Tax Free Lump Sum Question

horace972897

Hi

I wonder if I could get the benefit of the forums wisdom around TFLS'

Using hypothetical numbers:

If i had 1 million in a SIPP and took £17430 of the £250000 TFLS available this year plus

£12570 of of the crystalised pension as well (so an income of £30000 but no tax)

I would leave £232570 TFLS available to take in future years and a SIPP value now £970000

But if the value of the SIPP was to drop by 50%

Would the original £25000 TFLS available now drop to £103820? (SIPP value now £485000 minus crystalised £69720 = £415280 so new TFLS available = 25% of £415280 = £103820)

If so, other than taking the whole TFLS and investing in Cash/Money market/ IL Gilts etc in ISA's / GIA's is there any other way of protecting the initial TFLS value from market drops?

Hope this makes sense - i'm sure there was a much short way of asking this question.......

Thanks in advance.

Horace

Albermarle

If the Sipp value drops, the remaining tax free cash available will drop. ( as will the taxable part of course)
it will be 25% of the remaining uncrystallised part of the pension, whatever its value was when you take the TFC.
To ‘protect’ it you could ( as you suggest) take it all out and keep it as cash or cash equivalents.
Of course if your Sipp continues to grow you would be missing out.

horace972897

So you can't crystalise the whole SIPP without drawing the TFLS out i assume?

zagfles

horace972897 said:

So you can't crystalise the whole SIPP without drawing the TFLS out i assume?

Theoretically you can but then you lose the TFLS. So would hardly ever make sense. 

phlebas192

horace972897 said:

So you can't crystalise the whole SIPP without drawing the TFLS out i assume?

You can (if your provider allows it - not all do) but you would lose the tax-free status of the 25% you don't withdraw. ie the TFLS amount has to be taken as part of the crystallisation process or else it will be taxable when you do withdraw it. 

Some providers operate separate uncrystallised and crystallised (drawdown) pots. If you used such a provider then you could put all of the uncrystallised amount into short dated gilts, a money market fund or even just hold as cash. That would preserve its value so wouldn't risk the TFLS available falling. But then you would lose out on future investment gains.

kempiejon

@horace972897 is there any other way of protecting the initial TFLS value from market drops?
With £1.xM and the lifetime allowance fixed and a risk the portfolio will fall in value only by taking it all now or having a bigger pot than the allowance x4
Take it now and of course it becomes liable for tax once out the pension. 

Or swap the whole port for gilts or bonds with a clearly understood cash outcome and crystallise in portions the full 25% or £268,275 TFLS is protected but of course there's naff all upside in this as the rest isn't positioned for growth.

Nebulous2

kempiejon said:

Or swap the whole port for gilts or bonds with a clearly understood cash outcome and crystallise in portions the full 25% or £268,275 TFLS is protected but of course there's naff all upside in this as the rest isn't positioned for growth.

How much growth do you need? 

You can get CPI+ 2% in index-linked gilts. If the aim is protecting the value rather than growth wouldn't that be enough? 

kempiejon

Nebulous2 said:

kempiejon said:

Or swap the whole port for gilts or bonds with a clearly understood cash outcome and crystallise in portions the full 25% or £268,275 TFLS is protected but of course there's naff all upside in this as the rest isn't positioned for growth.

How much growth do you need? 

You can get CPI+ 2% in index-linked gilts. If the aim is protecting the value rather than growth wouldn't that be enough? 

Growth, me? None. it's not my plan the OP wants to preserve the TFLS and index linked gilts is just the ticket. 

horace972897

There is a nuance to this that i'm not certain about regarding the uncrystalised and crystalised pots. If i can use an example again.

If i have a 100k pension pot and take £10000 TFLS I have then crystalised £40000 of the 100k

If the drop was 50% i assume that the £30000 in the crystalised part of the SIPP applies still if the pot drops 50%

Therefore when i next come to take a TFLS i can only get a max of 25% of £15000 as the SIPP is now worth only £45000 and £30000 is classed as crystalised i.e. the crystalised amount doesn't drop by 50% because the SIPP value has halfed? Is this correct?

af1963

With some providers, you will have separate crystallised and non crystallised pots, each with its own set of investments, and in that case each will grow or shrink in line with those investments. This potentially lets you choose whether to put 'riskier' or 'safer' investments into one pot or other.

Other providers keep a single pot and designate it as "x% crystallised".

In your scenario after taking £10k, you'd either have £30k remaining in a crystallised pot and £60k in an uncrystallised pot each with their own investment mix,  or you'd have £90K in a SIPP that was 33% crystallised.

With the first option, each pot has its own defined value and you can take 25% of what's left in the uncrystallised.

With the second option: Start with 90k, drop by 50%, and you have £45K of which 33% ( £15k) crystallised and £30k uncrystallised, so you can take 25% of £30k.

Albermarle

Whatever is in the Sipp, crystallised or uncrystallised, will continue to move up and down in line with the investment performance.
Which normally is positive as the long term investment trend has always been up.