UPFLS versus Drawdown

magd36

Assuming the state pension uses up your personal allowance, and IHT isn't an issue, I can't see any difference between Drawdown and taking the Lum Sum from a UPFLS and investing in an ISA (assuming tbe pension and ISA are invested in the same funds). I've modelled in on taking the same net income over the same number of years and it's exactly the same. Why is there two options that seem to give the same outcome? Am I missing something?

NoMore

The flexibility of drawdown, whereby the ratio of Tax free and taxable income you withdraw is adjustable, can in some circumstances be more tax efficient than UFPLS.

If you have just modelled UFPLS versus a drawdown where your withdrawal is 25% tax free and 75% taxable, then of course you won't see a difference as they are exactly the same tax wise.

Albermarle

It is not deliberately designed that there are two options, they have just evolved like that over the years, changes in legislation etc .
In your case, both may do effectively the same job, but it is not the same for everybody.
They are quite similar but small differences can mean one is more suitable than the other in different circumstances.
For example with UFPLS, you have to take taxable income and this will affect how much you can add to a pension in future. 
Recently I wanted to withdraw quite a large sum from a pension. If I had used UFPLS, I could well have ended up paying 40% tax on some of it ( as the taxable part would have been added to my existing taxable income). So it was better to just take the tax free cash and the remainder into a drawdown account.

More of a question for you is why not just leave it in the pension until you need it? Are you really gaining anything by moving it from pension to ISA.
In some circumstances it can be a good idea, but often it is not necessary.

magd36

Albermarle said:

It is not deliberately designed that there are two options, they have just evolved like that over the years, changes in legislation etc .
In your case, both may do effectively the same job, but it is not the same for everybody.
They are quite similar but small differences can mean one is more suitable than the other in different circumstances.
For example with UFPLS, you have to take taxable income and this will affect how much you can add to a pension in future. 
Recently I wanted to withdraw quite a large sum from a pension. If I had used UFPLS, I could well have ended up paying 40% tax on some of it ( as the taxable part would have been added to my existing taxable income). So it was better to just take the tax free cash and the remainder into a drawdown account.

More of a question for you is why not just leave it in the pension until you need it? Are you really gaining anything by moving it from pension to ISA.
In some circumstances it can be a good idea, but often it is not necessary.

I get your point about the large lump sum but I'm in a situation at looking at a fairly steady income. I'm purely thinking of transferring some of the money into a cash isa to de-risk the pension. As Trump and Truss have shown, and with Labour reviewing tax free lump sums, it's a pretty volatile time. Ok if you're young but a bit more risky when your retired.

magd36

NoMore said:

The flexibility of drawdown, whereby the ratio of Tax free and taxable income you withdraw is adjustable, can in some circumstances be more tax efficient than UFPLS.

If you have just modelled UFPLS versus a drawdown where your withdrawal is 25% tax free and 75% taxable, then of course you won't see a difference as they are exactly the same tax wise.

I understand that, but I can't think of a scenario of UPFLS would be a benefit as you can achieve the same and more with drawdown. Thats whats confusing me. Why does UFPLS exist?

NoMore

magd36 said:

NoMore said:

The flexibility of drawdown, whereby the ratio of Tax free and taxable income you withdraw is adjustable, can in some circumstances be more tax efficient than UFPLS.

If you have just modelled UFPLS versus a drawdown where your withdrawal is 25% tax free and 75% taxable, then of course you won't see a difference as they are exactly the same tax wise.

I understand that, but I can't think of a scenario of UPFLS would be a benefit as you can achieve the same and more with drawdown. Thats whats confusing me. Why does UFPLS exist?

As Ablemarle has said, they weren't really designed at the same time, it's just the way pensions have evolved.

UFPLS I think was the original option and then FAD came along with Pension freedoms in 2016. Some older pensions can't facilitate FAD so UFPLS is the only option for them. You can usually get round this by transferring to a modern plan. 

EDIT: I'm sure somebody will be along shortly to talk about capped drawdown and other things that were also available before FAD! 

squirrelpie

magd36 said:

I'm purely thinking of transferring some of the money into a cash isa to de-risk the pension.

As has often been said on here, it's not where investments are held that matters for risk, it's what the investments are. So why move money to an ISA instead of just placing some money in your pension into cash if that's what you want?

kempiejon

magd36 said:
I get your point about the large lump sum but I'm in a situation at looking at a fairly steady income. I'm purely thinking of transferring some of the money into a cash isa to de-risk the pension. As Trump and Truss have shown, and with Labour reviewing tax free lump sums, it's a pretty volatile time. Ok if you're young but a bit more risky when your retired.

Prediction about future markets and allowances aside that seems like an awkward way to achieving your aim of de-risking the pension. Couldn't one do that within the pension? Change the asset allocation and of course keep away from triggering money purchase limits.
In fact if it feels a bit more risky now you're retired perhaps you can look at your pension holdings.

dunstonh

EDIT: I'm sure somebody will be along shortly to talk about capped drawdown and other things that were also available before FAD! 

Drawdown is 30 years old this year.   First introduced in 1995.   But I will stop there to avoid boring people.

Albermarle

magd36 said:

Albermarle said:

It is not deliberately designed that there are two options, they have just evolved like that over the years, changes in legislation etc .
In your case, both may do effectively the same job, but it is not the same for everybody.
They are quite similar but small differences can mean one is more suitable than the other in different circumstances.
For example with UFPLS, you have to take taxable income and this will affect how much you can add to a pension in future. 
Recently I wanted to withdraw quite a large sum from a pension. If I had used UFPLS, I could well have ended up paying 40% tax on some of it ( as the taxable part would have been added to my existing taxable income). So it was better to just take the tax free cash and the remainder into a drawdown account.

More of a question for you is why not just leave it in the pension until you need it? Are you really gaining anything by moving it from pension to ISA.
In some circumstances it can be a good idea, but often it is not necessary.

I get your point about the large lump sum but I'm in a situation at looking at a fairly steady income. I'm purely thinking of transferring some of the money into a cash isa to de-risk the pension. As Trump and Truss have shown, and with Labour reviewing tax free lump sums, it's a pretty volatile time. Ok if you're young but a bit more risky when your retired.

It’s pretty much always a volatile time; now, it was in  the past and it will be in the future.
All markets are significantly up since January 1st.
Also it is best not to base financial decisions on media speculation, which usually turns out to be wrong ( regarding tax free cash in this instance)

poseidon1

magd36 said:

NoMore said:sly 

The flexibility of drawdown, whereby the ratio of Tax free and taxable income you withdraw is adjustable, can in some circumstances be more tax efficient than UFPLS.

If you have just modelled UFPLS versus a drawdown where your withdrawal is 25% tax free and 75% taxable, then of course you won't see a difference as they are exactly the same tax wise.

I understand that, but I can't think of a scenario of UPFLS would be a benefit as you can achieve the same and more with drawdown. Thats whats confusing me. Why does UFPLS exist?

Not sure if my example might help.

Right now I can take around £110k max 25% TFC from my SiPP, with remaining pot crystallised and therefore fully taxable as drawdown income  thereafter at the 40% tax rate.

However I am in the midst of aggressively growing the value of the SIPP with a view to exceeding the £100k TFC currently available, over the next 8 years until age 75. UFPLSs allows me to potentially achieve this objective whilst still drawing an 'income'

To put this in perspective my maximum TFC at 25% when I retired 10 years ago would have only been £68k on what was then a lower valued SIPP at the time.

The  current maximum permitted  (unprotected) TFC is £268k, so UFPLSs is a mechanism for someone in my position to try and hit that limit whilst still drawing an income.

However, I would add that maximum annual funding of S&S/cash ISAs is happening at the same time as actively growing the SIPP, since clearly tax free ISA income is very valuable to a 40/45% tax payer. Therefore  for me it is not an issue of either/ or, its both.