25% Tax Free Question from a SIPP

segovia

I believe once you have crystallized your pot and taken the full 25% tax-free any investment gains on the remaining 75% will not be eligible for further 25% tax-free, correct ?  

Alternatively, what happens if you take a regular “salary” from your pot with 25% tax-free and the remaining 75% taxable, assume 3% safe withdrawal and your investments continue to grow at say 10%.  

How does the SIPP provider calculate / manage / monitor your 25% tax-free element ?        

Dazed_and_C0nfused

segovia said:

I believe once you have crystallized your pot and taken the full 25% tax-free any investment gains on the remaining 75% will not be eligible for further 25% tax-free, correct ?  

Alternatively, what happens if you take a regular “salary” from your pot with 25% tax-free and the remaining 75% taxable, assume 3% safe withdrawal and your investments continue to grow at say 10%.  

How does the SIPP provider calculate / manage / monitor your 25% tax-free element ?        

If you take 25/75 split 100% of what is left is uncrystallised so nothing to monitor.

Except the overriding TFLS limit of ~£268k 

tacpot12

You are correct; under the current rules, once you have had all the 25% tax-free amount, you are not eligible for any more tax-free cash from your pension. This method is often described as flexible drawdown (or FAD), because you don't acutally needed to take all the tax-free amount in one go.

But when you do, the provider's system makes a note of how much of your pot you have crystallised by taking some tax-free cash. You will always pay tax if you draw out from this crystallised amount.   

The regular 'salary' you describe is better off described using the abbreviation UFPLS, which stands for Uncrystallised Fund Pension Lump Sum. Don't let the 'Lump Sum' bit at the end fool you. UFPLS is a means of withdrawing money from your pension such that receive 25% of the sum tax-free and 75% taxed. I used this method with AJ Bell and it works well for me. They generate a payslip for the taxable portion (so it does feel very much like a 'salary') and a Benefit Crystalisation Letter that confirms how much tax-free you have taken, and and what remains of your life-time allowance. (Their system keeps track of these figures so you can see where you are up to with your crystallised and uncrystalised pots - anything that isn't crystallised by taking tax free cash is uncrystallised.) 

FAD and UFPLS are different ways of paying tax on your withdrawals. They don't affect how the money is invested or grows, so with either method, you can leave everything invested to grow or produce income as you see fit.

The key advantage of UFPLS for me is that it allows you to have more tax-free cash that FAD, especially if you take all your tax-free cash as soon as you retire. 

Take this example. 

You have a Personal Pension with £400,000 in it.
You retire and take £100,000 of tax-free cash from it. 
That's it, you've had all the tax-free cash you can ever have from your pension. 
You have a personal lump sum limit of £268,275 but you've only used £100,000 of it. 

If you start with the same pension, and make UFPLS withdrawals from it, you can, if you live long enough, take enough UFPLS payments to use all your lump sum limit. 
e.g. 

You start with £400,000
You withdraw £25000 per year using UFPLS. 25% of this is tax-free. You increase this each year to keep pace with inflation (which I assumed was 3% for the purposed of the model)
Your fund grows at 10% a year. (The process works for lower investment growths, but it won't allow you to withdraw to the same degree, and below about 5% return, there isn't enough in the pot to start with in this example to hit the lump sum limit). 
By age 87, you have had about £268,275 of tax-free lump sum payments.

UFPLS can be a good choice for those with relateively high proportions of DB pensions, and small personal pension amounts where the total tax free amount available is less than the personal lump sum limit. 

However for most people FAD will be a better option, especially if the tax-free cash is invested in an ISA to produce further tax-free income/growth. 

MK62

tacpot12 said:

You have a Personal Pension with £400,000 in it.
You retire and take £100,000 of tax-free cash from it. 
That's it, you've had all the tax-free cash you can ever have from your pension. 

....unless you add new money to it......

tacpot12

MK62 said:

tacpot12 said:

You have a Personal Pension with £400,000 in it.
You retire and take £100,000 of tax-free cash from it. 
That's it, you've had all the tax-free cash you can ever have from your pension. 

....unless you add new money to it......

Yes, one particular downside of UFLPS is that once you have taken some taxable cash from your pension you trigger the MPAA (Money Purchase Annual Allowance) which limits how much you can put into your pension to £10,000 per year. This could be a concern if you are still working, or if you expect to receive an inheritance or other capital sum (e.g. from selling a rental property) that you want to be able to put into your pension.

However, the MPAA plus the current ISA allowance (assuming the chancellor doesn't change this) means you could still shelter £30,000 a year. 

Marcon

tacpot12 said:

MK62 said:

tacpot12 said:

You have a Personal Pension with £400,000 in it.
You retire and take £100,000 of tax-free cash from it. 
That's it, you've had all the tax-free cash you can ever have from your pension. 

....unless you add new money to it......

Yes, one particular downside of UFLPS is that once you have taken some taxable cash from your pension you trigger the MPAA (Money Purchase Annual Allowance) which limits how much you can put into your pension to £10,000 per year. This could be a concern if you are still working, or if you expect to receive an inheritance or other capital sum (e.g. from selling a rental property) that you want to be able to put into your pension.

It's not an 'or'. You'd still need to be working to ensure you had 'relevant earnings' - there are regular posts on this forum from people who ask about putting an inheritance into their pension and getting tax relief, when they have nothing like the level of earnings needed in relation to the amount they are looking at contributing.

SVaz

Given that the majority of providers don’t offer monthly UFPLS,  if you use it and take a one off yearly income,  how long before you get the tax back?   If you take £12570 taxable in one lump in April how much tax is taken?

This year,  neither mine or my Wife’s 24-25 tax calculations are even done yet,   despite me being self employed and doing my tax return back in in May.   My Wife was taxed £70 on a taxable Sipp withdrawal in April and there doesn’t seem to be an option to claim it back on her online tax account.  

It’s fine if you can live on savings for the first year and take an UFPLS in March,  that will cut out the rigmarole of claiming the tax back. 

Dazed_and_C0nfused

SVaz said:

Given that the majority of providers don’t offer monthly UFPLS,  if you use it and take a one off yearly income,  how long before you get the tax back?   If you take £12570 taxable in one lump in April how much tax is taken?

This year,  neither mine or my Wife’s 24-25 tax calculations are even done yet,   despite me being self employed and doing my tax return back in in May.   My Wife was taxed £70 on a taxable Sipp withdrawal in April and there doesn’t seem to be an option to claim it back on her online tax account.  

It’s fine if you can live on savings for the first year and take an UFPLS in March,  that will cut out the rigmarole of claiming the tax back. 

If you moved from filing a paper return to doing it online you would get the calculation literally at the point you submit your return.

Depending on which tax year you are referring to there are several forms your wife could probably have used, the specific one would depend on her circumstances.  But there is no point in her doing that now if it was after tax deducted in 24/25.

SVaz

Everything IS done online, via accounting software so 

I know my tax position, it’s all there in my hmrc account,  however , on the landing page when I log in,  it states ; 

2024-25 
 “ Your tax has not yet been calculated.There is no need to contact HMRC about this”  

My Wife’s says the same,  she has pension PAYE income and PAYE income from me.  

I assumed they are either way behind or are waiting to see if my savings interest is different to the figure I gave.   Or it could be their usual incompetence. 

Dazed_and_C0nfused

SVaz said:

Everything IS done online, via accounting software so 

I know my tax position, it’s all there in my hmrc account,  however , on the landing page when I log in,  it states ; 

2024-25 
 “ Your tax has not yet been calculated.There is no need to contact HMRC about this”  

My Wife’s says the same,  she has pension PAYE income and PAYE income from me.  

I assumed they are either way behind or are waiting to see if my savings interest is different to the figure I gave.   Or it could be their usual incompetence. 

That is for people getting a PAYE calculation, it isn't relevant to someone filing a Self Assessment return, even if they have PAYE income.

I would expect the status to change but not sure exactly when or what the wording used is once that happens.

If they disagree we your figures the most likely outcomes are a S9A enquiry, where they will write to you investigating your return, or a modern phenomenon apparently known as a nudge letter where they write to lots(?) of people and suggest they might want to check their return in case X is wrong.

SVaz

Delving into the hmrc site,  it says something about tax calculation letters being received by November if you are owed a refund.

I don’t have any PAYE income ( yet - I’ll start getting my military pension next month, hopefully). 
 

I’ve obviously never noticed the previous tax year / calculation box on the landing page and just thought it strange.