crystalisation and drawdown

Mistermeaner

Dazed_and_C0nfused said:

Mistermeaner said:

Re the tax implications of crystallising the lot in one go i understand you will take 25% out of the cash wrapper and therefore you will be limited in tax free growth , particularly if your 25% is ~250k as there’s nowhere to put it other than isas that won’t tax growth….. however even if you left it in the pension and therefore tax sheltered you will always end up paying tax eventually to get your hands on it ….. or am I missing something ? 

You wouldn't be crystallising it if you left it in the pension.

Thanks - this is where I get confused (and dazed) . 1mil pot - extract 250k TfLs is the 750 not crystallised? 

Dazed_and_C0nfused

Mistermeaner said:

Dazed_and_C0nfused said:

Mistermeaner said:

Re the tax implications of crystallising the lot in one go i understand you will take 25% out of the cash wrapper and therefore you will be limited in tax free growth , particularly if your 25% is ~250k as there’s nowhere to put it other than isas that won’t tax growth….. however even if you left it in the pension and therefore tax sheltered you will always end up paying tax eventually to get your hands on it ….. or am I missing something ? 

You wouldn't be crystallising it if you left it in the pension.

Thanks - this is where I get confused (and dazed) . 1mil pot - extract 250k TfLs is the 750 not crystallised? 

Yes, but the £250k is no longer in the pension.

Or were you referring to the remaining £750k?  It didn't seem so from this comment but maybe I've misunderstood what you meant?

i understand you will take 25% out of the cash wrapper and therefore you will be limited in tax free growth , particularly if your 25% is ~250k as there’s nowhere to put it other than isas that won’t tax growth….. however even if you left it in the pension and therefore tax sheltered 

Mistermeaner

I’m trying to understand the disadvantages of crystallising all 1mil;

you get 250k TfLs , 750 remains tax wrapped (until withdrawn at whatever marginal rate)

the 250k while withdrawn tax free is then subject to tax on any growth it might enjoy through interest or investment growth 

is all this correct?

crystalising a smaller sum would leave more tax wrapped for longer but my point is that even if left tax wrapped for longer you always end up paying tax on withdrawals eventually one way or another don’t you ? 

Put another way what would be the advantage say in crystalising the 1mil pot in 200k chunks over 5 years than crystalising it all in one go ?

zagfles

With £1M your potential TFLS is getting close to the £268k LSA, once it exceeds that then any growth becomes taxable on withdrawal, so you may be paying income tax on growth of the potential TFLS. So could be better to fully crystallise when it hits that level. 

dunstonh

the 250k while withdrawn tax free is then subject to tax on any growth it might enjoy through interest or investment growth 

Pensions, ISAs, unwrapped and other wrappers all share the same investments at the same costs.   So, the main difference is tax.

crystalising a smaller sum would leave more tax wrapped for longer but my point is that even if left tax wrapped for longer you always end up paying tax on withdrawals eventually one way or another don’t you ? 

You will pay income tax whenever you access the 75% crystallised element (assuming its above personal allowance).   But that is the same whether it is now or later.     

If you draw from the 75% element just to stick it in investments, then that would be pointless unless there is some specific justification (which is possible) .

DRS1

Mistermeaner said:

I’m trying to understand the disadvantages of crystallising all 1mil;

you get 250k TfLs , 750 remains tax wrapped (until withdrawn at whatever marginal rate)

the 250k while withdrawn tax free is then subject to tax on any growth it might enjoy through interest or investment growth 

is all this correct?

crystalising a smaller sum would leave more tax wrapped for longer but my point is that even if left tax wrapped for longer you always end up paying tax on withdrawals eventually one way or another don’t you ? 

Put another way what would be the advantage say in crystalising the 1mil pot in 200k chunks over 5 years than crystalising it all in one go ?

Well one thing you could do is take the TFLS in lumps of £20k pa (or £40k if you are in a couple) and pay that money into an S&S ISA.  You could then invest the ISA in the same things you hold in the pension.  Then you'd be crystallising the pension in chunks of £80k (or £160k) with £20k (or £40K) coming out as TFLS and £60k (or £120k) staying in the pension as crystallised funds.

The advantage of not crystallising the whole pot all at once is that any growth in the pension pot can improve the amount of the TFLS.  Of course as pointed out already that advantage stops when you hit the maximum TFLS.  When you do that it is better to get it out as soon as possible because inflation will eat away at the value of the TFLS.

If you do the staged transfers to ISAs over a period of years to get the maximum TFLS out of the pension then any further growth of that amount in the ISA will be tax free and when you take money out of the ISA that will also be tax free.  That is better than leaving it in the pension.  It can take several years and you won't be able to start doing it until you are 57.  By then you may have a better use for the pension - like spending it on living expenses.

RecliningInPeace

Mistermeaner said:

I’m trying to understand the disadvantages of crystallising all 1mil;

you get 250k TfLs , 750 remains tax wrapped (until withdrawn at whatever marginal rate)

the 250k while withdrawn tax free is then subject to tax on any growth it might enjoy through interest or investment growth 

is all this correct?

I'm no advisor but understand your frustration having gone through the same process a few years ago. I hope the following helps.

Re your final question, correct on the assumption you save and/or invest it and subject to relief provided by personal savings allowance and capital gains allowance, respectively.

Re disadvantages of crystallising the whole £1m, in my opinion the main ones are:
- small potential loss of TFC (c. £18k being the difference between what you will get (full 25% which is £250k) and what you could have got if you left your pot or some of it and it grew beyond c. £1.073m, allowing you the maximum TFC of c. £268k.
- having to put the £250k TFC somewhere when you get it. As you said, you are possibly going to have to pay tax on savings interest or capital gains.
- forgoing potential capital growth on the TFC that is no longer invested.

You could minimise all of these disadvantages by using the other approach you mentioned, crystallising £200k chunks per year for five years. The other side of that coin is that you will be exposed to investment risk for longer, but you could minimise that by selecting lower risk investments in the SIPP.

Mistermeaner

Thanks all I think I got it now 

in the real world I am 46 years old with a 1mil plus pot, still working and paying in ~30k a year to stay below 100k earnings…. As such very likely I’ll exceed the max TfLs hence pondering the pros and cons of crustalising the lot 

I can certainly see an advantage in gradual crystallisation of a smaller point to allow continued tax free growth but as consensus above suggests once you hit the 1mil+ may as well crystallise the max to withdraw the fullest TfLs 

thanks for help - likely academic though as 10+ budgets to go before I get there so rules will likely change several times 

if rach would only let me have my money 

QrizB

At 46 you're pretty much guaranteed to exceed the current TFLS limit even if you don't pay another penny into your pension.

You can only hope that they raise the limit during the.next.11-12 years.

MallyGirl

If you take the £250k out in one go you will almost inevitably end up paying 40% tax on the interest generated from wherever you put it. You can put £50k in premiums bonds and £20k a year in a S&S ISA but then in that first year you still have £180k to manage. Say you get 3% interest on that - £5,400 - then you are going to pay £2,160 tax and have to factor that £5k in when trying to stay under £100k