crystalisation and drawdown

Mistermeaner

hi sry if these are really dumb questions.... I am some way off needing to do it yet but just starting to think about draw down of my DC pot

To keep things simple lets just say the pot is worth £1mil

I understand that (for now at least) you can access 25% of this tax free (TFLS) so if the whole pension is 'crystalised' one could take £250K tax free as cash and do with it as they please.... the thing i'm not clear on is what happens to the remaining 750K.... does it stay in the pension wrapper and therefore invested and untaxed until it is withdrawn..... at which point i presume subject to income tax as any employment earnings would be (£12.5K at 0%, £12.5K-£50K 20%, >£50K 40%... etc.) - is this broadly correct?

When you crystalise a pension or portion of a pension do you have to take 25% of the crystalised amount as cash or can you crystalise and not withdraw?

I see snippets of folk withdrawing £16.7K per annum from their pensions; is this because all of this can be withdrawn tax free? (for simplicity £12.5K + TFLS allowance)? 

What is the disadvantage in crystalising the lot early? Perhaps now it is because the uncrystallised amount is outside of your estate for IHT but post 2027 this wont matter anymore?

Any help clarifying greatly appreciated

Thanks

SVaz

You have to take the tax free cash from whatever amount you crystallise.
The corresponding 75% goes into a drawdown pot ( whether shown or notional)  and is fully taxable when drawn, whether now or 5/10/20 years. 

SVaz

Yes,  with no other taxable income,  you can have £16700 a year without paying tax as the 25% tax free brings the taxable element to normal Personal allowance level. 

QrizB

Mistermeaner said:

I understand that (for now at least) you can access 25% of this tax free (TFLS) so if the whole pension is 'crystalised' one could take £250K tax free as cash and do with it as they please

Yes.

Mistermeaner said:

the thing i'm not clear on is what happens to the remaining 750K.... does it stay in the pension wrapper and therefore invested and untaxed until it is withdrawn

Yes.

Mistermeaner said:

at which point i presume subject to income tax as any employment earnings would be (£12.5K at 0%, £12.5K-£50K 20%, >£50K 40%... etc.) - is this broadly correct?

Yes.

Mistermeaner said:

When you crystalise a pension or portion of a pension do you have to take 25% of the crystalised amount as cash or can you crystalise and not withdraw?

You can choose to take less than 25%, but whatever you don't take is crystallised and taxable when you withdraw it.

Taking less than 25% tax-free is rarely a good idea.

Mistermeaner said:

I see snippets of folk withdrawing £16.7K per annum from their pensions; is this because all of this can be withdrawn tax free? (for simplicity £12.5K + TFLS allowance)? 

Yes.

Mistermeaner said:

What is the disadvantage in crystalising the lot early?

You need to fins somewhere to invest the whole TFLS - in your example, £250k - outside the pension. This is likely to result in at least some of the investment growth being taxable. If you leave most of it uncrystallised, that growth isn't taxable.

Also if you take all the TFLS at once, you might think "ooh what a big pile of money" and be tempted to spend it on eg. a yacht or a Lambo, or fly to Vegas and put it all on black ...

dunstonh

What is the disadvantage in crystalising the lot early? Perhaps now it is because the uncrystallised amount is outside of your estate for IHT but post 2027 this wont matter anymore?

Depends on what you do with it.

In the pension, it suffers no income tax, dividend tax or capital gains tax.  Death before 75 has no difference in respect of IHT  (post 2027) than alternatives.

So, it is effectively wrapped up tax free at the moment.  If you place it in taxable investments, you will be subject to unnecessary tax. 

Jerben

Hi Mistermeaner,

You are generally correct in your initial post, but for anyone to help further, can you say who your DC pension is with?

This is because some of the ‘options’ available to you and their treatment of particular situations may be different!.

Posters with experience of your platform may be able to give more detailed answers.

Albermarle

Jerben said:

Hi Mistermeaner,

You are generally correct in your initial post, but for anyone to help further, can you say who your DC pension is with?

This is because some of the ‘options’ available to you and their treatment of particular situations may be different!.

Posters with experience of your platform may be able to give more detailed answers.

As well as the platform, it is useful to know how old the pension is/when it was started, as if it is quite old then this is often when withdrawal options can be limited. If so a transfer to a modern pension is usually the best course of action. 
Plus who the provider was when it was started, if not the same as the current one ( there have been lots of consolidation over the years) .