To take TFLS maximum now or not?

Dazed_and_C0nfused

DRS1 said:

It may be worth splitting off three "small pots" from your main pension pot. HL are well known for allowing that if your current provider doesn't.  The benefit of the small pots rule is that the TFLS from the small pot does not count against the LSA and you are bumping up against that but only marginally.  So the small pots might get you to having a full 25%.

You don't say what income you have and whether you are using the starter rate to cover interest from the cash savings.  That may influence your decision on taking taxable income from the pension.  But you should certainly be using up your personal allowance even if you don't use all or any of the 20% band.

It's not clear what taxable income, if any, the op (and wife) now have.

And although a lot of money/assets overall the wife's pension is relatively small in the overall scheme of things.  Especially when there is Personal Allowance of at least £11,310 available to be used.

UncleTomCobley

This "taking the full tax free amount" given that the overall limit's been reached is something I'm looking at too. The small pots route will give a “little”(£30,000 overall, £7,500 TFLS ) limit increase but that's only a small delay.

My thoughts are, for what they're worth:

a) By itself, taking the tax free lump sum by itself doesn't mean I'll change my investment approach. It just means that the assets/funds I had in one SIPP pot will now be held in, to start with three - The SIPP sans TFLS, some in an ISA and some in a general trading account. I'm still trying to work out how to do the split/transfer to limit any market exposure.

b) The taxation of any subsequent growth of assets moved to the general trading account and ISA will be less that it would have been had the TFLS value remained in the SIPP pot. The ISA will have no tax due on any income or growth and the general trading account will be subject to dividend tax and CGT. However currently the basic rate levels of these two taxes are lower than "normal" income tax...8.25% and 18% respectively compared to 20%. They also come with (seemingly even decreasing) allowances. At a higher rate the differences are (currently) significantly more clear with dividend tax at 33.75% and CGT at 24% as opposed to 40% "normal" income tax.

c) Having the assets outside the pension also allows the assets to be split with my spouse (to maximise their ongoing allowances and basic rates too). It also allows me to gift them - or even spend them - should I feel the urge.

d) The calculation of dividend tax and CGT for assets held as non UK funds (inc. ETFs) is fiddly.

 

Hope that helps - there are many moving parts (I have some DB pension and the state one somewhere down the line) and I guess there are other options - a nice annuity perhaps - that may make a future life simpler (or at least the finance part).

ali_bear

Taking three small pots of 10k each only gives you an extra 7.5k of TFLS 

ukdw

Re drawing down efficiently - I would consider maximising your 20% tax bands if you haven't already used them.

re PCLS - I agree with the comments about investing it outside of the pension potentially being more tax efficient than leaving it in the pension - especially if eventual drawdown ever ends up being taxed at 40-60%  (plus 40%+ IHT on top).

Re annuity - rates may go up even higher  - so personally I would only purchase a partial annuity now - rather than the whole appx £850k (after PCLS) pot.

Albermarle

QrizB said:

There's a case to be made for taking the TFLS from the £1.1M pot, since any further growth will be taxable. Investing the TFLS elsewhere (eg. in ISAs) would probably give a better outcome, unless there's a significant increase in the £268k allowance.

With >£4M in assets, you might like to consider taking professional advice rather than asking a bunch of nobodies on the internet 🙂

As one of the nobodies, I would only say if I was the OP, I would be more worried about potential IHT liabilities than anything else, which professional advice can help with .
At £4million, it might be out of range of a regular high st advisor though.

logies

Thanks for all the thoughts. I want to know how to draw down in a tax efficient manner (however that might be) and avoid any unnecessary IHT liabilities if possible. Somebody recently asked me if I had thought about a trust, but I have no knowledge of these. I’ve always thought them to be complicated and expensive!

My wife could draw down her personal allowance but her pot is small compared to mine so my instinct was to leave that be. I will have taxable income for the next few years which will use up my PA but it won’t be enough to live on.  I was thinking of taking the tax free cash and living off that as an interim measure. However, I am no expert in these matters and from what’s been said here I need some professional advice. But where to find trusted and good advice. That is part of the problem.

ali_bear

You could try https://adviserbook.co.uk/ and enter your postcode. 

If you were to take my advice and use half of your DC pot to buy an annuity, you should engage with an IFA to arrange that - you're likely to get a better deal overall (despite paying the IFA for the advice and execution he will be able to get you a better rate on the annuity). If he is any good he should also be able to advise on the rest of it   

Albermarle

logies said:

Thanks for all the thoughts. I want to know how to draw down in a tax efficient manner (however that might be) and avoid any unnecessary IHT liabilities if possible. Somebody recently asked me if I had thought about a trust, but I have no knowledge of these. I’ve always thought them to be complicated and expensive!

They are and are best avoided if possible by the large majority. However as you get into a certain wealth bracket they start to become more of interest.

My wife could draw down her personal allowance but her pot is small compared to mine so my instinct was to leave that be. I will have taxable income for the next few years which will use up my PA but it won’t be enough to live on.  I was thinking of taking the tax free cash and living off that as an interim measure. However, I am no expert in these matters and from what’s been said here I need some professional advice. But where to find trusted and good advice. That is part of the problem.

My wife could draw down her personal allowance but her pot is small compared to mine so my instinct was to leave that be
You want to save tax but do not want to do the most obvious thing, which is that you both fully utilise your personal allowances ?

wjr4

Albermarle said:

QrizB said:

There's a case to be made for taking the TFLS from the £1.1M pot, since any further growth will be taxable. Investing the TFLS elsewhere (eg. in ISAs) would probably give a better outcome, unless there's a significant increase in the £268k allowance.

With >£4M in assets, you might like to consider taking professional advice rather than asking a bunch of nobodies on the internet 🙂

At £4million, it might be out of range of a regular high st advisor though.

£4million is completely normal for most IFAs.

wjr4

ali_bear said:

You could try https://adviserbook.co.uk/ and enter your postcode. 

If you were to take my advice and use half of your DC pot to buy an annuity, you should engage with an IFA to arrange that - you're likely to get a better deal overall (despite paying the IFA for the advice and execution he will be able to get you a better rate on the annuity). If he is any good he should also be able to advise on the rest of it   

Not all IFAs are male. OP needs a proper, holistic, financial planner and not someone who will concentrate on just the pension.