Which platform for separate crystallised and uncrystallised pots?

DavidT67

michaels said:

TheTelltaleChart said:

michaels said:

TheTelltaleChart said:

michaels said:

But with separate pots you might have high growth assets in the uncrystallised pot so the amount that can be taken tax free in future is increasing and safer assets in the crystallised pot so the amount that will be subject to IT does not grow as much.

I do agree with the general idea that there may be an advantage in investing crystallised and uncrystallised pots differently.

However, this isn't a good argument for the idea. If you really knew that the "high growth" assets would outperform the "safer" assets, then you'd invest 100% of both pots in the "high growth" assets. In reality, there is always a risk that they will underperform. You need an argument for why you'd want to take more risk with a tax-free pot than with a taxable pot.

For me the 'low risk' crystallised pot is for spending in the bridge period between retirement and state pension age so with a shortish time horizon is better in a less volatile and therefore lower average return investments whereas the uncrystallised is for longer term higher volatility and hopefully higher growth.  Of course no one can guarantee returns but historical experience is that equities outperform over longer time horizons.

OK, it makes perfect sense to use less volatile assets for the shorter time horizon, and more volatile but hopefully higher return assets for the longer horizon. But what I still don't see is why you're using the crystallised pot for the short term and uncrystallised for the long term. Since you could equally well make short term withdrawals from the uncrystallised pot (via UFPLS).

You would think so - but then student finance rears its ugly head, TFLS does not count as income for student finance parental household income calcs (nor therefore uni bursaries) whereas UFPLS (including the tax free component) does

I'd disagree with the last paragraph.  On the SFE supporting evidence forms you report the P60 taxable amount from the pension provider.  For UFPLS, that doesn't include the TFLS element.

General rule, if you wouldn't report it to HMRC as income on your Self Assessment Tax Return, don't report it to SFE as such.

SFE seem to deliberately phrase their forms to encourage parents to overreport their incomes.  No idea why, since the student still needs to repay their loans regardless of parental income. 

Pat38493

Now I am getting really confused -  if I have an £500K uncrystallised pot with a notional split provider, and I transferred in a £500K drawdown pot, what is the notional split %?  Is it 50% or some other number because the net value to me is different?   Maybe my mistake is to assume that the notional split is set by the gross % transferred in?

Triumph13

Pat38493 said:

Now I am getting really confused -  if I have an £500K uncrystallised pot with a notional split provider, and I transferred in a £500K drawdown pot, what is the notional split %?  Is it 50% or some other number because the net value to me is different?   Maybe my mistake is to assume that the notional split is set by the gross % transferred in?

Your notional split will be 50:50 as that only looks at the gross. 

You then work out your net tax rate across the whole pot to know the after tax value when thinking about your asset allocation.  In a simple case that would be 17.5% (half at 20%, half at 15%) but on those numbers might need more careful calculation as you are probably over the lifetime TFLS limit and quite possibly into HRT territory

Pat38493

Triumph13 said:

Pat38493 said:

Now I am getting really confused -  if I have an £500K uncrystallised pot with a notional split provider, and I transferred in a £500K drawdown pot, what is the notional split %?  Is it 50% or some other number because the net value to me is different?   Maybe my mistake is to assume that the notional split is set by the gross % transferred in?

Your notional split will be 50:50 as that only looks at the gross. 

You then work out your net tax rate across the whole pot to know the after tax value when thinking about your asset allocation.  In a simple case that would be 17.5% (half at 20%, half at 15%) but on those numbers might need more careful calculation as you are probably over the lifetime TFLS limit and quite possibly into HRT territory

OK - I accept that Telltale and you are correct about how you can set a net preferred asset allocation and then reverse engineer it back to the gross allocation for each pot (although I've never even heard an IFA in detailed Q&A sessions and so on mention that they actually do this in real life).

OK, but then if I transferred that £50K drawdown pot to an notional split provider where I already have £50K UC, my notional split is 50:50

If you were in the exact same position as me but you keep your pots separate.  We both start with 2 separate providers one 50K drawdown in cash and one £50K UC pot in equities.

You continue to have £50K drawdown account in cash, and £50K UC pot in equity.

I transferred into Interactive Investor and I have £50K in cash and £50K in equity with a 50:50 split between drawdown and UC.

As such the net value at this exact moment is the same £82500?  Right or wrong as I am now doubting everything?  In this moment we have the same split so we have the same net values, and the same asset allocation?  Our net equity/cash allocation is 52%/48% approx in both.

So if I am right then with the same starting point, if equities double and cash stays the same, you will end up with a higher net amount than me.

Won't you end up with £125K net value and I will end up with £123750 even though we both started at the same net value and we have not made any investment changes in between? In Interactive investor I now have £75K drawdown and £75K UC.  You have 50K Drawdown and £100K UC.  I cannot magically transform my £123750 back to £125000.

If we wait another year and the same thing happens again, you will end up with a net pot of 210000 and I will end up with 206250?  Yes our respective risk levels now changed on a net level, but not due to any action we have taken.

Therefore if we wanted to target the same net split of equities versus cash, you would have to make a different adjustment to me each time, but how can I ever get back the £1250 loss in value in year 1?

What am I missing now?  I am unable to see how I can make an adjustment at the start which will mean that I end up with the same net result after each period, regardless whether the pot is notional or not  (unless I know the growth rate in advance)?

Edit:  - I tried making an adjustment at the end of year 1 to bring the net equity allocation back to 51.5151% as per the start in each case.  After year 2 you now had £203030 and I had £201000 so this reduced the difference, but I still ended up with less money with the notional split at a net level.  

michaels

DavidT67 said:

michaels said:

TheTelltaleChart said:

michaels said:

TheTelltaleChart said:

michaels said:

But with separate pots you might have high growth assets in the uncrystallised pot so the amount that can be taken tax free in future is increasing and safer assets in the crystallised pot so the amount that will be subject to IT does not grow as much.

I do agree with the general idea that there may be an advantage in investing crystallised and uncrystallised pots differently.

However, this isn't a good argument for the idea. If you really knew that the "high growth" assets would outperform the "safer" assets, then you'd invest 100% of both pots in the "high growth" assets. In reality, there is always a risk that they will underperform. You need an argument for why you'd want to take more risk with a tax-free pot than with a taxable pot.

For me the 'low risk' crystallised pot is for spending in the bridge period between retirement and state pension age so with a shortish time horizon is better in a less volatile and therefore lower average return investments whereas the uncrystallised is for longer term higher volatility and hopefully higher growth.  Of course no one can guarantee returns but historical experience is that equities outperform over longer time horizons.

OK, it makes perfect sense to use less volatile assets for the shorter time horizon, and more volatile but hopefully higher return assets for the longer horizon. But what I still don't see is why you're using the crystallised pot for the short term and uncrystallised for the long term. Since you could equally well make short term withdrawals from the uncrystallised pot (via UFPLS).

You would think so - but then student finance rears its ugly head, TFLS does not count as income for student finance parental household income calcs (nor therefore uni bursaries) whereas UFPLS (including the tax free component) does

I'd disagree with the last paragraph.  On the SFE supporting evidence forms you report the P60 taxable amount from the pension provider.  For UFPLS, that doesn't include the TFLS element.

General rule, if you wouldn't report it to HMRC as income on your Self Assessment Tax Return, don't report it to SFE as such.

SFE seem to deliberately phrase their forms to encourage parents to overreport their incomes.  No idea why, since the student still needs to repay their loans regardless of parental income. 

I would believe what you state to be correct, but I have also read elsewhere that is not how SFE actually treat such pension income in at least some people's experience....

Triumph13

Pat38493 said:

Triumph13 said:

Pat38493 said:

Now I am getting really confused -  if I have an £500K uncrystallised pot with a notional split provider, and I transferred in a £500K drawdown pot, what is the notional split %?  Is it 50% or some other number because the net value to me is different?   Maybe my mistake is to assume that the notional split is set by the gross % transferred in?

Your notional split will be 50:50 as that only looks at the gross. 

You then work out your net tax rate across the whole pot to know the after tax value when thinking about your asset allocation.  In a simple case that would be 17.5% (half at 20%, half at 15%) but on those numbers might need more careful calculation as you are probably over the lifetime TFLS limit and quite possibly into HRT territory

OK - I accept that Telltale and you are correct about how you can set a net preferred asset allocation and then reverse engineer it back to the gross allocation for each pot (although I've never even heard an IFA in detailed Q&A sessions and so on mention that they actually do this in real life).

OK, but then if I transferred that £50K drawdown pot to an notional split provider where I already have £50K UC, my notional split is 50:50

If you were in the exact same position as me but you keep your pots separate.  We both start with 2 separate providers one 50K drawdown in cash and one £50K UC pot in equities.

You continue to have £50K drawdown account in cash, and £50K UC pot in equity.

I transferred into Interactive Investor and I have £50K in cash and £50K in equity with a 50:50 split between drawdown and UC.

As such the net value at this exact moment is the same £82500?  Right or wrong as I am now doubting everything?  In this moment we have the same split so we have the same net values, and the same asset allocation?  Our net equity/cash allocation is 52%/48% approx in both.

So if I am right then with the same starting point, if equities double and cash stays the same, you will end up with a higher net amount than me.

Won't you end up with £125K net value and I will end up with £123750 even though we both started at the same net value and we have not made any investment changes in between? In Interactive investor I now have £75K drawdown and £75K UC.  You have 50K Drawdown and £100K UC.  I cannot magically transform my £123750 back to £125000.

If we wait another year and the same thing happens again, you will end up with a net pot of 210000 and I will end up with 206250?  Yes our respective risk levels now changed on a net level, but not due to any action we have taken.

Therefore if we wanted to target the same net split of equities versus cash, you would have to make a different adjustment to me each time, but how can I ever get back the £1250 loss in value in year 1?

What am I missing now?  I am unable to see how I can make an adjustment at the start which will mean that I end up with the same net result after each period, regardless whether the pot is notional or not  (unless I know the growth rate in advance)?

Edit:  - I tried making an adjustment at the end of year 1 to bring the net equity allocation back to 51.5151% as per the start in each case.  After year 2 you now had £203030 and I had £201000 so this reduced the difference, but I still ended up with less money with the notional split at a net level.  

Okay, I can see where the problem is, but you're not gonna like it

Before the transfer you were sitting with a £50k drawdown pot in cash, with an after tax value of 80% so £40k. And a £50k uncrystallised equity pot with an after tax value of 85%  so £42.5k.  In the instant after you transfer you have a single pot with an average after tax value of 82.5% of the gross, so your after tax net asset allocation has just changed from 40 vs 42.5 to both cash and equities being worth £41.25k.  To get back to the same position after tax that you were before the transfer, you need to buy equities with £1,515 of the cash to account for the fact that you have just lowered the tax rate on your cash and raised it on your equities.

And yes, this is indeed getting complicated!

Pat38493

Triumph13 said:

Pat38493 said:

Triumph13 said:

Pat38493 said:

Now I am getting really confused -  if I have an £500K uncrystallised pot with a notional split provider, and I transferred in a £500K drawdown pot, what is the notional split %?  Is it 50% or some other number because the net value to me is different?   Maybe my mistake is to assume that the notional split is set by the gross % transferred in?

Your notional split will be 50:50 as that only looks at the gross. 

You then work out your net tax rate across the whole pot to know the after tax value when thinking about your asset allocation.  In a simple case that would be 17.5% (half at 20%, half at 15%) but on those numbers might need more careful calculation as you are probably over the lifetime TFLS limit and quite possibly into HRT territory

OK - I accept that Telltale and you are correct about how you can set a net preferred asset allocation and then reverse engineer it back to the gross allocation for each pot (although I've never even heard an IFA in detailed Q&A sessions and so on mention that they actually do this in real life).

OK, but then if I transferred that £50K drawdown pot to an notional split provider where I already have £50K UC, my notional split is 50:50

If you were in the exact same position as me but you keep your pots separate.  We both start with 2 separate providers one 50K drawdown in cash and one £50K UC pot in equities.

You continue to have £50K drawdown account in cash, and £50K UC pot in equity.

I transferred into Interactive Investor and I have £50K in cash and £50K in equity with a 50:50 split between drawdown and UC.

As such the net value at this exact moment is the same £82500?  Right or wrong as I am now doubting everything?  In this moment we have the same split so we have the same net values, and the same asset allocation?  Our net equity/cash allocation is 52%/48% approx in both.

So if I am right then with the same starting point, if equities double and cash stays the same, you will end up with a higher net amount than me.

Won't you end up with £125K net value and I will end up with £123750 even though we both started at the same net value and we have not made any investment changes in between? In Interactive investor I now have £75K drawdown and £75K UC.  You have 50K Drawdown and £100K UC.  I cannot magically transform my £123750 back to £125000.

If we wait another year and the same thing happens again, you will end up with a net pot of 210000 and I will end up with 206250?  Yes our respective risk levels now changed on a net level, but not due to any action we have taken.

Therefore if we wanted to target the same net split of equities versus cash, you would have to make a different adjustment to me each time, but how can I ever get back the £1250 loss in value in year 1?

What am I missing now?  I am unable to see how I can make an adjustment at the start which will mean that I end up with the same net result after each period, regardless whether the pot is notional or not  (unless I know the growth rate in advance)?

Edit:  - I tried making an adjustment at the end of year 1 to bring the net equity allocation back to 51.5151% as per the start in each case.  After year 2 you now had £203030 and I had £201000 so this reduced the difference, but I still ended up with less money with the notional split at a net level.  

Okay, I can see where the problem is, but you're not gonna like it

Before the transfer you were sitting with a £50k drawdown pot in cash, with an after tax value of 80% so £40k. And a £50k uncrystallised equity pot with an after tax value of 85%  so £42.5k.  In the instant after you transfer you have a single pot with an average after tax value of 82.5% of the gross, so your after tax net asset allocation has just changed from 40 vs 42.5 to both cash and equities being worth £41.25k.  To get back to the same position after tax that you were before the transfer, you need to buy equities with £1,515 of the cash to account for the fact that you have just lowered the tax rate on your cash and raised it on your equities.

And yes, this is indeed getting complicated!

Hmmm - I know I am being dim but how do I calculate the £1515?

And yes I admit I was wrong all along as I have just worked it out on a spreadsheet, but I am not sure how to calculate the 1515 number, but I can see that it works.

Edit: And in particular how would I calculate this one off adjustment if the starting pot values were not equal e.g. if I started out with 75K uncrystallised equities and 50K drawdown in cash?  If I'm not mistaken the average after tax value will now be 83% of the gross.

Pat38493

I think I have figured it out:
I need to calculate the average tax rate across the notional pot at the time of transfer, which is the total theoretical tax payable divided by the total gross pot.

Then I need to take the initial net percentage split and deduct the new net percentage at the average tax rate, and then multiple by the gross pot size.

This gives me the exact adjustment needed, and if I did this, my net value going forward will be identical until the ends of the earth regardless of how equity and cash grow (and ignoring that I will hit a ceiling due to TFC allowances).

I wish I could explain in simple words why this works as it doesn’t feel like it should!  

And this will also work if I have cash, bonds and equities - I will come out with 3 different adjustment numbers which balances to zero?

and then the 64K question - is it really worth bothering with such adjustments in the real world - even when we are using ridiculous numbers like equities doubling and cash staying the same, the adjustments required are very small and I doubt it will make any real difference in the long run - it is not going to make or break my retirement?

Triumph13

I calculated it by taking the change in post-tax value of the cash part (£1.25k) to see how much the net needed to be adjusted, and then grossing it up by dividing by the new overall tax rate (82.5%) to get the gross adjustment.

Pat38493

TheTelltaleChart said:

Pat38493 said:

Further, even when accepting your POV, as soon as you start to take into account that having the equities in higher marginal tax wrappers will be statistically more likely to put you into a higher tax bracket at some future point, my point one actually becomes "yes" but not for the reason I was stating.

Sometimes, yes. Though we all tend to imagine that other people have vaguely comparable finances to ourselves, when in fact most are either a lot poorer or a lot richer, and may also have a very different split between tax wrappers. So it very much does depend.

So for some, growing uncrystallised pots could reach the TFLS limit. For others, that's not a factor, but growing crystallised pots (+ growing 75% of uncrystallised pots) could lead to a higher tax rate on taxable withdrawals. Or both. Generally, all these things do, as you say, suggest putting lower expected growth assets in the pots where the effective tax rate could rise.

It's perhaps worse than that, though. My stated assumption, "that the tax application ratios for each account is unchanged", is a stronger assumption than just saying that the marginal tax rate doesn't change. E.g. if you know your marginal rate will be 20%, but will pay a mixture of 0% and 20% (or if you know the marginal rate will be 40%, but will pay a mixture of 20% and 40%), then my assumption doesn't hold.

The problem is that, if you have a £100k crystallised pot, and expect to get £50k out at 0% tax (using your Personal Allowance), the rest at 20% tax, so the net value is £90k and the tax ratio is 0.9, then that tax ratio will change if the pot's investments grow faster than does the amount you're able to take out tax free. So if the pot grows to £125k but you can still only get £50k out tax free, then the net value is £110k and the tax ratio is down to 0.88.

At this level of complication, something like the cash flow modelling software you mention might be necessary.

OK well now if I take a step back, I could make the case that it's a waste of effort to make such small adjustments as, for example, £1515.

Let's say I have a £100K pot which is £80K in drawdown and £20K in ISAs.  My chosen target risk tolerance / allocation is 80%20% Equities / Cash.

I took the easy way out and just put all the drawdown in equities and all the ISA in cash.  My allocation is 80/20.  Wrong - it is actually 76.1% / 23.8% per your calculations and within the assumptions described.

However, my error in equity allocation is less than 4%.  

My new lazy theory is - unless I believe that my risk tolerance allocation choices are accurate to within 4% or less, there is no point making such adjustments.

Most investors are encouraged to choose an allocation of 80/20, 70/30, 60/40 or whatever, so they are effectively choosing the equity allocation with an accuracy of +/- 10%.  As such, and error of 3.8% is irrelevant - I am polishing a turd to use the colloquial expression?

Further - if I look at detailed studies on safe withdrawal rates like, for example, the ERN blogs, they generally tested rates at increments of 10%.

Therefore, it's entirely plausible that my "wrong" allocation of 76.1% is actually "better" than your exactly adjusted net 80/20 allocation.

Also taking into account all your points above, I think it would be too complicated for me to bother with such adjustments, since my allocations are currently estimated using time windows into the future like:
2 years cash
3-5 years 70/30
6-10 years 80/20
10+ years 100% equities.

If I then try to calculate the adjustments across all my pots all the time to equalise the net values, the adjustments will be too small to be outside the general opening margin of error.

You are also right that for me personally I am in danger of paying 40% tax if my pension pots grows too much, so I am generally planning to bring money out of the pensions within the 20% tax bands, at least for the first 10 years or so.