Drawdown Approach - Anything I am missing, are my assumptions correct?

MK62

JamTomorrow said:

NoMore said:

You could be missing out on further tax free cash from growth in uncrystallised funds by taking more money out at 20% tax to put in isa. Up until you’ve withdrawn £268275 of tax free cash , I would only take out what you need from the pension not transferring excess to the isa. 

But if they take out more then they need and that is all invested in an ISA, in the same fund as the SIPP, then all that growth in the ISA wrapper is tax free anyway so shouldn't make any difference.

It can make a difference due to the 25% tax free element of SIPP withdrawals.

MEM62

JamTomorrow said:

DE_612183 said:

If the goal is £36k - why are you drawing down £52k?

Surely it should be £30k - then with the SP £41 before tax, and after £5k tax you get £36k... 

Why not just leave the balance in the pension to grow

The thinking here, maybe incorrectly, was get as much out of the pension at 20% as quickly as possible so build investments out of a SIPP wrapper and into an ISA wrapper.  The ISA will likely be invested in the same fund as in the SIPP.  Assumptions is they are always going to take out of the pension at a level that will crystallise 20% tax so thought it was indeifferent to whether the surplus to requirements is invested in ISA or SIPP.

I don't see the logic in draining the pension (and paying Tax) just to stick the money in an ISA.  Keep the money in the pension and the 20% you would have paid in tax stays invested and continues to grow.  Just take what is needed to meet the income requirement and leave the rest invested.   

NoMore

JamTomorrow said:

NoMore said:

You could be missing out on further tax free cash from growth in uncrystallised funds by taking more money out at 20% tax to put in isa. Up until you’ve withdrawn £268275 of tax free cash , I would only take out what you need from the pension not transferring excess to the isa. 

But if they take out more then they need and that is all invested in an ISA, in the same fund as the SIPP, then all that growth in the ISA wrapper is tax free anyway so shouldn't make any difference.

The difference is using tax free money to fill the isa or taxed money. Don’t make the mistake of thinking isa are tax free totally. It’s only the gains are tax free. Contributions can come from taxed money. 

JamTomorrow

Exodi said:

Is there any particular reason you want all the money eventually in an ISA instead of the SIPP?

Your friend is not near the LSA so there is still a lot of additional tax free cash that can be generated staying in the pension.

If the pension was exhausted at 80, whereas the average life expectancy is around 85 for someone of your friend's age, then (so long as the state pension is less than the personal allowance) they would have paid 20% tax on money they didn't need that they could have withdrawn later at 0%.

Likewise what is the situation regarding their assets upon death? While tax changes are being made to bring pensions within the estate, in my opinion they are still favourable to ISA's (especially when passing directly to children) - though how favourable depends on the death benefit options offered by the pension provider. Is it part of the long term plan to have a great big ISA instead of a great big SIPP?

Thanks Exodi, all good reflection points.

Main driver for ISA over SIPP is that as they have no other savings, and £36k is their expected run rate, they don't have backup for unexpected lumpy costs.  That was why they wanted to build up in an ISA so that if the unexpected occurs they can dip into ISA rather that a forced drawdown that could push them into 40% tax bracket.

I had reflected on the missed 0% tax for the difference between pensiona and annual allowance in the years 80+ but with a pension of £11k and tax free alowance of £12.5k there was not a lot in it.  Maybe they could pivot to only taking £1.5k from pension when they are down to last £25k.

In terms of assets upon death they have a spouse and no dependents so didn't see much here between SIPP and ISA.

JamTomorrow

MEM62 said:

JamTomorrow said:

DE_612183 said:

If the goal is £36k - why are you drawing down £52k?

Surely it should be £30k - then with the SP £41 before tax, and after £5k tax you get £36k... 

Why not just leave the balance in the pension to grow

The thinking here, maybe incorrectly, was get as much out of the pension at 20% as quickly as possible so build investments out of a SIPP wrapper and into an ISA wrapper.  The ISA will likely be invested in the same fund as in the SIPP.  Assumptions is they are always going to take out of the pension at a level that will crystallise 20% tax so thought it was indeifferent to whether the surplus to requirements is invested in ISA or SIPP.

I don't see the logic in draining the pension (and paying Tax) just to stick the money in an ISA.  Keep the money in the pension and the 20% you would have paid in tax stays invested and continues to grow.  Just take what is needed to meet the income requirement and leave the rest invested.   

Thank you, that makes sense now.  Thats whay I like to come here to pressure test thoughts.  I'll re-run their excel only taking out of pension what is required to see what ipmact that has their pot at age 80/85.

crv1963

Alternatively they could take the TFLS of £150k, put £30k in savings account or premium bonds as their Emergency Fund. Put 40k into an ISA (20k each) leaving 80k then put a further 40k into ISA in April 2025 leaving 40k cash which they could then take 25k for annual spend. Leaving a further 15k float. They may find that they spend less than or more than their target. So they have a cushion to "suck it and see".

We have drawn my wifes 25% TFLS from one of her pensions and have earmarked 50% of it as a future EF and 50% has been earmarked for some building works to future proof the house and the balance after building work towards a car.

Wife has not drawn any taxable income from her pension pot as we are still contributing 12k pa to her HL SIPP, as she did retire some years ago for a few months but decided to return to work, at that time we decided to use savings to fund her retirement just in case she wasn't quite ready to retire!

LHW99

JamTomorrow said:

zagfles said:

I don't think you can set up monthly UFPLS with HL, so probably far easier to crystallise the whole ~£52k and take the year's TFLS up front, this could go straight into the ISA, then draw the taxable income monthly. 

Thanks.  So when you take a UFPLS annually with HL this doesn't trigger income tax, you just get the tax free element.  Then you draw taxable income from what has been crystalised monthly and this triggers income tax calculation?

For clarty.

UFPLS is taking a specified amount, with 25% tax free, and 75% potentially taxable at the time you take the UFPLS.

eg £10,000 total, £2500 FLS, £7500 paid out and potentially taxable in one go, for you to put in eg a savings account, and withdraw from monthly. You may then be able to claim back part / all of that tax from HMRC, depending on your other income.

If you don't want to be hit by the full amount of tax all in one go, then you "crystallise" the specified amount, draw the TFLS immediately, and arrange for the taxable part to be paid in monthly installments. That way, the tax paid is likely to adjust once the platform has corresponded with HMRC.

So 10,000 crystallised, £2500 tax free in month 1 of the withdrawal, and (£7500 / 12) paid monthly, and subject to income tax when paid out.

Same amount taken, but one way takes the whole lot up front, and you have to sort out any reclaim with HMRC

michaels

Depending on how long the income tax bands are frozen or fail to keep up with inflation, withdrawals up to the band are worth more now in real terms than they might be in the future. It might be that the OPs 36k net in 2025 pounds pushes them into higher rate tax band in later years. Which is a reason to use the full standard rate bound now.

Secret2ndAccount

MEM62 said:

I don't see the logic in draining the pension (and paying Tax) just to stick the money in an ISA.  Keep the money in the pension and the 20% you would have paid in tax stays invested and continues to grow.  Just take what is needed to meet the income requirement and leave the rest invested.   

MK62 said:

It can make a difference due to the 25% tax free element of SIPP withdrawals. 

It doesn't make any difference.

They need 40k from the pension. They choose to take out 50k.  That extra 10k is  2.5k (tax free) + 6k (7.5k x 0.8). So 8.5k goes into ISA. Let’s say this doubles. They now have 17k with no further tax to pay.

Leave that 10k in the pension. It doubles. Take it out. 5k tax free + 15k x 0.8 = 12k.  12k + 5k = 17k. Same as ISA.

So if the money is reinvested in the ISA it doesn’t cost any more tax. In the ISA they have instant access to the money if they need it. Could be lower fees too. I’ve seen free S&S ISA’s and a lot of people pay a percentage on their pensions. It’s only worse if they see the big pile of money and go and spend it (although that might be the right thing to do too - who knows?)

Exodi details a case where Pension could be the winner. IMO it's marginal - the tax saved probably doesn't justify the lockup and possible fees. However, he could turn out to be right depending on what the future holds.

zagfles

Secret2ndAccount said:

MEM62 said:

I don't see the logic in draining the pension (and paying Tax) just to stick the money in an ISA.  Keep the money in the pension and the 20% you would have paid in tax stays invested and continues to grow.  Just take what is needed to meet the income requirement and leave the rest invested.   

MK62 said:

It can make a difference due to the 25% tax free element of SIPP withdrawals. 

It doesn't make any difference.

They need 40k from the pension. They choose to take out 50k.  That extra 10k is  2.5k (tax free) + 6k (7.5k x 0.8). So 8.5k goes into ISA. Let’s say this doubles. They now have 17k with no further tax to pay.

Leave that 10k in the pension. It doubles. Take it out. 5k tax free + 15k x 0.8 = 12k.  12k + 5k = 17k. Same as ISA.

So if the money is reinvested in the ISA it doesn’t cost any more tax. In the ISA they have instant access to the money if they need it. Could be lower fees too. I’ve seen free S&S ISA’s and a lot of people pay a percentage on their pensions. It’s only worse if they see the big pile of money and go and spend it (although that might be the right thing to do too - who knows?)

Exodi details a case where Pension could be the winner. IMO it's marginal - the tax saved probably doesn't justify the lockup and possible fees. However, he could turn out to be right depending on what the future holds.

Alternatively things could go the other way and investments do so well that OP won't be able to withdraw it all and stay within BR tax. So not using up BR tax band now could mean more tax in future.