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

leosayer

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.

Analysis paralysis is a real thing for people like me who are planners - it's my job. Having a plan and knowing the details is great but it's important to build flexibility in for all reasonably foreseeable eventualities and not overthinking / overplanning things that naturally have a high degree of uncertainty.

I've been doing retirement and savings plans for myself for over 10 years and most don't survive for very long due to unexpected changes to tax rates, thresholds and allowances, investment returns, inflation and my own lifestyle, attitudes and spending habits. That's before you start to consider potential future changes to tax that might be introduced by future governments and unexpected events like the pandemic.

To give you an example I got seriously into the weeds of planning around the lifetime allowance only for the chancellor to whip it away last year.

In practice, this generally means not having all your eggs in one basket whether that be investment, tax account or whatever. In practical terms, having savings will make you a target for future government tax raising but I prefer that to the alternative.

BoxerfanUK

ader42 said:

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. 

How does option 2 work?  I thought u had to take the 25% tax free with every crystallisation event!!