP for at least another 3 years. I don’t want to touch any taxable part of my DC SIPP - as I don’t want to trigger the MPAA. However I am thinking that it may be useful to use some of the 25% tax free element for paying my mortgage off and a luxury of two!

QUERY 1:

If I have £400,000 in the SIPP, then £100,000 is tax free.I believe I can move any amount into flexi access drawdown. So if I needed an initial £20,000 to pay off the mortgage, I would move £80,000 into FAD and withdraw the £20K (25% of the FAD amount) with no tax to pay. The remaining £60K can remain invested. Is this all OK so far?

QUERY 2:

Let’s say in another year or so, I want access to another £30,000 to buy something with. Can I then move another £120,000 from the uncrystallised/original SIPP pot into the FAD pot and then take the £30K (25%) tax free and adding the remaining £90K to what I already have in the FAD pot (ie. the £60K + any investment growth from the last year)?

QUERY 3:

If I’m correct with my assumptions on Query 1 and 2 and I’ve accessed money as above, is ANY subsequent withdrawal from my FAD pot subject to tax? This means if I’m still working and paying tax, then any withdrawal will trigger the MPAA and I will pay tax on it? If I don’t touch that money until I’m retired and not paying tax, then I will only pay tax on anything I withdraw from it over my personal tax free allowance (ie currently £12,570)?

QUERY 4:

If I’ve made the 2 transactions above, then I will have £190K (+ any growth over the period) in the FAD account plus all the remainder I didn’t withdraw in the uncrystallised/original SIPP pot. Do I just keep withdrawing as much as I need in tax free cash from that original pot and putting it into the FAD pot - each time there is 25% of the transferred amount available as tax free? I’m not sure how HMRC keep tabs on this or whether I have to inform them each time I transfer into the FAD pot?

Sorry for rambling, but I’m struggling with the permutations on some of this!

BoxerfanUK

I'm sure someone far knowledgeable than I will be along, but I believe you are correct in all your assumptions.  Not sure about HMRC part in query 4 though

older_and_no_wiser

This was the video I watched which got me thinking as it seems the most tax efficient way to withdraw lump sums as and when needed.

https://www.youtube.com/watch?v=AMJ8Ya3CPj4&t=390s

Doctor_Who

QUERY 3:
If I’m correct with my assumptions on Query 1 and 2 and I’ve accessed money as above, is ANY subsequent withdrawal from my FAD pot subject to tax? This means if I’m still working and paying tax, then any withdrawal will trigger the MPAA and I will pay tax on it? If I don’t touch that money until I’m retired and not paying tax, then I will only pay tax on anything I withdraw from it over my personal tax free allowance (ie currently £12,570)?
QUERY 4:
If I’ve made the 2 transactions above, then I will have £190K (+ any growth over the period) in the FAD account plus all the remainder I didn’t withdraw in the uncrystallised/original SIPP pot. Do I just keep withdrawing as much as I need in tax free cash from that original pot and putting it into the FAD pot - each time there is 25% of the transferred amount available as tax free? I’m not sure how HMRC keep tabs on this or whether I have to inform them each time I transfer into the FAD pot?

After the 25% TFC any withdrawal is taxable income.

Any taxable income withdrawal will trigger the MPAA, which limits future pension contributions eligible for tax relief to £10K.

Not sure where the £190K came from? I estimate £200K uncrystallised, £150K in the FAD account and £50K taken as TFC.  

HMRC are not interested in the TFC. Your pension provider will inform HMRC about taxable income and use your tax code to deduct income tax.

L9XSS

Just to throw this in the mix.......You can utilise the small pots rule up to 3 times......I transferred £29,700 from my Main SIPP & split it to three other providers (AJ Bell, Fidelity, HL)...I then utilised 2 of them to pay off my mortgage. I took 25% tax free from the two of them and paid tax on the remaining 75%....Depends how much cash you need I need the end I suppose to service your debt/purchase.

older_and_no_wiser

L9XSS said:

Just to throw this in the mix.......You can utilise the small pots rule up to 3 times......I transferred £29,700 from my Main SIPP & split it to three other providers (AJ Bell, Fidelity, HL)...I then utilised 2 of them to pay off my mortgage. I took 25% tax free from the two of them and paid tax on the remaining 75%....Depends how much cash you need I need the end I suppose to service your debt/purchase.

Does that "small pots rule" only apply to SIPPs with different providers? I will have all my pension in one platform (Interactive Investor) and may want to move lump sums several times across a few years to a flexi-access drawdown account (still with II).  Is that OK?

FIREDreamer

older_and_no_wiser said:

L9XSS said:

Just to throw this in the mix.......You can utilise the small pots rule up to 3 times......I transferred £29,700 from my Main SIPP & split it to three other providers (AJ Bell, Fidelity, HL)...I then utilised 2 of them to pay off my mortgage. I took 25% tax free from the two of them and paid tax on the remaining 75%....Depends how much cash you need I need the end I suppose to service your debt/purchase.

Does that "small pots rule" only apply to SIPPs with different providers? I will have all my pension in one platform (Interactive Investor) and may want to move lump sums several times across a few years to a flexi-access drawdown account (still with II).  Is that OK?

Hargreaves Lansdown will create three small pots for you if you ask.

older_and_no_wiser

Doctor_Who said:

Not sure where the £190K came from? I estimate £200K uncrystallised, £150K in the FAD account and £50K taken as TFC. 

Yes you are correct. That was my bad maths!

Pat38493

L9XSS said:

Just to throw this in the mix.......You can utilise the small pots rule up to 3 times......I transferred £29,700 from my Main SIPP & split it to three other providers (AJ Bell, Fidelity, HL)...I then utilised 2 of them to pay off my mortgage. I took 25% tax free from the two of them and paid tax on the remaining 75%....Depends how much cash you need I need the end I suppose to service your debt/purchase.

Why £29700 and not £30K?

Also just to refresh my memory - the advantage of using the small pots rule in this way is that you do not trigger the MPAA even though part of the withdrawal is taxed?

How difficult was it to actually take the money out using that rule and how long did it take after being requested? 

Doctor_Who

Also just to refresh my memory - the advantage of using the small pots rule in this way is that you do not trigger the MPAA even though part of the withdrawal is taxed?

Yes, 'small pots' do not trigger the MPAA.

Albermarle

older_and_no_wiser said:

L9XSS said:

Just to throw this in the mix.......You can utilise the small pots rule up to 3 times......I transferred £29,700 from my Main SIPP & split it to three other providers (AJ Bell, Fidelity, HL)...I then utilised 2 of them to pay off my mortgage. I took 25% tax free from the two of them and paid tax on the remaining 75%....Depends how much cash you need I need the end I suppose to service your debt/purchase.

Does that "small pots rule" only apply to SIPPs with different providers? I will have all my pension in one platform (Interactive Investor) and may want to move lump sums several times across a few years to a flexi-access drawdown account (still with II).  Is that OK?

The idea of a small pot withdrawal was to allow people with small pensions just to withdraw them, without triggering MPAA or affecting your Lifetime Allowance ( although this is not relevant anymore) . Almost like a clearing up admin exercise.
It was not really the idea that people with large pensions, split off small pots, to take advantage of the rule.
Probably the  fact there is significant admin involved for the provider, with little reward, means only HL will do it on the retail side AFAIK ( probably some financial advisor focused providers will also do it) Some providers may also be a bit squeamish about doing it is as it is against the spirit of the rule.
Otherwise you have to transfer or add < £10K to a new provider, to take advantage of it as @Pat38493  has done ( and I did ) 
Also not every provider will facilitate even one small pot rule withdrawal. I think for example Vanguard will not.