Comparison of UFPLS vs Flexi Access Drawdown using the TFLS strategically to avoid income tax.

GazzaBloom

I won't bore you with the fairly complex spreadsheet & calcs but I have just run a comparison of the first 10 years of retirement for my wife and myself starting drawdown at the beginning of tax year 2025.

I was trying to determine the most tax advantageous way to drawdown from our 2 DC pensions using UFPLS vs FAD in the years before the state pensions commence in 2034 (me) & 2037 (wife) 

We have some planned lumpy one off spend in the first 3 years over and above the regular living expenses needs.

 So, The FAD plan is - Crystallise wife's pension fully (expected to be around £71K at point of retirement and taking the full TFLS then taking £12,570 each year thereafter until it is depleted, assuming a mediocre growth rate, so wife pays no income tax on her pension drawdown at all.

 Crystallising enough of my pension each year (expected to be around £548,000 at point of retirement) to make up the difference in drawdown needed with the TFLS covering all needs tax free so none of the taxable 75% is taken as drawdown, it just builds up each year. repeating this each year until my pension is fully crystallised and all TFLS cash is taken, then, I start drawing from the 75% taxable crystallised amount of my pension and pay income tax on it, which I calculate will be in year 7 of retirement.

 The UFPLS alternative is to only crystallise enough each year from both pensions to cover our needs and paying tax on the 75% after the 25% tax free, leaving no uncrystallised balance at the end of the year. Rinse and repeat each year, so there is always a 25% tax free amount available, ad infinitum.

Complicated? yep!

 What I found was that after the first 10 years of retirement I would pay £18.5K more tax using UFPLS, as we're paying some income tax from year 1, and the expected remaining pot, assuming a crude average growth rate, would be around £40K less using UFPLS. 

 UFPLS appears to win over the very long term as from year 7 onwards we are paying circa £1,444 more annual income tax using FAD as there is no 25% tax free amount left to draw each year but the crossover point is approximately 2046 when I am 79 before I would have paid more income tax using FAD.

It's the lumpy additional spend in the first 3 years, drawn as tax free cash, and the slowing down of spend thereafter that tips the balance and pushed the crossover point out so far.

Not sure if any of the above is easy to follow or makes sense, but, unless I've really screwed up the calcs, I think I have answered my question. FAD utilising the TFLS strategically to avoid income tax for as long as we can - wins (until around 20 years into retirement, by which time our expenditure may have reduced anyway, I may have shuffled off this mortal coil, or WWIII has blown us all away! )

I have a year to check and recheck and continue planning/refining our drawdown approach. As a keen DIYer, I do wonder how someone who is not spreadsheet savvy or pension/tax aware would get topside of this kind of thing.

Anyone run a similar kind of analysis for themselves?

Pat38493

I have done similar comparisons using Voyant Go.

It seems to me like the difference in the scenarios is quite small over the long term and will most likely be cancelled out one way or another depending how markets, inflation, and fiscal drag, are working during the coming years and decades.  As such I kind of concluded that it's a wash in the long term and to just look at it over the medium term for tax planning (10 years out).

Most likely I will also use TFLS/FAD as I also have some big amounts planned up until about age 65 (e..g helping kids with house deposits or suchlike) - as such, whichever approach I use I probably need to max out my 20% tax band in the first 9 years in order to avoid a big 40% tax bill.

We are also in the process of attempting to downsize if we find a suitable target house so this might also influence the withdrawal strategy.

Of course this is also a bit of a paper exercise as there is no way to know exactly when the time will be right to help each child - I just have to take an assumption and adapt it over time.

GazzaBloom

Pat38493 said:

I have done similar comparisons using Voyant Go.

It seems to me like the difference in the scenarios is quite small over the long term and will most likely be cancelled out one way or another depending how markets, inflation, and fiscal drag, are working during the coming years and decades.  As such I kind of concluded that it's a wash in the long term and to just look at it over the medium term for tax planning (10 years out).

Most likely I will also use TFLS/FAD as I also have some big amounts planned up until about age 65 (e..g helping kids with house deposits or suchlike) - as such, whichever approach I use I probably need to max out my 20% tax band in the first 9 years in order to avoid a big 40% tax bill.

We are also in the process of attempting to downsize if we find a suitable target house so this might also influence the withdrawal strategy.

Of course this is also a bit of a paper exercise as there is no way to know exactly when the time will be right to help each child - I just have to take an assumption and adapt it over time.

Agreed, with so many unknowns future variables, it's tricky, but with some assumptions on the things you know today, or at the point of retirement, it's good to go forward with a plan and strategy of some kind.

gm0

Regulatory risk is dominant over all others.

Owing to the inability of our political leaders (of all stripes) to understand and actually honour the need for long term planning stability over pension timescales. 

To the original question I did this FAD/UFPLS analysis. 

At the time I did it - possible UFPLS "superiority" on in year income tax planning for a tailing off self-employement income or SP arriving - was largely destroyed by the LTA "crystallised growth test" and untouched/uncrystallised tests looming at age 75.  Of historical interest - at least for now.  Where nominal gains - whether inflationary or real were tested again for FAD and the 25% penalty applied on top of normal income tax. For growth undrawn from first crystallisation (catching FAD), or just 20 years of uncrystallised growth (catching UFPLS). 

So FAD and taking 25% of the total pot - before it grew for another 20 years - outside the pension wrapper to grow in an S&S ISA - quite likely in the same investments could - for some pot sizes avoid a stupid penalty that would otherwise be due at 75.  You could play with assumptions on inflation and pot size and returns to work out how effective age-75 test "minimisation" would be.  But favoured FAD for that group.  All gone now.

What comes next is of course - unknown

zagfles

As long as you're both using your income tax allowances and not entering higher rate tax it's unlikely to make any difference. It sounds like one of your methods doesn't use your tax allowance!

ader42

Surely leaving more in the “pot” for longer by not paying any income tax means it grows more and so FAD is superior until such a time as you start taking taxable higher rate cash (40% income tax). That’s how my calculations worked out anyhow.

So I’ll likely use TFLS for lump sums plus £12570 drawdown. Of course if you leave it all in safe little-growth investments then it might make little difference. 

GazzaBloom

zagfles said:

As long as you're both using your income tax allowances and not entering higher rate tax it's unlikely to make any difference. It sounds like one of your methods doesn't use your tax allowance!

Both tax allowances used fully, I haven't shown the calcs, a small DB pension uses up half of mine, I will take the other half from crystallised taxable to utilise it fully and the rest of our annual expenses from tax free.

GazzaBloom

ader42 said:

Surely leaving more in the “pot” for longer by not paying any income tax means it grows more and so FAD is superior until such a time as you start taking taxable higher rate cash (40% income tax). That’s how my calculations worked out anyhow.

So I’ll likely use TFLS for lump sums plus £12570 drawdown. Of course if you leave it all in safe little-growth investments then it might make little difference. 

The lumpy spend in our early years would put me into 40% tax band in one of the years but beyond that we will be in 20% band for retirement.

So yes, by not paying income tax for the first 6 years leaves more in the pot to grow

Pat38493

GazzaBloom said:

ader42 said:

Surely leaving more in the “pot” for longer by not paying any income tax means it grows more and so FAD is superior until such a time as you start taking taxable higher rate cash (40% income tax). That’s how my calculations worked out anyhow.

So I’ll likely use TFLS for lump sums plus £12570 drawdown. Of course if you leave it all in safe little-growth investments then it might make little difference. 

The lumpy spend in our early years would put me into 40% tax band in one of the years but beyond that we will be in 20% band for retirement.

So yes, by not paying income tax for the first 6 years leaves more in the pot to grow

I'm sure you know this already but you can also examine intermediate scenarios - e.g. you could take partial amounts of TFC in one year, UFPLS in another year etc.

GazzaBloom

Pat38493 said:

GazzaBloom said:

ader42 said:

Surely leaving more in the “pot” for longer by not paying any income tax means it grows more and so FAD is superior until such a time as you start taking taxable higher rate cash (40% income tax). That’s how my calculations worked out anyhow.

So I’ll likely use TFLS for lump sums plus £12570 drawdown. Of course if you leave it all in safe little-growth investments then it might make little difference. 

The lumpy spend in our early years would put me into 40% tax band in one of the years but beyond that we will be in 20% band for retirement.

So yes, by not paying income tax for the first 6 years leaves more in the pot to grow

I'm sure you know this already but you can also examine intermediate scenarios - e.g. you could take partial amounts of TFC in one year, UFPLS in another year etc.

Agreed. I also need to look at the impact taking more TFLS cash than covers our annual needs and look at shovelling it into S&S ISAs, then using the ISAs down the road. A bit more spreadsheet work ahead. 

I'm retiring at the end of this year but not planning taking taxable income (even within tax allowance until after 5th April 2025) so plenty of time to refine.

Pat38493

GazzaBloom said:

Pat38493 said:

GazzaBloom said:

ader42 said:

Surely leaving more in the “pot” for longer by not paying any income tax means it grows more and so FAD is superior until such a time as you start taking taxable higher rate cash (40% income tax). That’s how my calculations worked out anyhow.

So I’ll likely use TFLS for lump sums plus £12570 drawdown. Of course if you leave it all in safe little-growth investments then it might make little difference. 

The lumpy spend in our early years would put me into 40% tax band in one of the years but beyond that we will be in 20% band for retirement.

So yes, by not paying income tax for the first 6 years leaves more in the pot to grow

I'm sure you know this already but you can also examine intermediate scenarios - e.g. you could take partial amounts of TFC in one year, UFPLS in another year etc.

Agreed. I also need to look at the impact taking more TFLS cash than covers our annual needs and look at shovelling it into S&S ISAs, then using the ISAs down the road. A bit more spreadsheet work ahead. 

I'm retiring at the end of this year but not planning taking taxable income (even within tax allowance until after 5th April 2025) so plenty of time to refine.

This is probably not very motivating but someone (Old Scientist I think) made the comment on another thread that in reality, blind luck (variation in sequence of investment returns in first 7-10 years of retirement), will play a much bigger role in your long term situation than tinkering with hundreds of different withdrawal scenarios which only makes a very small difference each.  This doesn't mean you shouldn't plan it, but in the end things that you cannot control will have a big impact.