Drawdown Notional split?

Donewithwork1

Just wondering how people manage their investments and drawdown with this.

My own fault I know, but I stupidly thought that when I opened my SIPP i'd be able to.......

1)  Crystallise an amount of money for up to the next 4.5 years (to take me up to state pension age) and do FAD to take a tax free sum and a monthly income from it up to my personal allowance.  I was going to hold this pot in a short term MMF.

2)  The remaining UNcrystallised pot I was just going to invest in a passive global tracker and forgot about it for at least the next 5 years, possibly even longer.

My thoughts were that no 1 would give me an income for the next 4+ years with a bit of growth with little worry about the crystallised pot dropping substantially and thus averting the much talked about 'sequence of returns risk' and give me a fairly stable income.

Now that I've found out about the so called 'notional split' it appears that what I thought was a fairly simple strategy I now cannot do, and now it all seems a bit more complicated!!!

Thoughts??

tacpot12

Who is your SIPP with? Did they make any representation that you would be able to do this? 

Donewithwork1

tacpot12 said:

Who is your SIPP with? Did they make any representation that you would be able to do this? 

Hi tacpot12, It's with Interactive Investor.  Tbh I've been happy with them since I opened a SIPP with them in February and transferred a couple of workplace pensions in so i'm not complaining as such.  I guess I just foolishly thought I could do as per my OP but it seems I can't!  

Linton

Some platforms (HL may be the only one) operate a 2 tranch system whereby crystalised funds are held in a separate sub-portfolio), others simply use an overall crystallised % value.

However you can easily have the same effect without having separate portfolios.  It doesnt actually matter that the short and long term funds aren't physically separated.  You can just sell the appropriate funds as needed.

Another way could be to take your full TFLS (or a partial one)and put it in an S&S ISA. Use that for the STMMF fund.  Keep the rest in your global tracker in your SIPP which you use to replenish the 5 year buffer when needed. 

There are many other options along the same lines, the main difference is how you avoid the possible risk of liability for higher rate tax.

Donewithwork1

Linton said:

Some platforms (HL may be the only one) operate a 2 tranch system whereby crystalised funds are held in a separate sub-portfolio), others simply use an overall crystallised % value.

However you can easily have the same effect without having separate portfolios.  It doesnt actually matter that the short and long term funds aren't physically separated.  You can just sell the appropriate funds as needed.

Another way could be to take your full TFLS (or a partial one)and put it in an S&S ISA. Use that for the STMMF fund.  Keep the rest in your global tracker in your SIPP which you use to replenish the 5 year buffer when needed. 

There are many other options along the same lines, the main difference is how you avoid the possible risk of liability for higher rate tax.

Thanks Linton.  If I've got this right the downside with just selling appropriate funds is.... if my current notional split in the first year of DD is, say, 3.5% Crystallised and 96.5 Uncrystallised then I would have to hold a much larger amount in a MMF in my uncrystallised pot in order to be able to take an income of 3.5% from MMF's for that year.

The ISA route is a good idea but that would mean crystallising a lot more to get the tax free cash to put into an ISA which could limit the ability to be able to grow the uncrystallised pot to grow more tax free cash in the future.

Hope that makes sense, starting to confuse myself now lo!!

gm0

They don't all support phasing FAD to the same extent or with good reporting/IT support

So to run an overall portfolio in truly separate pots - Partial transfer is your friend. 
But ideally you need to use it before you start access for easier admin.

This lets you leave an untouched uncrystallised residual pot wherever you want. 
And to pick one platform (or more than one as I did) for the particular range and cost and holdings you select.  And to take advantage of the seasonal cashback for switching which in my case and usage offset several years platform costs

This has the advantage that it doesn't ask anything difficult of the provider - so most will be a capable and valid choice varying only in how well they match up in terms of pricing different elements - to your portfolio size, desire for funds vs etfs, trading behaviour etc.

Linton

Donewithwork1 said:

Linton said:

Some platforms (HL may be the only one) operate a 2 tranch system whereby crystalised funds are held in a separate sub-portfolio), others simply use an overall crystallised % value.

However you can easily have the same effect without having separate portfolios.  It doesnt actually matter that the short and long term funds aren't physically separated.  You can just sell the appropriate funds as needed.

Another way could be to take your full TFLS (or a partial one)and put it in an S&S ISA. Use that for the STMMF fund.  Keep the rest in your global tracker in your SIPP which you use to replenish the 5 year buffer when needed. 

There are many other options along the same lines, the main difference is how you avoid the possible risk of liability for higher rate tax.

Thanks Linton.  If I've got this right the downside with just selling appropriate funds is.... if my current notional split in the first year of DD is, say, 3.5% Crystallised and 96.5 Uncrystallised then I would have to hold a much larger amount in a MMF in my uncrystallised pot in order to be able to take an income of 3.5% from MMF's for that year.

The ISA route is a good idea but that would mean crystallising a lot more to get the tax free cash to put into an ISA which could limit the ability to be able to grow the uncrystallised pot to grow more tax free cash in the future.

Hope that makes sense, starting to confuse myself now lo!!

The crystalisation % does not specify the fund.

All that is recorded is that the total pot % crystallised.  So as an example:

1) starting with an uncrystallised £100K with £20K short term and £80K  long term funds you could take out say £5K tax free lump sum raised by selling funds. There is now £5K in your pocket and £15K crystalised in your pension leaving £80K uncrystalied.  So a % crystalisation of £15K/£95K=16%

Say the £5K had been  raised by selling long term funds so you now have £20K short term funds and £75K long term funds.


2) Say you now want to drawdown a taxable £10K which you can do since you have £15K crystallised.  So that will leave you with £5K crystallised and £80K uncrystallised, representing a % crystalisation of £5K/£85K=5.9%

Looking at the fund allocation assume that you raised the £10K by selling short term funds.

So that leaves you with £10K short term funds and £75K longterm funds.

The key point is that the % crystallisation calculation is completely independent of the fund allocation. 

 
Yes it is very confusing and you need a clear head.  I hope I havent got myself confused!

Donewithwork1

gm0 said:

They don't all support phasing FAD to the same extent or with good reporting/IT support

So to run an overall portfolio in truly separate pots - Partial transfer is your friend. 
But ideally you need to use it before you start access for easier admin.

This lets you leave an untouched uncrystallised residual pot wherever you want. 
And to pick one platform (or more than one as I did) for the particular range and cost and holdings you select.  And to take advantage of the seasonal cashback for switching which in my case and usage offset several years platform costs

This has the advantage that it doesn't ask anything difficult of the provider - so most will be a capable and valid choice varying only in how well they match up in terms of pricing different elements - to your portfolio size, desire for funds vs etfs, trading behaviour etc.

Thank you gm0 that's a good idea and certainly food for thought.  I've literally only crystallised a very small amount, enough to pay me 12 months up to personal allowance so I guess I could just let that run out and then I presume i'm back with just an uncrystallised pot.  I'm expecting £1500.00 cashback in 10 months from ii so as you say i could then look at possibilities of splitting/moving some of it somewhere else and maybe take advantage of another CB offer too.

LHW99

With II you may find it easier to do an annual UFPLS, so that your remaining pot remains uncrystallised. That would be 25% tax free, and the rest taxed at your normal rate (so if you have no other income you won't need to pay tax, although some would be deducted from the first payment until HMRC catches up).

You would ensure you have sold a suitable amount of funds / have retained dividends in the SIPP to cover the withdrawal. The withdrawal could be placed in an easy access (or even 30 day notice access) and monthly amounts withdrawn as income (any surplus earning interest meanwhile).

AFAIK, II isn't quite as flexible as some other platforms in terms of exactly how you take tax-free / taxed. It doesn't easily allow monthly UFPLS for example, because of the application process, but they are pretty good answering secure messages. You could say exactly what you want to do, and see what they suggest.

Donewithwork1

Linton said:

Donewithwork1 said:

Linton said:

Some platforms (HL may be the only one) operate a 2 tranch system whereby crystalised funds are held in a separate sub-portfolio), others simply use an overall crystallised % value.

However you can easily have the same effect without having separate portfolios.  It doesnt actually matter that the short and long term funds aren't physically separated.  You can just sell the appropriate funds as needed.

Another way could be to take your full TFLS (or a partial one)and put it in an S&S ISA. Use that for the STMMF fund.  Keep the rest in your global tracker in your SIPP which you use to replenish the 5 year buffer when needed. 

There are many other options along the same lines, the main difference is how you avoid the possible risk of liability for higher rate tax.

Thanks Linton.  If I've got this right the downside with just selling appropriate funds is.... if my current notional split in the first year of DD is, say, 3.5% Crystallised and 96.5 Uncrystallised then I would have to hold a much larger amount in a MMF in my uncrystallised pot in order to be able to take an income of 3.5% from MMF's for that year.

The ISA route is a good idea but that would mean crystallising a lot more to get the tax free cash to put into an ISA which could limit the ability to be able to grow the uncrystallised pot to grow more tax free cash in the future.

Hope that makes sense, starting to confuse myself now lo!!

The crystalisation % does not specify the fund.

All that is recorded is that the total pot % crystallised.  So as an example:

1) starting with an uncrystallised £100K with £20K short term and £80K  long term funds you could take out say £5K tax free lump sum raised by selling funds. There is now £5K in your pocket and £15K crystalised in your pension leaving £80K uncrystalied.  So a % crystalisation of £15K/£95K=16%

Say the £5K had been  raised by selling long term funds so you now have £20K short term funds and £75K long term funds.


2) Say you now want to drawdown a taxable £10K which you can do since you have £15K crystallised.  So that will leave you with £5K crystallised and £80K uncrystallised, representing a % crystalisation of £5K/£85K=5.9%

Looking at the fund allocation assume that you raised the £10K by selling short term funds.

So that leaves you with £10K short term funds and £75K longterm funds.

The key point is that the % crystallisation calculation is completely independent of the fund allocation. 

 
Yes it is very confusing and you need a clear head.  I hope I havent got myself confused!

Thank you Linton I think I'll have to read your post a few times to see if I can get my head around it, but thanks for taking the time to explain. :-)

Pat38493

Donewithwork1 said:

Linton said:

Some platforms (HL may be the only one) operate a 2 tranch system whereby crystalised funds are held in a separate sub-portfolio), others simply use an overall crystallised % value.

However you can easily have the same effect without having separate portfolios.  It doesnt actually matter that the short and long term funds aren't physically separated.  You can just sell the appropriate funds as needed.

Another way could be to take your full TFLS (or a partial one)and put it in an S&S ISA. Use that for the STMMF fund.  Keep the rest in your global tracker in your SIPP which you use to replenish the 5 year buffer when needed. 

There are many other options along the same lines, the main difference is how you avoid the possible risk of liability for higher rate tax.

Thanks Linton.  If I've got this right the downside with just selling appropriate funds is.... if my current notional split in the first year of DD is, say, 3.5% Crystallised and 96.5 Uncrystallised then I would have to hold a much larger amount in a MMF in my uncrystallised pot in order to be able to take an income of 3.5% from MMF's for that year.

The ISA route is a good idea but that would mean crystallising a lot more to get the tax free cash to put into an ISA which could limit the ability to be able to grow the uncrystallised pot to grow more tax free cash in the future.

Hope that makes sense, starting to confuse myself now lo!!

I’m not really following why you think that you need to hold more money in MMF to achieve the same objective.  As Linton explained you keep the same proportion of investments as you always intended, and then you decide which investments to sell to cash when you want to take money out.

You can choose whether you take money out from your drawdown part or by UFPLS or by TFC so in the end you can achieve the same objectives but you just might need to do a few sums on a spreadsheet or whatever.  Interactive Investor will recalculate the % of notional split based on the type of withdrawal that you made.

If you think that’s too much faff, as others have said you have other options like using ISAs or moving your drawdown part to a different provider.