When exactly is a pension crystallised?

Reggieinthebath

Please bear with me for asking the blooming obvious (probably). I have a dc pension ( Aviva) and need to take between 10-25% of it over the next few years (am 56), the first 10% imminently as a lump sum and then probably the rest on an ad hoc basis ideally as drawdown. I have a long term health condition and am struggling now financially-trying to get part time work now, not easy out there. 

Anyway, I am stupidly confused still about this, ill health does t help, if I take the initial 10% shortly, does the whole 25% get crystallised or the whole pot? If it’s the whole pot, how do I most affordably work it so that I can draw down from it, flexibly, would I have to set up a SIPP? Aviva not been very helpful.  I want to avoid any unnecessary costs or to pay to see an IFA. 

Thanks for your patience. 

Reggieinthebath

To add, it’s a workplace pension, not contributing any more.

El_Torro

You can take 10% of your pot initially if you want. If you do that some of your pension will be crystallised and some will be uncrystallised. You can take further tax free money from the uncrystallised pot. 

Aviva has various pension schemes, some of which are pretty old. The older ones may not allow you to do what you want to do. If that is the case you can move that money to a newer private pension or SIPP to allow you to do what you want. Generally speaking this is straightforward, can all be done online and doesn't require you to pay for financial advice.

Reggieinthebath

Thank you, that’s helpful. So if I take 10% of a £200k pot, is it the. £50k which has been crystallised and so £150k can remain as is. And I’d need to move the £50k into a SIPP in order to enable future drawdowns? Their site says to call if questions but I’ve found them either rushing to offer commercial products and no real insight gleaned on actual options, I know they can’t give advice as such but not been terribly helpful. 

Marcon

Reggieinthebath said:

Please bear with me for asking the blooming obvious (probably). I have a dc pension ( Aviva) and need to take between 10-25% of it over the next few years (am 56), the first 10% imminently as a lump sum and then probably the rest on an ad hoc basis ideally as drawdown. I have a long term health condition and am struggling now financially-trying to get part time work now, not easy out there. 

Anyway, I am stupidly confused still about this, ill health does t help, if I take the initial 10% shortly, does the whole 25% get crystallised or the whole pot? If it’s the whole pot, how do I most affordably work it so that I can draw down from it, flexibly, would I have to set up a SIPP? Aviva not been very helpful.  I want to avoid any unnecessary costs or to pay to see an IFA. 

Thanks for your patience. 

When you say 'Aviva has not been very helpful', what exactly do you mean? Usually when someone posts that comment here, it either means the wires have crossed (often quite considerably!), or the poster is expecting their pension provider to give something which crosses the line between information and advice - and the latter is something the provider cannot and should not do, unless they are actually appointed to give you advice.

Aviva has a really good, detailed explanation on their website. Have a look at https://static.aviva.io/content/dam/document-library/adviser/adviserplatform/lf01125c.pdf

Reggieinthebath

yes, I have seen that on the website

MarlowMallard

For clarification above, there are two main ways to take it: if you take say £20k as "UFPLS",  then 25% = £5k is tax-free, £15k is taxed as income (added to the rest of your income for the tax year and taxed accordingly),  and everything left in the pot is uncrystallised and you can repeat as necessary.
 
If you take £20k as tax-free cash, that's all invisible to the taxman,  but then 3x that i.e. £60k of what's left in the pot becomes "crystallised" and will be subject to income tax when you take it out. The original pot minus the £80k will be uncrystallised.   (The £60k crystallised can grow with no CGT etc while left in the pot, but income-taxable at the point of taking out). 

Or, you can do a mixture of the above. 

QrizB

Reggieinthebath said:

Thank you, that’s helpful. So if I take 10% of a £200k pot, is it the. £50k which has been crystallised and so £150k can remain as is.

No.

10% of a £200k pot is £20k.

You could take this as a tax-free lump sum (TFLS) which would mean crystallising £80k of the fund. After taking the £20k TFLS, you'd have £120k uncrystallised and £60k crystallised.

Or you could take £20k as an uncrystallised funds pension lump sum (UFPLS). That would leave £180k uncrystallised in your pension, but the £20k would be £4k tax-free, £16k taxable.

Marcon

Reggieinthebath said:

yes, I have seen that on the website

If you've read it and still far from clear, maybe a free appointment with PensionWise would help: https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

gm0

Crystallisation (for income) and the taking of income.  Are separate things.  

Income can be "at the same time all at once" for a slice of pension benefits (UFPLS) or can be deferred and abitrary amounts later (FAD) - crystallised for income.

Tax free cash is (normally) up to 25% bar of the amount of pension being accessed bar some rare exceptions

So you can.  Take 25% and "mark for income" the accompanying 75%.  All 100% is "crystallised".  But the 75% of the sausage is stored for income later at time of choosing - this is called FAD (flexible access drawdown).

This can be 25%/75% of the whole pot, or applied as ratios to just a part of it - and the part can be sized to suit your requirements and the rest left untouched.  Call that Phased FAD.  

Say I take half my total pot.  I get 12.5% the original pot value as tax free cash. And 37.5% the original value is now crystallised for income.  And the other "50%" is untouched - uncrystallised.  

This is allowed.   Or any other % of total pot you chose 10%, 20% 60%.  Lumpy slices.

But not all old schemes and providers can do all versions in situ. So they may say "you can do x,y,z a subset of things and clam up about other options.

So you may need to transfer a full pot somewhere else to slice and dice using a particular option.  

But the existing provider will not tell you to do that - as it would be advice based on personal circumstances.   

The full transfer out will ALWAYS be a listed option available as it  is a legal requirement.  Partial transfer may or may not be available.  And the provider won't suggest to you that you use the option.  As it would be advice.  Forbidden.  Also unhelpful but it is what it is.

Or if the FAD option doesn't suit. Then you can take a "complete slice" - 25% and 75% ALL at the same time as a single payment.  Tiny slices - think salami.  Nothing is stored for later. 

Just a small slice off the end of the sausage mixing tax free and income taxed income at a single moment.  And done.  

Again this can be any size you like up to the entire pot (subject to in year income and taxes).

With UFPLS "income is taken" alongside tax free cash.  So here is one wrinkle. 

The reduced from full annual allowance contribution limit - the Money Purchase Annual Allowance (MPAA) cuts in.  This is part of the measures to prevent recyling pension income for more tax relief.  If retired this is unlikely to matter.  If still employed and saving - it could.

FAD with Tax Free Cash only. And no income taken - doesn't trigger the MPAA.  Setup an income (on the 75%) the MPAA cuts in.

That is the main difference. 

It is possible by choosing the size of benefits touched and the way income is paid - to setup regular income and cashflow using either method which is the same cashflow.  

The tax relief along the way year to year - suits some people better (UFPLS) 
Others want a larger tax free capital lump for some purpose (FAD).

The other difference is the growth of tax free cash with investment returns.  TFC on the pot is assessed at the point of crystallisation.  So with FAD you take your 25% and the 75% is now marked for income.  It doesn't grow any more entitlement for tax free cash.  You have had it all.  Regardless of it remaining invested and growing or shrinking. For that 75% nothing changes.  If you phased it - and so have some crystallised funds (FAD) and some uncrystallised.  The uncrystallised still generates new tax free cash entitlement with growth.

With UFPLS aka salami slicing.   The slice is eaten. Gone.  The remaining uncrystallised sausage - grows.  And the tax free 25% of the now bigger sausage is a bit bigger.   

Because you had not had the 25% of that part.  It can grow.  And ultimately you get more tax free cash available up to the lifetime caps (LSA etc.)

The pension rules change regularly so none of these options can be guaranteed to stay still and remain available later on.  Fiscal drag is often used to fail to index allowances which disadavantage the consumer relative to inflation.  A favourite technique of the treasury.

Reggieinthebath

Thanks all, need to get my ailing analytical skills round all that. Appreciate your time.