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

GazzaBloom

Pat38493 said:

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.

Yeah I know, plans and first contact with the enemy etc.

Our DC pot drawdown plan looks like the classic hatchet shape, front end loaded until SPs kick in when it turns in to the axe handle.

There is always the prospect of income from part time work which isn't my plan at all at present.

zagfles

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. 

Why do you think that? If it grows before tax then you'll pay more tax on it! Multiplication is commutative. As long as you don't pay tax on growth outside the pension. 

So for instance every £1000 (after TFLS, PA used), compare taking it now and paying tax now or leave it to grow and pay tax later. Take it now and put it in an ISA, you pay 20% tax, so £800 into the ISA, growth say doubles it over many years, you have £1600. 

Leave it in, growth doubles it to £2000, then take it out, you pay 20% tax, so you have £1600. Identical. 

Obviously, if tax rates change it could be different. Basic rate could be cut so later would be better, or the HRT threshold could be cut/frozen and growth could push you into HRT when taking it out so earlier would then be better. So could go either way. And if you die before accessing it depending on when and who you leave it to and their tax status it could be different. 

GazzaBloom

@Pat38493 I know you use Timeline for your planning, it's a shame the drawdown logic in Timeline isn't a bit more sophisticated with options to allow testing of different withdrawal approaches.

I think it's set at UFPLS by the way the tax calculates, so I can't model using FAD TFLS within the app.

Also, one oddity I have observed is that changing the account drawdown order between my DC pension and my wife's changes the outcomes and amount left at end of plan. Not sure I understand why that is. 

Moonwolf

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. 

I thought about this and I'm not 100% convinced as there is more tax to pay on the growth.  

I decided that keeping a float that I can draw down tax free might save me from higher rate tax, say I suddenly needed to replace the car with less residual value than I expected in my current one.  I think that probably has higher real value to me.

One thing, I intend to spend my entire pot as there is no one that has to inherit it.  I did wonder as a purely academic point if I expected to pass on the pot, probably after the age of 75 that spending all the tax free element earlier might benefit me and not hurt my heirs.  

GazzaBloom

Moonwolf 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. 

I thought about this and I'm not 100% convinced as there is more tax to pay on the growth.  

I decided that keeping a float that I can draw down tax free might save me from higher rate tax, say I suddenly needed to replace the car with less residual value than I expected in my current one.  I think that probably has higher real value to me.

One thing, I intend to spend my entire pot as there is no one that has to inherit it.  I did wonder as a purely academic point if I expected to pass on the pot, probably after the age of 75 that spending all the tax free element earlier might benefit me and not hurt my heirs.  

I don't think there's a lot in it over the longer term. My current cals show a benefit to using FAD in the first 10 years I have modelled, mostly because of the larger one-off spends that I won't pay tax on using FAD.

Pat38493

Moonwolf 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. 

I thought about this and I'm not 100% convinced as there is more tax to pay on the growth.  

I decided that keeping a float that I can draw down tax free might save me from higher rate tax, say I suddenly needed to replace the car with less residual value than I expected in my current one.  I think that probably has higher real value to me.

One thing, I intend to spend my entire pot as there is no one that has to inherit it.  I did wonder as a purely academic point if I expected to pass on the pot, probably after the age of 75 that spending all the tax free element earlier might benefit me and not hurt my heirs.  

I was stuggling with this as well but it's what Zagfles said.  If you are paying the same tax and the same marginal charge % it doesn't make any difference.  It's surprising how unintuitive that is.

In my case it will at least make a small difference as I am with Interactive Investor and at the moment my charges are maxed out, so when I start moving a lot of funds outwide pension wrappers it will increase my charges, but it's not a big amount in the scheme of things and will be offset by the fact that I have started to regularly empty my work pension pot (0.25% platform charge) into other places where there is a fixed charge.

Pat38493

GazzaBloom said:

@Pat38493 I know you use Timeline for your planning, it's a shame the drawdown logic in Timeline isn't a bit more sophisticated with options to allow testing of different withdrawal approaches.

I think it's set at UFPLS by the way the tax calculates, so I can't model using FAD TFLS within the app.

Also, one oddity I have observed is that changing the account drawdown order between my DC pension and my wife's changes the outcomes and amount left at end of plan. Not sure I understand why that is. 

I use both Timeline and Voyant Go - Voyant go is better for modelling those type of scenarios, but as a DIY investor, to get it you will need to invest in a retirement planning class costing around £500 and then pay an annual fee of about a hundred quid  (I think you can sign up for a 1 month trial to take a look).

Timeline is better for historical stresstesting against historic data, Voyant for testing cash flow scenarios and tax options and non retirement related scenarios.  Voyant also defaults to UFPLS but you can do forced crystallisations, planned withdrawals of specific amounts and suchlike.  It also has much better visibility on the tax calculations so you can optimise years for tax.

Yes Timeline defaults to using only UFPLS withdrawals which is a pain if you have lumpy withdrawals.  You can fudge it a bit by doing the following:
- Split your pension(s) into separate sections for the amount you want to have in drawdown versus the amount you want to take as tax free cash.
- Set the tax free cash part as account type "other" and then set it to be 0% tax.
- Drawdown part if set as drawdown rather than uncrystallised.
- Set up another fake pension for new uncrystallised funds if still contributing.
- Set the system up to withdraw from the dummy TFC funds before the drawdown funds.

Unfortunately this unlinks your timeline account pensions from your real world pension provider balances so you have to calculate what you want to put in, but this is how I am using it right now.  You can use the tax report to see that this does indeed help to mitigate any huge tax bills where you have large one off items.

If you change the withdrawal order it may change the tax outcome or maybe the pensions are on different investment approaches?  In Timeline you can pick one of the canned investments or you can actually type in an ISINs to create a portfolio and Timeline will calculate the appropriate investment mix.  (if you are an IFA you can interface it to other systems).

GazzaBloom

Pat38493 said:

GazzaBloom said:

@Pat38493 I know you use Timeline for your planning, it's a shame the drawdown logic in Timeline isn't a bit more sophisticated with options to allow testing of different withdrawal approaches.

I think it's set at UFPLS by the way the tax calculates, so I can't model using FAD TFLS within the app.

Also, one oddity I have observed is that changing the account drawdown order between my DC pension and my wife's changes the outcomes and amount left at end of plan. Not sure I understand why that is. 

I use both Timeline and Voyant Go - Voyant go is better for modelling those type of scenarios, but as a DIY investor, to get it you will need to invest in a retirement planning class costing around £500 and then pay an annual fee of about a hundred quid  (I think you can sign up for a 1 month trial to take a look).

Timeline is better for historical stresstesting against historic data, Voyant for testing cash flow scenarios and tax options and non retirement related scenarios.  Voyant also defaults to UFPLS but you can do forced crystallisations, planned withdrawals of specific amounts and suchlike.  It also has much better visibility on the tax calculations so you can optimise years for tax.

Yes Timeline defaults to using only UFPLS withdrawals which is a pain if you have lumpy withdrawals.  You can fudge it a bit by doing the following:
- Split your pension(s) into separate sections for the amount you want to have in drawdown versus the amount you want to take as tax free cash.
- Set the tax free cash part as account type "other" and then set it to be 0% tax.
- Drawdown part if set as drawdown rather than uncrystallised.
- Set up another fake pension for new uncrystallised funds if still contributing.
- Set the system up to withdraw from the dummy TFC funds before the drawdown funds.

Unfortunately this unlinks your timeline account pensions from your real world pension provider balances so you have to calculate what you want to put in, but this is how I am using it right now.  You can use the tax report to see that this does indeed help to mitigate any huge tax bills where you have large one off items.

If you change the withdrawal order it may change the tax outcome or maybe the pensions are on different investment approaches?  In Timeline you can pick one of the canned investments or you can actually type in an ISINs to create a portfolio and Timeline will calculate the appropriate investment mix.  (if you are an IFA you can interface it to other systems).

Thanks - I hadn't noticed that you can set the tax rate for the "other" account types. I'll have a play with that as suggested and see how it goes. 

ader42

zagfles 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. 

Why do you think that? If it grows before tax then you'll pay more tax on it! Multiplication is commutative. As long as you don't pay tax on growth outside the pension. 

So for instance every £1000 (after TFLS, PA used), compare taking it now and paying tax now or leave it to grow and pay tax later. Take it now and put it in an ISA, you pay 20% tax, so £800 into the ISA, growth say doubles it over many years, you have £1600. 

Leave it in, growth doubles it to £2000, then take it out, you pay 20% tax, so you have £1600. Identical. 

Obviously, if tax rates change it could be different. Basic rate could be cut so later would be better, or the HRT threshold could be cut/frozen and growth could push you into HRT when taking it out so earlier would then be better. So could go either way. And if you die before accessing it depending on when and who you leave it to and their tax status it could be different. 

I get what you are saying, and you would often be right about taking money beyond £12570 as the primary benefits of using TFLS and FAD over UFPLS are a combination of using the personal allowance and then there are the benefits for inheritance.

I wouldn’t take funds out to put into an ISA - as it would put it into the estate for inheritance tax purposes - but I get that you were just illustrating.

Kicking the tax can down the road is always better imho, it gives you or your descendants more options down the line; and yes it might mean my heir can take it all tax-free if I die before I’m 75. Personally my SIPP is not just for my income I want to leave a legacy. 

Option 1: UFPLS Take £12,570 + £4,190 income tax. i.e. removing £16,760 from the pot.
Option 2: FAD Take £12,570, i.e. removing £12,570 from the pot.
That £4,190 left in the pot could easily grow to £12,570 and provide an additional year of £12,570 taxable at zero percent. 

I might take £12k per year for 10 years then step off the wrong kerb having paid no income tax. My heir would obviously be £40k better off as I would have died before I was 75. 

leosayer

Personally, unless inheritance tax planning is important to you then I'd be looking to use UFPLS to extract chunks of the DC pot to fill 2xISAs for a few years to build up non-pension pots because you haven't mentioned any.

This helps to mitigate against future income tax rate increases and negates the risk of ever having to pay higher rate tax should you have a larger unexpected expense later in life like care, medical treatments, house extension, Lamborghini etc. It also helps mitigate tax if you are lucky enough to have exceptional investment growth that you want to extract.

Your posts make it sound like you are under-utilising your savings in the pursuit of saving tax, in other words letting tax drive your behaviour.

You clearly have done a great job saving so I would encourage you to make the most of your savings and if that means paying some basic rate tax now then so be it!