SIPP “Notional split”

Justso65

I expect this has been asked multiple times but please bear with me seeking clarification.

I have a SIPP.  Let’s apply some easy numbers to it for the sake of calculation.

I have £400k in my SIPP and am due to retire.  I initially want £25k as a tax free lump sum. So I need to crystallise £100k to get my £25k TFLS.

Am I correct in the following assumptions?

My SIPP provider (interactive investor) will not actually do anything with the crystallised and non-crystallised sections but instead will assign percentages to each section.  So my remaining £75k crystallised section will be 20% and the uncrystallised section with £300k will be 80% of my SIPP.

Now i start to draw a pension.  This will come from the crystallised section.  In effect as I take income the percentage value of the crystallised section will fall and the uncrystallised section will increase until the percentage becomes 100% uncrystallised and 0% crystallised.  At which point, or any point, I can repeat the process, crystallise funds, take 25% of it tax free and draw the remainder from the crystallised portion as pension taxable at my marginal rate.

Is the above correct?

The above are just example figure for ease of calculation.  Now if, in reality, I want £20k TFLS soon but due to my investments I only have £76k I can crystallise would it be within the recycling rules and sensible to add £3200 from my ISA, get £800 tax relief thus adding the required £4k to my SIPP to allow me to crystallise £80k and get the desired £20k TFLS?  I realise adding the £4k only results in an additional £1k TFLS but the tax payable as I take the rest out is the same as my marginal rate and I’m only being taxed on what actually cost me £2.2k so I do gain a bit.  I believe I gain 6.25% on my £3200.

I do understand there are rules around putting money into my pension just before retirement then taking it back out but if I understand those rules correctly the £3200 in as a proportion of the £20k I would take out does not breach those rules.

Thanks as always, JS. 

JDK1971

No, I don’t think that is correct.  The £75k that is now crystallised will always attract tax when taken.  You will be able to take another tax free amount from the remaining £300k, but once you’ve exhausted this, all the remaining funds would be 100% taxable at your prevailing marginal rate.

HappyHarry

Justso65 said:

I expect this has been asked multiple times but please bear with me seeking clarification.

I have a SIPP.  Let’s apply some easy numbers to it for the sake of calculation.

I have £400k in my SIPP and am due to retire.  I initially want £25k as a tax free lump sum. So I need to crystallise £100k to get my £25k TFLS.

Am I correct in the following assumptions?

My SIPP provider (interactive investor) will not actually do anything with the crystallised and non-crystallised sections but instead will assign percentages to each section.  So my remaining £75k crystallised section will be 20% and the uncrystallised section with £300k will be 80% of my SIPP.

Not quite. You will continue to have your SIPP with £300,000 in it which can be added to by future contributions and will retain the ability for you to draw 25% tax-free cash.

You will also have a new crystallised pot with £75,000 in it which you can draw taxable income from.

The separation between the pots is defined in £s and pence, not by percentages.

Edited: I stand corrected - it transpires that ii do split the pots by percentages.

 Now if, in reality, I want £2 k TFLS soon but due to my investments I only have £76k I can crystallise would it be within the recycling rules and sensible to add £3200 from my ISA, get £800 tax relief thus adding the required £4k to my SIPP to allow me to crystallise £80k and get the desired £20k TFLS?  I realise adding the £4k only results in an additional £1k TFLS but the tax payable as I take the rest out is the same as my marginal rate and I’m only being taxed on what actually cost me £2.2k so I do gain a bit.  I believe I gain 6.25% on my £3200.

I do understand there are rules around putting money into my pension just before retirement then taking it back out but if I understand those rules correctly the £3200 in as a proportion of the £20k I would take out does not breach those rules.

Thanks as always, JS. 

This would not breach the recycling rules.

JDK1971

Whilst your crystallised £75k might remind you invested in the fund you’ve chosen, it will be labelled as crystallised.  I don't know how II present their accounts, but I would be very surprised if they don’t show your crystallised v uncrystallised funds separated out.

NoMore

The difference in notional split and two separate pots is how growth of your investments is treated, and since you haven't mentioned growth at all in your example, it's hard to explain

Notional split - The sizes of your crystallised and uncrystallised portions is tracked as a percentage of the overall value of your pot. 

Two pots - Each pot is treated separately and as such as value changes, one pot may be come proportionally larger/smaller than the other one, if you have different investments and proportions in each pot. 

NoMore

HappyHarry said:

Not quite. You will continue to have your SIPP with £300,000 in it which can be added to by future contributions and will retain the ability for you to draw 25% tax-free cash.

You will also have a new crystallised pot with £75,000 in it which you can draw taxable income from.

The separation between the pots is defined in £s and pence, not by percentages.

Not in II he won't, they use notional split. He would have an overall pot of £375k, with an 80% uncrystallised portion and 20% crystallised. As the value of the overall pot changes, these percentages would be used to calculate the new amounts available for crystallisation when required (most likely at next withdrawal)

Notional split - ii

HappyHarry

NoMore said:

HappyHarry said:

Not quite. You will continue to have your SIPP with £300,000 in it which can be added to by future contributions and will retain the ability for you to draw 25% tax-free cash.

You will also have a new crystallised pot with £75,000 in it which you can draw taxable income from.

The separation between the pots is defined in £s and pence, not by percentages.

Not in II he won't, they use notional split. He would have an overall pot of £375k, with an 80% uncrystallised portion and 20% crystallised. As the value of the overall pot changes, these percentages would be used to calculate the new amounts available for crystallisation when required (most likely at next withdrawal)

Notional split - ii

Well, I have learnt something new today. I wonder how many decimal places they go to to calculate this?

Albermarle

Justso65 said:

I expect this has been asked multiple times but please bear with me seeking clarification.

I have a SIPP.  Let’s apply some easy numbers to it for the sake of calculation.

I have £400k in my SIPP and am due to retire.  I initially want £25k as a tax free lump sum. So I need to crystallise £100k to get my £25k TFLS.

Am I correct in the following assumptions?

My SIPP provider (interactive investor) will not actually do anything with the crystallised and non-crystallised sections but instead will assign percentages to each section.  So my remaining £75k crystallised section will be 20% and the uncrystallised section with £300k will be 80% of my SIPP.

Now i start to draw a pension.  This will come from the crystallised section.  In effect as I take income the percentage value of the crystallised section will fall and the uncrystallised section will increase until the percentage becomes 100% uncrystallised and 0% crystallised.  At which point, or any point, I can repeat the process, crystallise funds, take 25% of it tax free and draw the remainder from the crystallised portion as pension taxable at my marginal rate.

Is the above correct?

The above are just example figure for ease of calculation.  Now if, in reality, I want £20k TFLS soon but due to my investments I only have £76k I can crystallise would it be within the recycling rules and sensible to add £3200 from my ISA, get £800 tax relief thus adding the required £4k to my SIPP to allow me to crystallise £80k and get the desired £20k TFLS?  I realise adding the £4k only results in an additional £1k TFLS but the tax payable as I take the rest out is the same as my marginal rate and I’m only being taxed on what actually cost me £2.2k so I do gain a bit.  I believe I gain 6.25% on my £3200.

I do understand there are rules around putting money into my pension just before retirement then taking it back out but if I understand those rules correctly the £3200 in as a proportion of the £20k I would take out does not breach those rules.

Thanks as always, JS. 

Regarding the comment in bold, you will have more choices than that. You could 

1) Take a taxable income from the crystallised part until it runs out( as you suggest)
2) Take UFPLS payments ( 25% tax free and 75% taxable) you could do this until the tax free part eventually runs out ( as you have already taken some of it)
3) Take a taxable income from say half the crystallised part, and then take some more tax free cash if that suited. You do not have to wait for all the crystallised pot to be used up before taking more tax free cash.

LHW99

Albermarle said:

Justso65 said:

I expect this has been asked multiple times but please bear with me seeking clarification.

I have a SIPP.  Let’s apply some easy numbers to it for the sake of calculation.

I have £400k in my SIPP and am due to retire.  I initially want £25k as a tax free lump sum. So I need to crystallise £100k to get my £25k TFLS.

Am I correct in the following assumptions?

My SIPP provider (interactive investor) will not actually do anything with the crystallised and non-crystallised sections but instead will assign percentages to each section.  So my remaining £75k crystallised section will be 20% and the uncrystallised section with £300k will be 80% of my SIPP.

Now i start to draw a pension.  This will come from the crystallised section.  In effect as I take income the percentage value of the crystallised section will fall and the uncrystallised section will increase until the percentage becomes 100% uncrystallised and 0% crystallised.  At which point, or any point, I can repeat the process, crystallise funds, take 25% of it tax free and draw the remainder from the crystallised portion as pension taxable at my marginal rate.

Is the above correct?

The above are just example figure for ease of calculation.  Now if, in reality, I want £20k TFLS soon but due to my investments I only have £76k I can crystallise would it be within the recycling rules and sensible to add £3200 from my ISA, get £800 tax relief thus adding the required £4k to my SIPP to allow me to crystallise £80k and get the desired £20k TFLS?  I realise adding the £4k only results in an additional £1k TFLS but the tax payable as I take the rest out is the same as my marginal rate and I’m only being taxed on what actually cost me £2.2k so I do gain a bit.  I believe I gain 6.25% on my £3200.

I do understand there are rules around putting money into my pension just before retirement then taking it back out but if I understand those rules correctly the £3200 in as a proportion of the £20k I would take out does not breach those rules.

Thanks as always, JS. 

Regarding the comment in bold, you will have more choices than that. You could 

1) Take a taxable income from the crystallised part until it runs out( as you suggest)
2) Take UFPLS payments ( 25% tax free and 75% taxable) you could do this until the tax free part eventually runs out ( as you have already taken some of it)
3) Take a taxable income from say half the crystallised part, and then take some more tax free cash if that suited. You do not have to wait for all the crystallised pot to be used up before taking more tax free cash.

or 4) Take several UFPLS payments and then later crystallise all the uncrystallised that remains, leaving the already crystallised part alone.

Justso65

Thank you for all your replies.

I think I’ve realised that in crystallising funds nothing actually happens to them. I don’t need to separate my investments into ones that are deemed wholly crystallised and those that are not. An investment such as a gilt that doesn’t mature until next year can have a proportion in both the crystallised and the uncrystallised portions of my overall pension. So to take my £20k TFLS I just need a pension pot of at least £80k. I don’t actually have to do anything other than make the £20k of cash available to withdraw.

Pat38493

The first section of your post up until "is the above correct" is broadly correct.

Interactive Investor will calculate the value of your crystallised and uncyrsallied pots every weekday (the values appear in your account at about 11am for some reason). You can see these values in the "SIPP Benefits" section under pensions. This seems to represent the previous day closing - there is nearly always a market open somewhere in the world every day, so they have to take a snapshot position somehow.

The percentage of UC vs drawown will remain constant each day unless you add or remove money. when you withdraw money, after a few days they will recalculate your % notional split.

Your comments about taking a pension - see Albermarle comments - when you want to make a withdrawal you will choose out of several options, and one of them is to make an UFPLS withdrawal directly from UC funds, but if you choose to take money from your drawdown (crystallised) pot, then you statements are again correct. As noted above drawdown payments are taxable at your marginal rate.