Pension Drawdown: Tax Treatment of Remaining Tax-Free Lump Sum

Albermarle

Cobbler_tone said:

NoMore said:

To create a crystallised pot you need to take the tax free cash. You can't do it the other way round and take taxable income and not take the tax free cash to leave in the pension.

Gotcha, so you could take £1 tax free and £3 is crystallised, with the most tax efficient way (if you can't avoid dropping below 20%) to stick £20k into an ISA.

So in essence you reverse calculate. You start with your desired net income (from the DC) and then work out the amount required to draw down, factoring in that 25% will be tax free and 75% will be taxed at your usual rate?

That would be one way of doing it,

Albermarle

NoMore said:

You have to learn the concept of crystallisation, this is what tracks how much tax free cash you can take.

It works like this, initially your pot will be 100% uncrystallised,  every time you want to take some tax free cash, you must crystallise 4 times that amount in the pension. So 10k tax free means 40k is crystallised, providing you have 40k of uncrystallised funds. 10k of this is tax free, the other 30k is taxable.

Once you understand that concept, it becomes easier to understand the two main methods of withdrawing from a pension.

1) Flexi Access Drawdown (FAD). This allows you to take only the tax free amount and the rest of the associated crystallised amount is left in the Pension to grow. Any withdrawals from the crystallised bit will be taxed at your marginal rate. This does not have to be drawn at the same time as the Tax free cash.

2) Uncrystallised Funds Pension Lumpsum (UFPLS), in this withdrawal you always with draw the 25% tax and the associated crystallised amount at the same time. So if you withdrew 10K, 2.5k would be tax free and 7.5k taxed at your marginal rate. No crystallised funds associated with this transaction are left in the pension.

The pension provider will track the uncrystallised/crystallised amounts for you.

You can mix and match both methods as and when, as long as you have enough uncrystallised funds to support the tax free cash.

It sounds complicated at first, but once you get your head around it, its not too bad.

I do not want to complicate your good explanation too much, but there can be a variation on option 1) .

You can take out some tax free cash and some taxable income, but you do not necessarily have to take all the tax free cash first before taking any taxable income. However unlike UFPLS they do not have to be in the exact ratio of 25;75.
However as you have said you can not take taxable income without taking a minimum tax free cash, but what you could do is something like this.
£100K pot
Crystallise £40K 
£10K tax free cash paid out
Then you can take any amount of taxable income between zero and £30K . 

Not all providers would be able to offer this sort of flexibility but most modern pensions will.

NoMore

Albermarle said:

NoMore said:

You have to learn the concept of crystallisation, this is what tracks how much tax free cash you can take.

It works like this, initially your pot will be 100% uncrystallised,  every time you want to take some tax free cash, you must crystallise 4 times that amount in the pension. So 10k tax free means 40k is crystallised, providing you have 40k of uncrystallised funds. 10k of this is tax free, the other 30k is taxable.

Once you understand that concept, it becomes easier to understand the two main methods of withdrawing from a pension.

1) Flexi Access Drawdown (FAD). This allows you to take only the tax free amount and the rest of the associated crystallised amount is left in the Pension to grow. Any withdrawals from the crystallised bit will be taxed at your marginal rate. This does not have to be drawn at the same time as the Tax free cash.

2) Uncrystallised Funds Pension Lumpsum (UFPLS), in this withdrawal you always with draw the 25% tax and the associated crystallised amount at the same time. So if you withdrew 10K, 2.5k would be tax free and 7.5k taxed at your marginal rate. No crystallised funds associated with this transaction are left in the pension.

The pension provider will track the uncrystallised/crystallised amounts for you.

You can mix and match both methods as and when, as long as you have enough uncrystallised funds to support the tax free cash.

It sounds complicated at first, but once you get your head around it, its not too bad.

I do not want to complicate your good explanation too much, but there can be a variation on option 1) .

You can take out some tax free cash and some taxable income, but you do not necessarily have to take all the tax free cash first before taking any taxable income. However unlike UFPLS they do not have to be in the exact ratio of 25;75.
However as you have said you can not take taxable income without taking a minimum tax free cash, but what you could do is something like this.
£100K pot
Crystallise £40K 
£10K tax free cash paid out
Then you can take any amount of taxable income between zero and £30K . 

Not all providers would be able to offer this sort of flexibility but most modern pensions will.

That's what I meant, does it come across as if I said you crystallise the whole pension ? That wasn't my intention in the explanation. 

Albermarle

NoMore said:

Albermarle said:

NoMore said:

You have to learn the concept of crystallisation, this is what tracks how much tax free cash you can take.

It works like this, initially your pot will be 100% uncrystallised,  every time you want to take some tax free cash, you must crystallise 4 times that amount in the pension. So 10k tax free means 40k is crystallised, providing you have 40k of uncrystallised funds. 10k of this is tax free, the other 30k is taxable.

Once you understand that concept, it becomes easier to understand the two main methods of withdrawing from a pension.

1) Flexi Access Drawdown (FAD). This allows you to take only the tax free amount and the rest of the associated crystallised amount is left in the Pension to grow. Any withdrawals from the crystallised bit will be taxed at your marginal rate. This does not have to be drawn at the same time as the Tax free cash.

2) Uncrystallised Funds Pension Lumpsum (UFPLS), in this withdrawal you always with draw the 25% tax and the associated crystallised amount at the same time. So if you withdrew 10K, 2.5k would be tax free and 7.5k taxed at your marginal rate. No crystallised funds associated with this transaction are left in the pension.

The pension provider will track the uncrystallised/crystallised amounts for you.

You can mix and match both methods as and when, as long as you have enough uncrystallised funds to support the tax free cash.

It sounds complicated at first, but once you get your head around it, its not too bad.

I do not want to complicate your good explanation too much, but there can be a variation on option 1) .

You can take out some tax free cash and some taxable income, but you do not necessarily have to take all the tax free cash first before taking any taxable income. However unlike UFPLS they do not have to be in the exact ratio of 25;75.
However as you have said you can not take taxable income without taking a minimum tax free cash, but what you could do is something like this.
£100K pot
Crystallise £40K 
£10K tax free cash paid out
Then you can take any amount of taxable income between zero and £30K . 

Not all providers would be able to offer this sort of flexibility but most modern pensions will.

That's what I meant, does it come across as if I said you crystallise the whole pension ? That wasn't my intention in the explanation. 

I read it like that. In any case there are pension providers who operate like that/less flexibly, where you have to crystallise the whole lot before allowing taxable withdrawals ( even if they allow you to take the tax free cash in stages). .
Anyway the main point is that flexible drawdown can operate a little differently with different providers.