Pension crystallisation/part crystalisation

Pat38493

artyboy said:

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...

Using your original figure of £500K, if you crystallize the whole pension you will receive 125K of cash.

Depending on how much income you have, at the current interest rates you will struggle to invest that 125K without ending up paying some kind of tax on it which you would not have paid otherwise if it was still in the pension.

You can put it in an ISA, but you can only put 20K per tax year, so that would still leave you with 105K in the first year to try to invest without paying any tax.

If you need that money for a specific purpose like paying off a mortgage then it could for sure make sense.

If you need the money to live on because you are stopping work, you may be better off using UFPLS withdrawals - this means you take out amounts directly from crystallized funds and 25% of each withdrawal is tax free.

Albermarle

OP,
Some good explanations of part crystallisation, and why taking all the 25% tax free up front is not often the best idea.
Just one thing to add. Not all pension providers offer the full flexibility of how to take tax free and taxable money as discussed above. Especially for older pensions.
Might be worth just mentioning who your pension provider is, as you should get some useful feedback.

gm0

Most relevant things have now been covered. 

Crystallised (FAD) can still be invested.  No difference.
IHT, CGT (until recycled to ISA) are applied to funds outside pension i.e. in your estate but are not applied when inside pension which is a big deal for some.

Yes - growth can generate more TFC until you hit a limit on it (Lifetime allowance variants - past, present, future)
One of the reasons to do the lot used to be precisely to take 25% of growth away from the LTA penalty by sticking it in family S&S ISAs as fast as possible where there was no such thing (and just doing the IHT planning).  Recent LTA reforms changed this logic.  TFC is still limited.  And the charge still exists (this tax year) but is zero rated.  Which neatly illustrates that relying on the exact rules of today is both all we have and also a poor basis for long term planning due to endless meddling

Of greater import - to some is Money Purchase Annual Allowance (MPAA)

Taking income clamps it on.
Just taking TFC and zero income does not
So even a tiny partial UFPLS triggers it
And a zero income taken crystallisation using Flexible Access Drawdown (FAD) (Critically taking the TFC) only does not.

Income smoothing across tax years can also be a factor where depending upon your overall circumstances one approach UFPLS (can be better than the other).

jim8888

Here's a reason you might want to take £150k out. Let's say you are married and both you and your spouse can take £12,500 tax free income each year from your crystallised pension(s). You can then take a further £25k a year from the tax free pot you have taken for the next six years without worrying that the markets might plunge and halve the value of it. That gives you a tax free income of £50k a year for the next six years that you don't really have to worry about, in terms of values going up and down. At 67, you collect your state pension. I'd say that's quite a nice bit of peace of mind. 

Qyburn

SVaz said:

If you only part crystalise,  you have MORE tax free cash in the future due to the pot growing (and being added to).

Even if the whole pot is crystalised, wouldn't new contributions be added as uncrystalised with their tax free element available? 

handful

Qyburn said:

SVaz said:

If you only part crystalise,  you have MORE tax free cash in the future due to the pot growing (and being added to).

Even if the whole pot is crystalised, wouldn't new contributions be added as uncrystalised with their tax free element available? 

Yes but the point being made was you get 25% TFC from a (potentially) growing pot for anything left uncrystallised including any additional contributions that you may add to it.

DavidT67

Unfortunately the TFLS now has a fixed limit of £268,275 in aggregate, as well as the previous 25% of each pension pot limit. So even if your pension pots continue to grow you can't neccessarily take 25% of the growth.

SVaz

The amount of people with that amount of TFLS must be absolutely miniscule.  I’m guessing fewer than 5% 

Albermarle

SVaz said:

The amount of people with that amount of TFLS must be absolutely miniscule.  I’m guessing fewer than 5% 

Yes the figure for the average pension pot size at retirement is significantly less than £268K ( the actual figure varies depending on how it is measured but is somewhere around £100K for DC pensions I think) and that is the whole pot , not 25% of it.

Qyburn

handful said:

Qyburn said:

SVaz said:

If you only part crystalise,  you have MORE tax free cash in the future due to the pot growing (and being added to).

Even if the whole pot is crystalised, wouldn't new contributions be added as uncrystalised with their tax free element available? 

Yes but the point being made was you get 25% TFC from a (potentially) growing pot for anything left uncrystallised including any additional contributions that you may add to it.

I was referring to the "and being added to" comment.