Taking 25% taxfree cash lumpsum out of large DC pension pot

BlisteringBarnacles

I have posted here a month ago about taking 25% taxfree cash lump and falling foul of possible pension recycling rules. Thanks to all of you who replied and clarified the various points around it.

In this post, I wanted to list my reasons for wanting to take the 25% taxfree lumpsum from my DC pension. I already posted this on Bogleheads and from the replies I got from couple of amazing folks there, it makes sense to take out the lumpsum in my case. But that thread became very long and I also wanted to summarize them here and get your valuable feedback as well.

Age : 55. Single, no kids. Will turn 56 next month. Unemployed. Resigned end of last year. Enjoying my break/sabbatical. DC pension value is £1.01 million, so my 25% comes to £254,000. For the sake of discussion, lets assume it is 268,000, its not that far off.

Plan is to take only the lumpsum very soon but not touch the rest of it, i.e go into "deferred drawdown", so question of MPAA doesn't arise.

My reasons for taking the money out and investing in GIA (General Investment Account) are :

1. I may go away to India for good - not sure when - perhaps in next 1-2 years - or sooner. India does not recognize 25% tax free unless I do QROPS which I dont want to do just yet. I could wait till I actually decide to go to India but then Mr.Market may crash and my 1 million pension pot may be less. So it makes sense to take the money out.
2. Once the pot hits the former LTA of 1.07 million, any growth on the 268K inside the pension wrapper will attract income tax. Outside the wrapper, it would only attract CGT and dividend tax. These are generally lower than income tax. So it kind of makes sense to take it out once 25% hits 268K. I am almost there.
3. I have no heirs or dependents, my capital will go to charity so the IHT protection of pensions is not a factor.
4. In the Oct 30 Budget, who knows if tax free lumpsum amount is going to be reduced ? Already IFS think tank has suggested reducing it to £100K. I doubt they will do anything suddenly but if I am going to take it, may as well do it before Oct 30.

 
Scenarios where taking out the 250K lumpsum will be sub-optimal :

1. If I get a well paying job here in UK - in this case the 250K in GIA will attract CGT of at least 20% and dividend tax of 33% (whereas left in the pension wrapper there is no immediate tax to pay, altho later I will end up paying income tax rates, hopefully 20% but possibly 40%). But in any case, the tax on the GIA is still going to be no higher than income tax rates. And in case I do get a good job, I may contribute some more into pension to hit the LTA. Anyway this is a nice problem to have.
2. If the 25% tax free lumpsum is increased ( from 268K ) in line with inflation - but it is unlikely this govt will do that anytime soon.

So, on the balance of probabilities, taking out the 254K lumpsum doesn't seem like a terrible decision in my case. It IS however an important decision to take a substantial sum out, so wanted to make sure I have not missed anything important.  

Appreciate your feedback and look forward to hearing from you.

Thanks !

BlisteringBarnacles

I guess I have my answers in these 2 very well articulated threads. Wanted to link them here for the sake of others.

https://www.bogleheads.org/forum/viewtopic.php?p=7885026#p7885026

https://www.bogleheads.org/forum/viewtopic.php?p=7966009#p7966009

In my scenario it does look reasonable to take the 25% PCLS money out. The only scenario I "lose out" is if I get a job in the UK but if I get a job I would be quids in and as I said its a nice problem to have.

I would still like to hear from folks here if I have overlooked anything important.

Cheers

EdSwippet

BlisteringBarnacles said:

1. ... I could wait till I actually decide to go to India but then Mr.Market may crash and my 1 million pension pot may be less. So it makes sense to take the money out.

Just on this ... as I see it, your downside risk of delay is (weirdly!) a large market rise. Here is why.

Suppose you take your PCLS now, and (as apparently planned) put it into the same investments, just outside the pension and in a GIA. If the market crashes, both your remaining pension and the GIA drop equally, leaving you in the same financial position as if you had not taken the money out. So, the same either with or without taking the PCLS.

However, suppose you delay the PCLS, and markets rocket upwards so that you exceed £1.072m. That way you can lose out. The best way to see this is to look at the margin. For argument, suppose your pension is exactly £1.072m today, and markets will rise to increase this by £400 tomorrow (you know this because you have a fully functional crystal ball!). Take the £268k PCLS today and put it into your GIA, and tomorrow you have £100 of capital gain in the GIA, taxable (currently!) at 10 or 20%. Or wait and take the £268k PCLS tomorrow and because you hit the PCLS cap, that £100 gain you could have had in the GIA is instead stuck in the pension, and will cost you 20% or 40% in income tax to extract.

Of course, tax rates could (will) change, and who knows to what level, so there's ever that. And there is a case to be made that annual tax deferral over a long period can overcome a higher final rate -- the problem here being that for those of us old enough to access a pension, the long period can be so long that break-even only occurs after you're dead, a hollow victory. But on current known information, the illustration above seems to hold.

None of this invalidates your decision, by the way -- if anything, it might bolster it further, because in general, and over time, markets rise. Just a note that a market crash, should one manifest, perhaps isn't really the problem that you think it might be.

BlisteringBarnacles

Edswippet, Great example and illustration. Although you have explained this same point earlier (thanks), here you specifically pointed out that the downside risk of delay is a large market rise. Its certainly another way to look at it, thanks for that insight and perspective.

EdSwippet said:

Take the £268k PCLS today and put it into your GIA, and tomorrow you have £100 of capital gain in the GIA, taxable (currently!) at 10 or 20%. Or wait and take the £268k PCLS tomorrow and because you hit the PCLS cap, that £100 gain you could have had in the GIA is instead stuck in the pension, and will cost you 20% or 40% in income tax to extract.

There is one exception to the above tho' which I mentioned in point (1) in my "scenario where I possibly lose out", i.e if I manage to get a job next month that puts me in 40% tax bracket. Now the £100 in the GIA from the example above will incur capital gains tax of 20%, dividend tax of 33.75% if invested in stocks, and 40% tax on dividends if invested in bonds, whereas left in the pension I may be able to get away with paying just 20% income tax in the future, although admittedly highly unlikely. Most likely money in the pension will grow and push me into 40% tax bracket as explained in the Bogleheads thread, but even then ALL of it is not taxed at 40%. For example even if I draw down £60K per year, only some of that (around 10K) is taxed at 40%. Anyway, its difficult to play what-if on this. So many things could change. But in short, if I do get a good job, taking the money out might be a bit sub-optimal but as I said its a nice problem to have and I am not going to worry too much about it.

Thanks again !

BlisteringBarnacles

More_complicated_than_that : Thanks for your response. Thanks for the ISA suggestion.

Didnt realize crystallizing takes time. Hope I can make it before 30 Oct (In case something drastic happens to the lumpsum in the budget, hope not) One additional problem is : Once you crystallize and take out the 25%, the remaining deferred drawdown can only be fully transferred to another provider, you cannot split a drawdown, apparently. Right now my pension (SIPP) is uncrystallized : I have 125K with Interactive Investor and 895K with Aegon. I want to split my deferred drawdown amount of 750K between Aegon, II and Hargreaves. (to avoid all eggs in one provider basket) So my plan is to take out 500K uncrystallized out of Aegon, move it to HL/II and then crystallize each of the three pots. Hope I have time to do all this. I moved uncrystallized SIPP from Standard Life to II and it took less than 10 days.

propensity to spend the funds : very valid point. I am not a spendthrift or impulsive by any means but I do have that worry. I thought I was frugal but turns out that I like my sandwiches and coffee in the town centre and those cappuccinos add up. It was free and/or subsidized when I had a job. I had great health insurance thanks to the company. I now pay £130 a month to continue the same health insurance policy. So my costs have gone up quite a bit after leaving the job. And when I used to travel to client's sites I saved a fortune as all expenses were borne by the company.

For the first time in my life I am without a job and spending from my savings. I have always been earning or been a student back in the day. Even as a student, I used to earn. I dont have any vices fortunately - no smoking, quit even moderate drinking, but given that cost of living has almost doubled compared to last year, and rent keeps going up (I dont own a home in UK), it does make me anxious. I think of Money in ISA/Pension as untouchable but money in a taxable account is easily within one's reach to spend. Been meaning to post another thread about portfolio review / how much is enough to FIRE, but never got around to it. But you make a valid point.

Thanks

Albermarle

Hope I have time to do all this. I moved uncrystallized SIPP from Standard Life to II and it took less than 10 days.
I have done Aviva to Fidelity - 48 hours
Scottish Widows twice ( from two different parts) to Fidelity - both about 2 weeks.
( all uncrystallised and in cash ) 

It is a pity you are in a rush as HL and II ( and others) often have quite good cashback deals for transfers in of big pots, but I do not think either is running one at the moment.

BlisteringBarnacles

Having problem with transferring uncrystalized SIPP into Hargreaves Landsdown. Having web server issues.

I have 900K in Aegon. Plan was to move 250 to II and 250 to HL. The move to II was smooth, online. Given the experience of moving uncrystallized SIPP from Standard Life to II, I am expecting this to take around 7 to 10 days max.

Then I tried HL : I logged into HL, spoke to the operator just to make sure I am doing nothing wrong. HL online form gave me a list of providers from which I could transfer : Aegon Platform, Aegon Retail, Aegon Scottish Equitable and one more Aegon thing. I had called Aegon in the morning and they had said the correct one is : "Aegon Retirement Choice (ARC)". II provided this "ARC" option but HL did not. The lady at HL customer service asked me to select "Aegon Platform"

When I press submit, it gave website error. After trying couple of times, it went thru but took me to a page where it said I need to download a form and sign it. But when I clicked on that download link, got another website error. She admitted they are having software issues. She then emailed me a 1 page application form which I can print out. Its a simple form, asking for provider name, plan number, scheme number etc.

If I fill out this paper application form and courier it to HL, will the actual transfer be electronic ? Otherwise I have to stick to II and Aegon and forget about HL.

Problem is : My pension amount is large, and I wanted to split between 3 providers. (Aegon, HL, II). Once I crystalize and do a deferred drawdown which I want to do before 30 Oct (budget day), I can only transfer in full if I need to. Ok perhaps it is not so bad. 1 million pot, 25% out, I can split the 750 SIPP drawdown between II and Aegon. 375 each.

Thanks

dunstonh

I moved uncrystallized SIPP from Standard Life to II and it took less than 10 days.

Standard Life are one of the quickest to transfer.  Key the transfer on a Monday and usually its in the new scheme by Wednesday.     So, if yours took 10 days, then its more likely II didn't act on it quickly.

The lady at HL customer service asked me to select "Aegon Platform"

Aegon platform is the Aegon Cofunds platform and a different location to ARC.

BlisteringBarnacles

Thanks dunstonh.

Thought I would wait an hour, log out of HL and try the transfer (from Aegon) again. It worked this time !

The submit button went thru fine and I got a reference number for the submission.

What floored me was the initial server error couple hours ago and even worse than that, upon immediate retry, the submission succeeding but being taken to a page with a message indicating that I need to download a form to sign and mail in but the download link also giving server error.

Anyway all’s well that ends well. Hopefully it will go thru ... now

dunstonh said:

Aegon platform is the Aegon Cofunds platform and a different location to ARC.

Oh that's worrying ... For what its worth, ARC is clubbed under "Aegon Platform" over here : https://www.nestpensions.org.uk/schemeweb/memberhelpcentre/companies-using-origo-options.html 

The Aegon rep said in the morning that my pension plan was ARC (Aegon Retirement Choices). ARC was indeed one of the options in I.I but unfortunately not in HL. In HL the only Aegon options were : Aegon Platform, Aegon Retail, Aegon Scottish Equitable and Aegon Target Plan (Ex Blackrock). Under I.I the options were : Aegon, Aegon Retirement Choices, Aegon Scottish Equitable Pensions and Bonds and finally Aegon Target Plan.

I hope this does not cause a problem. The HL rep told me to choose "Aegon Platform".

Fingers crossed.

BlisteringBarnacles

On another note, in either II or HL, there is no provision to track the status of the transfer within the website, the amount I am transferring and the various details I had entered such as the name of the pension scheme, plan number etc.

In the case of II, I got an email with just the reference number but in the case of HL just an email with not even a reference number.

I guess I was supposed to take screenshots of every single page as I was going thru the process.

Are these platforms so poor that they cannot implement a basic software feature or just unprofessional ? Just amazing.

Oh well.  

Albermarle

BlisteringBarnacles said:

On another note, in either II or HL, there is no provision to track the status of the transfer within the website, the amount I am transferring and the various details I had entered such as the name of the pension scheme, plan number etc.

In the case of II, I got an email with just the reference number but in the case of HL just an email with not even a reference number.

I guess I was supposed to take screenshots of every single page as I was going thru the process.

Are these platforms so poor that they cannot implement a basic software feature or just unprofessional ? Just amazing.

Oh well.  

A problem noted by others. Another platform I transferred to did have a transfer update page, but it did not seem to work.
You will also probably find one day that the funds have arrived at your new provider, by checking the website/app, rather than getting an actual notification from anybody.