UFPLS or Drawdown

DFC1893

Hi

I'm struggling to get my head around which option is best for me even after reading lots of online help resources.

I understand the point about UFPLS being 25% tax free and 75% taxed on each withdrawal and that my pot would remain uncrystallised, but isn't drawdown practically the same if you only move a certain chunk of your pot into drawdown?

My situation is that I don't want any tax free lump sum but want to begin taking a monthly income from my pot from March '24. 
I'm 57, retired, want to take 24k income a year for 10 years until state pension age. My pot is currently 630k, averaging 25k annually in divi income so (very crudely I know) I'm just aiming to withdraw divi income and hopefully retaining much of the pot's capital for after age 67. Pot is self invested through II platform mostly in ETFs and investment trusts. 

So assuming I'm not taking any tax free lump sum, is drawdown more flexible for me or UFPLS?
In terms of tax, if I opt for drawdown then am I correct in saying that for a 24k pa withdrawal, 6k would be tax free on top of my 12.5k personal allowance and I'd only be taxed on 5.5k? Also, would I be better to only move a portion of my 630k into drawdown, ie only crystallising part of my pot so that if there's any capital growth then theoretically I'm increasing my available 25% tax free element? 

The other thing I'm struggling with is whether, once in drawdown if I go that way, do I have to cash in all my current investments and choose one of these "investment pathways" or drawdown products I keep reading about or can I just continue to manage my own investments?

I'm leaning towards drawdown over UFPLS as just seems more flexible but worried I'm maybe missing something important!

wjr4

You must take some TFC when taking an income. 

handful

With FAD for every 1£ of TFC you take, another £3 of your pot is crystallised. with UFPLS every time you make a withdrawal, £25% of it is tax free cash allowing you to keep more uncrystallised and invested and potentially growing to allow more TFC later. Others will probably give you a clearer explanation shortly but that's my take on it!

Also, it's possible to withdraw monthly and take your tax allowance +25% with UFPLS

FAD gives you more flexibility in that you can choose how much TFC you want to take with each drawdown, as long as you don't exceed your total TFC allowance.

As you are also with II, have you seen this? https://www.ii.co.uk/ii-accounts/sipp/ufpls

ader42

The tendency is for UFPLS for monthly payments and Drawdown for larger stand-alone lump sums (which can also include TFC).

I don’t know about II but with HL you just need to have the relevant TFC amount (£6k) in cash for drawdown if for example you only wanted TFC, so the other £18k can stay invested exactly as it was before crystallization. i.e. With HL you can even just crystallize an amount and take only TFC, e.g. you could crystallize £96k and take £24k tax free cash which could have been an idea if you were still working/contributing and had a larger pot so weren’t concerned about reducing the TFC possible. 

So yes basically they have the same end-result, but you could look at it as monthly UPFLS would afford something akin to “pound-cost averaging”. 

In your shoes I’d be tempted to just make sure the dividends are not re-invested and then decide to either make a £24k withdrawal once a year (Drawdown) or a monthly UFLPS of £2k. 

Yes you would be income taxed on £24k minus the personal allowance minus the £6k TFC (assuming no other income that uses the personal allowance).

Yes, not crystallizing the entire pot means your uncrystallized can grow which in turn means more TFC. 

xylophone

Have you seen this?

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

Seems simple enough if that's the way you want to go.

squirrelpie

A lot depends on your pension provider and exactly how they provide the various possibilities (i.e. how much bureaucracy is involved). With UFPLS you choose an amount, it is crystallised and then paid to you. 25% of the gross payment is tax free. 75% is taxable, so potentially reduced depending on your tax situation. With drawdown, you choose an amount to crystallise and normally 25% of it is paid to you tax free immediately (if you don't take it, you permanently lose that tax free allowance). You select how much to pay you of the remaining 75% and how often (e.g. a monthly payment). The regular payments continue until the crystallised money is exhausted.

Just looking at https://www.ii.co.uk/ii-accounts/sipp/ufpls/take-ufpls it seems you could take a UFPLS every month online if you're prepared to spend what they say is half an hour filling forms every month. With drawdown you'd have to put the tax free sum in an account and pay it to yourself after the taxable money was exhausted.

RoysV

ader42 said:

The tendency is for UFPLS for monthly payments and Drawdown for larger stand-alone lump sums (which can also include TFC).

Is that the right way round? I keep reading on here monthly UFPLS can be a bit of a faff on doing admin every month? Whereas once in drawdown you just decide how much you want each month and away you go.

Doctor_Who

RoysV said:

ader42 said:

The tendency is for UFPLS for monthly payments and Drawdown for larger stand-alone lump sums (which can also include TFC).

Is that the right way round? I keep reading on here monthly UFPLS can be a bit of a faff on doing admin every month? Whereas once in drawdown you just decide how much you want each month and away you go.

On a DIY platform (II in my case) I would only want to do UFPLS a few times a year maximum (I'm actually only doing it once per year in March). Monthly UFPLS doesn't seem to be an option for many DIY platforms. FAD is more aimed at monthly withdrawals.

Albermarle

RoysV said:

ader42 said:

The tendency is for UFPLS for monthly payments and Drawdown for larger stand-alone lump sums (which can also include TFC).

Is that the right way round? I keep reading on here monthly UFPLS can be a bit of a faff on doing admin every month? Whereas once in drawdown you just decide how much you want each month and away you go.

I was going to say the same. Regular UFPLS is a bit messy ( unless you work via a financial advisor) so often people take just one or two UFPLS during the year.

I understand the point about UFPLS being 25% tax free and 75% taxed on each withdrawal and that my pot would remain uncrystallised, but isn't drawdown practically the same if you only move a certain chunk of your pot into drawdown?

In reality there is not a huge difference between the two methods. It is more a matter of fine tuning how you want to take the income. However as said, even with FAD you can not take taxable income without taking some tax free cash as well. 

ader42

Sounds like I did get that the wrong way around.

I was purely going by the way with HL I had to fill in an online form for drawdown (I’ve only only done it once) - and I don’t recall there being an option for it to be a monthly event - so I assumed this was the bigger lump sum more one-off scenario. I just checked on HL and it does appear that UFPLS is more the one-off approach, so maybe I should have chosen that option, ho hum.

MK62

With FAD, you have the option to avoid income tax altogether in the early years of your retirement.......something you cannot do with UFPLS at your desired level of income. This can make a material difference..........though you might pay more tax post SP......it might also make little difference at all though, depending on your plans. Unfortunately the maths can be quite complicated as it involves inflation adjusting future tax payments...ie, £1100 paid in tax today might be more, in real terms, than say £1400 paid in 6 or 7 years time......and you can only guess at future inflation and tax rates/allowances. That said, money paid to the taxman today, can't generate any future returns for you.