Do I move account into drawdown?

RocheM

I’ve combined some small pension accounts into one as I want to withdraw 25% tax free. This would total about £10k which I need for some work on my house.

It’s all in my Hargreaves Lansdown SIPP. When I sign in to the website I have two options:

• Take a lump sum - (Uncrystallised Funds UFPLS) The problem with this is that 25% of my withdrawal will be tax free, but 75% will be subject to income tax. This doesn’t sound right to me. 

• Take a lump sum tax freeThis seems to be what I want, but the whole pension seems like it will go into “drawdown” and I will take the 25% from that.

I will call Hargreaves Lansdown next week, but I just wanted to undrstand a bit more before I speak to them. 

I guess the “drawdown” option is what I want. But what does drawdown actually mean? I don’t want to trigger the MPAA.

Thanks,

Rochelle

Sarahspangles

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

RocheM

Sarahspangles said:

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

The combined pension pot is £44k, of which I need to take around £10500 for the essential work on my house. It looks like I can get the £10500 tax free, but the remaining 75% (£33,500) will go into a drawdown 'account'. Is this the way that it normally works? I don't plan on accessing any more of that £33,500. I get that its not tax efficient, but I'm stuck with needing to pay for these works and this is my best option riht now.

As mentioned, I plan on calling HL next week, but first just wanted to understand the situation so that I know what I'm dealing with and don't want to appear too clueless to them, LOL

Thanks again!

Rochelle

gm0

DO NOT take any income from the 75%.  That triggers MPAA.  Just the TFC.  This method is called FAD (Flexible Access Drawdown).  TFC now. Income later as you choose to.  Make that zero income clear in any instructions to HL.  That is simple to do.  Single transaction.  But the 75% is crystallised and all taxable thereafter.  Any growth too.  You have had your shot at TFC.

There is another method called the "small pots rules".  Google. And talk to provider.

Up to 3 small pensions of 10k each can be taken.  Without hitting your lifetime allowances or the MPAA.  This is an alternative to FAD for you.  But which is more complex for you and the provider to do - chop pension into several pieces. Leave one untouched.  Take the others to generate 10k.  A possible advantage is not triggering MPAA like UFPLS would.  And leaving some pension untouched (so it can grow TFC in the future).  Worth the effort?  Depends on you and the provider.

UFPLS triggers MPAA because income is taken now.  You understand that. 25% is tax free.  The rest is income in year for self assessment.  And the income triggers MPAA

dunstonh

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

Going into drawdown is a vague term and could cover more methods of drawdown.  It isn't helped by different providers often referring to different methods by different names.    And some providers not being particularly helpful.  For example, Aviva will say "yes we support drawdown on some of their legacy plans and when you ask them to pay a monthly income with each payment 25% and 75% split, they will then say we don't support that method.

If you have chosen to draw 25% TFC up front and zero income then you are crystallising your pension with nil income.     There are other methods of drawdown.  That method does not trigger the MPAA

It’s all in my Hargreaves Lansdown SIPP. When I sign in to the website I have two options:I thought HL finally supported phased drawdown but perhaps not.

Pat38493

I guess based on HL terminology, yes it's normal - per definition, by taking the 25% tax free cash, you are crystallising the pension and putting the other 75% into a full taxable state, and many providers call that a "drawdown" amount.

Usually you can also choose to take less than 25% of your allowance in which case you will end up with some of your pension crystallized, and some not.  Different providers may track this differently - some will give you 2 separate "accounts", others may just track what % of your pot is crystallized (meaning you have to be invested the same in all portions).

poseidon1

RocheM said:

Sarahspangles said:

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

The combined pension pot is £44k, of which I need to take around £10500 for the essential work on my house. It looks like I can get the £10500 tax free, but the remaining 75% (£33,500) will go into a drawdown 'account'. Is this the way that it normally works? I don't plan on accessing any more of that £33,500. I get that its not tax efficient, but I'm stuck with needing to pay for these works and this is my best option riht now.

As mentioned, I plan on calling HL next week, but first just wanted to understand the situation so that I know what I'm dealing with and don't want to appear too clueless to them, LOL

Thanks again!

Rochelle

You say accessing your TFC is your only option.

Is a £10k personal loan out of the question?

 Depending on your credit score, a £10k unsecured loan over 5 years at 6.7%  ( Lloyds Bank ) would cost around £195 per month, so total interest charge over the 5 years thereon would be around £1,740. 

Obviously, do not know the annual rate of growth you are achieving on your pension pot, but it would have to be very poor, not to exceed by a noticeable margin the interest paid on a modest personal loan over 5 years. At say a modest compound growth of 4% on your £44,000 pension pot, after 5 years it could then be worth in excess of £53, 000. Seems a shame to impact on this future growth (to your longer term benefit) , if an unsecured personal loan is viable in your circumstances.

Certainly this is advice I gave a friend who was similarly looking at accessing TFC for roof repairs. I Was able to convince him cheap unsecured borrowing was a better overall solution to his predicament. 

A mortgage would potentially be cheaper, but much more faff , delay and formalities involved in getting mortgage advances these days.

RocheM

poseidon1 said:

RocheM said:

Sarahspangles said:

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

The combined pension pot is £44k, of which I need to take around £10500 for the essential work on my house. It looks like I can get the £10500 tax free, but the remaining 75% (£33,500) will go into a drawdown 'account'. Is this the way that it normally works? I don't plan on accessing any more of that £33,500. I get that its not tax efficient, but I'm stuck with needing to pay for these works and this is my best option riht now.

As mentioned, I plan on calling HL next week, but first just wanted to understand the situation so that I know what I'm dealing with and don't want to appear too clueless to them, LOL

Thanks again!

Rochelle

You say accessing your TFC is your only option.

Is a £10k personal loan out of the question?

 Depending on your credit score, a £10k unsecured loan over 5 years at 6.7%  ( Lloyds Bank ) would cost around £195 per month, so total interest charge over the 5 years thereon would be around £1,740. 

Obviously, do not know the annual rate of growth you are achieving on your pension pot, but it would have to be very poor, not to exceed by a noticeable margin the interest paid on a modest personal loan over 5 years. At say a modest compound growth of 4% on your £44,000 pension pot, after 5 years it could then be worth in excess of £53, 000. Seems a shame to impact on this future growth (to your longer term benefit) , if an unsecured personal loan is viable in your circumstances.

Certainly this is advice I gave a friend who was similarly looking at accessing TFC for roof repairs. I Was able to convince him cheap unsecured borrowing was a better overall solution to his predicament. 

A mortgage would potentially be cheaper, but much more faff , delay and formalities involved in getting mortgage advances these days.

Thaks for the response. It's a loooooong story. But my credit score is very poor and have been turned down for loans unfortuntely. So this is the option I have.

poseidon1

RocheM said:

poseidon1 said:

RocheM said:

Sarahspangles said:

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

The combined pension pot is £44k, of which I need to take around £10500 for the essential work on my house. It looks like I can get the £10500 tax free, but the remaining 75% (£33,500) will go into a drawdown 'account'. Is this the way that it normally works? I don't plan on accessing any more of that £33,500. I get that its not tax efficient, but I'm stuck with needing to pay for these works and this is my best option riht now.

As mentioned, I plan on calling HL next week, but first just wanted to understand the situation so that I know what I'm dealing with and don't want to appear too clueless to them, LOL

Thanks again!

Rochelle

You say accessing your TFC is your only option.

Is a £10k personal loan out of the question?

 Depending on your credit score, a £10k unsecured loan over 5 years at 6.7%  ( Lloyds Bank ) would cost around £195 per month, so total interest charge over the 5 years thereon would be around £1,740. 

Obviously, do not know the annual rate of growth you are achieving on your pension pot, but it would have to be very poor, not to exceed by a noticeable margin the interest paid on a modest personal loan over 5 years. At say a modest compound growth of 4% on your £44,000 pension pot, after 5 years it could then be worth in excess of £53, 000. Seems a shame to impact on this future growth (to your longer term benefit) , if an unsecured personal loan is viable in your circumstances.

Certainly this is advice I gave a friend who was similarly looking at accessing TFC for roof repairs. I Was able to convince him cheap unsecured borrowing was a better overall solution to his predicament. 

A mortgage would potentially be cheaper, but much more faff , delay and formalities involved in getting mortgage advances these days.

Thaks for the response. It's a loooooong story. But my credit score is very poor and have been turned down for loans unfortuntely. So this is the option I have.

That is a great shame, and sorry to have put you on the spot in this regard. As regards your TFC, needs must, so good luck!

Albermarle

RocheM said:

poseidon1 said:

RocheM said:

Sarahspangles said:

Drawdown of only the 25% tax free won’t trigger the MPAA so you will continue to be able to contribute more than £10k a year going forward.

However doing that, you crystallise the 75% from which you are taking the 25% tax free so it will all be taxable when you do take it - including any investment growth. So what’s tax efficient in the short term may not be in the long term. 

Ohh thank you. I see. So going into "drawdown" is normal and expected when accessing a 25% tax free lump sum, then?

The combined pension pot is £44k, of which I need to take around £10500 for the essential work on my house. It looks like I can get the £10500 tax free, but the remaining 75% (£33,500) will go into a drawdown 'account'. Is this the way that it normally works? I don't plan on accessing any more of that £33,500. I get that its not tax efficient, but I'm stuck with needing to pay for these works and this is my best option riht now.

As mentioned, I plan on calling HL next week, but first just wanted to understand the situation so that I know what I'm dealing with and don't want to appear too clueless to them, LOL

Thanks again!

Rochelle

You say accessing your TFC is your only option.

Is a £10k personal loan out of the question?

 Depending on your credit score, a £10k unsecured loan over 5 years at 6.7%  ( Lloyds Bank ) would cost around £195 per month, so total interest charge over the 5 years thereon would be around £1,740. 

Obviously, do not know the annual rate of growth you are achieving on your pension pot, but it would have to be very poor, not to exceed by a noticeable margin the interest paid on a modest personal loan over 5 years. At say a modest compound growth of 4% on your £44,000 pension pot, after 5 years it could then be worth in excess of £53, 000. Seems a shame to impact on this future growth (to your longer term benefit) , if an unsecured personal loan is viable in your circumstances.

Certainly this is advice I gave a friend who was similarly looking at accessing TFC for roof repairs. I Was able to convince him cheap unsecured borrowing was a better overall solution to his predicament. 

A mortgage would potentially be cheaper, but much more faff , delay and formalities involved in getting mortgage advances these days.

Thaks for the response. It's a loooooong story. But my credit score is very poor and have been turned down for loans unfortuntely. So this is the option I have.

Hopefully your finances will allow you to continue contributing to a pension ( with your employer ?) as then your funds will be building up again.

RocheM

poseidon1 said:

That is a great shame, and sorry to have put you on the spot in this regard. As regards your TFC, needs must, so good luck!

It's fine - its mostly down to a failed relationship which put me in this position. And some other bad choices on my side, I admit. But I own this, and am making progress to fix my credit (with the help of this website). "Onwards and upwards" as my old boss used to always say! Thanks for your great advice.

Rochelle.