Technical question on FAD vs UFPLS

handful

I am getting close to having to make a decision of how to access my pension pot. I am basically just going be taking my PA and top up with other savings until SPA and just need to understand the mechanics of how the FAD option would work.

If I take the UFPLS option I would sell some investments, enough to take £16670 and put it into my Marcus account apart from £2880 which I would put back into my pension. I then transfer my monthly payment to my every day current account This seems to me to be the straightforward option. It keeps the TFC/crystallising to a minimum and puts my drawdown cash somewhere safe and earning a bit of interest.

With the FAD option, I understand that I effectively set up a drawdown account and crystallise a sum which I guess could be £16670 as well but then I start to get a bit confused. Do I have to instruct my provider ii as to what investments to sell or do I just do the same as with UFPLS and just make sure I have enough cash available for that amount to be deposited into the drawdown account and then set up a regular payment from there? Or do I crystallise a particular investment e.g. some money held in a STMM fund and just let them sell enough of that each month to make the regular payment. I could choose any of the investments in my pension but if I choose something that is more volatile then I may not have crystallised enough to fund the payments for the year. Also, I guess I need to hold my "safer" investments uncrystallised in case there is a market crash. This all seems much more complicated to me or am I missing something? TIA

gm0

You are confusing how and when investments are sold and which ones are chosen. 
With the different forms of taking the TFC element. 

The two are not tied together.


With FAD the TFC comes out.  The marked for income (other 75%) sits there and waits for you to do something - in same (or different) investments or in cash fund or whatever but inside the pension.  And you take income as you choose - without TFC (had it earlier) so all subject to SA income tax

With UFPLS the taking of TFC and the ALL the other income is tied to the single transaction. Which is over.  And the 25% is tax free and the 75% is subject to SA income tax

From what - you can take "cash" balance from a pension with UFPLS  Or ask to sell £x of other investments and to make the UFPLS payment after the trades settle (couple of days).  You can do that once per year.  Once per quarter.  Once per month. Subject to provider and how easy the paperwork is.

Of you can rebalance, create a cash (fund) buffer. And if you previously took TFC with FAD.  Take your income from the cash buffer as a FAD income change - only refilling it once per year, twice etc.  Nothing sold each month.

How often you take income.  And how often you sell.  Is not connected to whether it is FAD or UFLPS

Not all providers support these processes for all variants in a well automated way as a default for "how they do it".  Some will make monthly UFLPS easier to manage.  Others - not so much - would better suit annual.

And by default some providers take "cash fund first".  And others keep the portfolio the same by selling a little bit of each by default.  So with some you have to tell them what you want and hope they read the instructions each time you do it.

dunstonh

If I take the UFPLS option I would sell some investments, enough to take £16670 and put it into my Marcus account apart from £2880 which I would put back into my pension. I then transfer my monthly payment to my every day current account This seems to me to be the straightforward option. It keeps the TFC/crystallising to a minimum and puts my drawdown cash somewhere safe and earning a bit of interest.

If your provider/platform doesnt support regular UFPLS, then that is the way that you would do it.

With the FAD option, I understand that I effectively set up a drawdown account and crystallise a sum which I guess could be £16670 as well but then I start to get a bit confused. Do I have to instruct my provider ii as to what investments to sell or do I just do the same as with UFPLS and just make sure I have enough cash available for that amount to be deposited into the drawdown account and then set up a regular payment from there?

Depends on your provider and your chosen drawdown investment strategy.   e.g. if you are using bucketing, then you would keep a cash float to fund withdrawals.   If you are going basic, then you would remain invested and it would auto-sell units to fund your withdrawals (although not all providers support this).

 Also, I guess I need to hold my "safer" investments uncrystallised in case there is a market crash.

Over what period will you be going from uncrystallised to crystallised?  i.e. if its going to take you 20 years to get fully uncrystallised, then you certainly wouldn't hold the safer investments uncrystallised.

This all seems much more complicated to me or am I missing something? TIA

Drawdown has method of drawdown but also you need the investment strategy for drawdown.  There are multiple ways.    You need to decide which methods.

handful

dunstonh said:

If I take the UFPLS option I would sell some investments, enough to take £16670 and put it into my Marcus account apart from £2880 which I would put back into my pension. I then transfer my monthly payment to my every day current account This seems to me to be the straightforward option. It keeps the TFC/crystallising to a minimum and puts my drawdown cash somewhere safe and earning a bit of interest.

If your provider/platform doesnt support regular UFPLS, then that is the way that you would do it. From what I can see ii support UFPLS but you have to apply each occasion you wish to action an UFPLS payment. It seems straightforward though.

With the FAD option, I understand that I effectively set up a drawdown account and crystallise a sum which I guess could be £16670 as well but then I start to get a bit confused. Do I have to instruct my provider ii as to what investments to sell or do I just do the same as with UFPLS and just make sure I have enough cash available for that amount to be deposited into the drawdown account and then set up a regular payment from there?

Depends on your provider and your chosen drawdown investment strategy.   e.g. if you are using bucketing, then you would keep a cash float to fund withdrawals.   If you are going basic, then you would remain invested and it would auto-sell units to fund your withdrawals (although not all providers support this). 

Thank you, I will check with ii

 Also, I guess I need to hold my "safer" investments uncrystallised in case there is a market crash.

Over what period will you be going from uncrystallised to crystallised?  i.e. if its going to take you 20 years to get fully uncrystallised, then you certainly wouldn't hold the safer investments uncrystallised. 

I'm only talking about circa 2 years of PA drawdowns, around £25k which I have in a STMM fund. the rest is predominantly in equity funds. What I was thinking is I should keep that intact whilst markets are looking pretty decent and sell some of the other higher risk investments to fund immediate drawdown.

This all seems much more complicated to me or am I missing something? TIA

Drawdown has method of drawdown but also you need the investment strategy for drawdown.  There are multiple ways.    You need to decide which methods.

Thank you

poseidon1

I note the OP has a sipp with ii, as do I.

 The link below gives a step by step guide to ufpls, which appears to be a little lengthy first time around. Presumably the process gets easier with repetition.

To be noted their minimum lump sum is £1,000, so if that is selected as the intial withdrawal to kick things off, HMRC might assume that to be the intended monthly withdrawal and likely apply an emergency tax code thereon. 

Taking £16,670 as the initial ufpls, may well give rise to the unfortunate assumption that this sum will be ongoing on a monthly basis with excessive (recoverable) tax charges arising thereon.

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

handful

poseidon1 said:

I note the OP has a sipp with ii, as do I.

 The link below gives a step by step guide to ufpls, which appears to be a little lengthy first time around. Presumably the process gets easier with repetition.

To be noted their minimum lump sum is £1,000, so if that is selected as the intial withdrawal to kick things off, HMRC might assume that to be the intended monthly withdrawal and likely apply an emergency tax code thereon. 

Taking £16,670 as the initial ufpls, may well give rise to the unfortunate assumption that this sum will be ongoing on a monthly basis with excessive (recoverable) tax charges arising thereon.

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

Yes I've seen the guide on the ii website, thanks. You are right with your tax assumptions but I believe it's not a difficult or lengthy process claiming the overpayment of tax back from HMRC using a Form P55.

Donewithwork1

handful said:

I am getting close to having to make a decision of how to access my pension pot. I am basically just going be taking my PA and top up with other savings until SPA and just need to understand the mechanics of how the FAD option would work.

If I take the UFPLS option I would sell some investments, enough to take £16670 and put it into my Marcus account apart from £2880 which I would put back into my pension. I then transfer my monthly payment to my every day current account This seems to me to be the straightforward option. It keeps the TFC/crystallising to a minimum and puts my drawdown cash somewhere safe and earning a bit of interest.

With the FAD option, I understand that I effectively set up a drawdown account and crystallise a sum which I guess could be £16670 as well but then I start to get a bit confused. Do I have to instruct my provider ii as to what investments to sell or do I just do the same as with UFPLS and just make sure I have enough cash available for that amount to be deposited into the drawdown account and then set up a regular payment from there? Or do I crystallise a particular investment e.g. some money held in a STMM fund and just let them sell enough of that each month to make the regular payment. I could choose any of the investments in my pension but if I choose something that is more volatile then I may not have crystallised enough to fund the payments for the year. Also, I guess I need to hold my "safer" investments uncrystallised in case there is a market crash. This all seems much more complicated to me or am I missing something? TIA

I have exactly the same dilemma as you handful, re FAD/UFPLS and how to fund it, although a bit behind you as my transfers into ii have not gone through yet and at this stage have very little idea how it all works in practice on the ii site.

Regarding the £2880 back into pension, I struggle a bit to get my head around this and whether its worth doing or not!  Technically you (or me) will be taking 2880 of your tax free cash and putting it back into your pension, yes you then get the 25% uplift but then it goes back into a pension which becomes taxable again if you can't get it all out before SP time. 

I don't know if I'm making sense with the above and it's not a criticism because it's something I would like to do myself if possible but struggle to get my head around it!!  I suppose the worst scenario is I would only benefit by £180 instead of £720

handful

Donewithwork1 said:

handful said:

I am getting close to having to make a decision of how to access my pension pot. I am basically just going be taking my PA and top up with other savings until SPA and just need to understand the mechanics of how the FAD option would work.

If I take the UFPLS option I would sell some investments, enough to take £16670 and put it into my Marcus account apart from £2880 which I would put back into my pension. I then transfer my monthly payment to my every day current account This seems to me to be the straightforward option. It keeps the TFC/crystallising to a minimum and puts my drawdown cash somewhere safe and earning a bit of interest.

With the FAD option, I understand that I effectively set up a drawdown account and crystallise a sum which I guess could be £16670 as well but then I start to get a bit confused. Do I have to instruct my provider ii as to what investments to sell or do I just do the same as with UFPLS and just make sure I have enough cash available for that amount to be deposited into the drawdown account and then set up a regular payment from there? Or do I crystallise a particular investment e.g. some money held in a STMM fund and just let them sell enough of that each month to make the regular payment. I could choose any of the investments in my pension but if I choose something that is more volatile then I may not have crystallised enough to fund the payments for the year. Also, I guess I need to hold my "safer" investments uncrystallised in case there is a market crash. This all seems much more complicated to me or am I missing something? TIA

I have exactly the same dilemma as you handful, re FAD/UFPLS and how to fund it, although a bit behind you as my transfers into ii have not gone through yet and at this stage have very little idea how it all works in practice on the ii site.

Regarding the £2880 back into pension, I struggle a bit to get my head around this and whether its worth doing or not!  Technically you (or me) will be taking 2880 of your tax free cash and putting it back into your pension, yes you then get the 25% uplift but then it goes back into a pension which becomes taxable again if you can't get it all out before SP time. 

I don't know if I'm making sense with the above and it's not a criticism because it's something I would like to do myself if possible but struggle to get my head around it!!  I suppose the worst scenario is I would only benefit by £180 instead of £720

You are right in that it does get taxed on withdrawal but you get more in relief paying in than you do getting taxed on the way out. I can't remember the figure now but your £180 may be it!