Pension crystallisation/part crystalisation

Avro1995

Hi all,

I hope you are well  

I am just looking for some clarification on pension terminology and process. I will be going to an IFA in the future but want to get my head round it first.

Lets say there is a DC pension pot of £500,000. Age 60. I am aware that you can take 25% tax free lump sum and then access the rest however and whenever you effectively want if allowable. What I really want to get my head round is crystallisation. I thought that when you took the 25% lump sum, the whole pension is crystallised. However I have heard of some people 'part crystallising' the pension. 

What are the benefits of this?
How does it work? 
Can you contribute to them after this?
Are they still invested and can you take tax free cash from either at this point?
Could you crstalise 100k, 200k 450k? and what would be the benefit or drawbacks.

I know this is a very nuanced and broad question but if anyone is able to simplify this clearly I would be so so grateful.
THANKS

handful

You can crystallie part or all of your pension these days. It's generally thought better to only cyrstallise what you need and leave the rest invested but this can vary greatly according to circumstances. If you have a pension provider that support it you can use UFPLS dynamically and draw down any sum and 25% of that would be tax free. It's a complex subject though and best explained by some of the more knowledgable people here!

Avro1995

handful said:

You can crystallie part or all of your pension these days. It's generally thought better to only crystallise what you need and leave the rest invested but this can vary greatly according to circumstances. If you have a pension provider that support it you can use UFPLS dynamically and draw down any sum and 25% of that would be tax free. It's a complex subject though and best explained by some of the more knowledgeable people here

Thanks for response. Yeah that's what I don't understand. Why not just crystalise the whole thing. I thought that even a part crystallised pot can stay invested?

DavidT67

Also Crystallation doesn't mean that component of the pension can't still remain invested.  You can take a tax free lump sum, whilst crystallising assets and leave them in drawdown account, rather than taking any taxable income.

dunstonh

 Why not just crystalise the whole thing. 

Because for most people, it's not the best option.    Why draw money out of one of the most tax efficient options to place it in less efficient options?

Linton

Say you had £500K in a pension.  If you withdraw £50K tax free you would have £50K in your pocket, £150K (£50K tax free=25% of £200K) crystallised and the remaining £300K uncrystallised.

You could then withdraw taxable money from the crystallised part or tax free money from the uncrystalised part.

Say you took £50K tax free from the uncrysallised part.  That would crystallise a further £150K Overall this would leave you holding £100K taken tax free, £300K crystallised and £100K uncrystallised.

Platforms can choose to operate this in one of 2 ways.  HL for example hold the crystallised funds and the uncrystallised funds in separate sub-accounts so you can iinvest each part separately.  Interactive Investors just keep track of the overall %s so the whole part is invested in the same way.

A major advantage of part crystallising is that you dont need to find a tax shelter outside the pension for a large lump sum.   Another is that you can  crystallise a small part of your tax free money to support a small drawdown leaving the rest untouched.

Avro1995

DavidT67 said:

Also Crystallation doesn't mean that component of the pension can't still remain invested.  You can take a tax free lump sum, whilst crystallising assets and leave them in drawdown account, rather than taking any taxable income.

Hi David thanks for the response. What I don't get is why crystallise some if you are just leaving it to drawdown separately. Why not just take your tax free cash and leave the rest in one pot?

artyboy

Avro1995 said:

DavidT67 said:

Also Crystallation doesn't mean that component of the pension can't still remain invested.  You can take a tax free lump sum, whilst crystallising assets and leave them in drawdown account, rather than taking any taxable income.

Hi David thanks for the response. What I don't get is why crystallise some if you are just leaving it to drawdown separately. Why not just take your tax free cash and leave the rest in one pot?

Because unless you have a specific purpose for the entire 25% (eg paying off a mortgage or other expensive debt, or maybe buying another property), then it's generally more sensible to leave as much within the pension as possible, where it can continue to grow free of considerations like CGT or IHT...

dunstonh

Avro1995 said:

DavidT67 said:

Also Crystallation doesn't mean that component of the pension can't still remain invested.  You can take a tax free lump sum, whilst crystallising assets and leave them in drawdown account, rather than taking any taxable income.

Hi David thanks for the response. What I don't get is why crystallise some if you are just leaving it to drawdown separately. Why not just take your tax free cash and leave the rest in one pot?

I think you are looking at it back to front.
Why draw it out when you dont need to?     You can save it until later when it is needed (and with growth, the 25% available would be bigger)

NoMore

Lets do an example why part crystallisation might work:

You have 100k in pension, full crystallisation results in 25k TFLS. With the rest left in to grow and be subject to income tax on withdrawal.

Instead lets take only 10k tax free instead so that's crystallising 40k (10k of which is tfls), so you now have 90k in the pension with 60k still not crystallised.

Later you decide to crystallise the rest of the pension (the 60k), but now its also had some growth so its now actually £72k so the tax free cash you can get out is 18k.

So instead of 25k TFLS .you have got a total of 28k TFLS by part crystallising and allowing growth to get you more tax free cash out later.

This is just an example of why it might be better to part crystallise but its ultimately its down to the need and what you are going to do with the tax free cash as to the best option.

As others have said just taking tax free cash because you can is not necessarily the best option.

SVaz

If you only part crystalise,  you have MORE tax free cash in the future due to the pot growing ( and being added to).
Why wouldn’t you do that?