Crystallised v Uncrystallised pension

EverythingCounts

I’ve been doing some reading to try to fully understand the concept of crystallising a pension, I think I’ve got my head around it but would appreciate if I could get some confirmation here that I’ve understood the various scenarios correctly…

So at a high level an uncrystallised pension is one where the funds have not been touched yet and the pension pot remains fully invested. Whilst a crystallised pension is where you have accessed money from the pension.

I have a defined contribution pension so if I do any of the following I will crystallise my pension:

1. Take a tax free lump sum
2. Buy an annuity
3. Choose income drawdown 
4. Or a combination of the above three
   

Then there is Uncrystallised Funds Pension Lump Sum (UFPLS)

So this option lets you take money from your pension pot in multiple lump sums over the years, each time you take a lump sum it will be split 25% tax free and 75% taxable (based on that tax years income). The amount of the lump sum is irrelevant, it’s always split 25/75 on any payment. The remaining funds stay invested.

One option I’m not sure about is if you take your tax free lump sum in separate chunks over the years, but use the rest to buy an annuity or drawdown. How does this work? Am I correct in thinking if you had a pension pot of £100,000 and you initially took £5000 tax free, then £15000 is then crystallised at that point, so only the corresponding 75% of that 25% £5000 (at the point of time). Which then leaves you with an £80000 Uncrystallised pot with £20000 that can still be taken as tax free lump sums in the future, but of course the funds could go up or down, so you effectively can take 20% tax free at some point in the future. Do you have to take all the tax free lump sums before you can buy an annuity or start drawdown?

And what does crystallised actually mean? This bit is not clear to me, is it related to tax or your ability to continue paying into the pension (MPAA)? With the various options above this is a little unclear to me.

Albermarle

MPAA is a separate rule, only indirectly related to crystallisation, which is more related to the tax status of the pension funds you have.

You mention a couple of times that remaining funds stay invested. That is usually the case, but you can hold both uncrystallised and crystallised funds in cash if you want.

One option I’m not sure about is if you take your tax free lump sum in separate chunks over the years, but use the rest to buy an annuity or drawdown. How does this work?

One thing to watch out for here, is that older pensions and to a lesser extent those with traditional providers, may not offer the same flexibility in withdrawal options as newer pensions. So for example with drawdown, I have an uncrystallised pension pot with Standard Life. If I want to withdraw, I can take the tax free part all at once or in stages, but I can not take any taxable income from crystallised funds until all the tax free has been taken. Due to this they do not offer UFPLS.

I have a SIPP with Fidelity. Last year I took a tax free lump sum, that crystallised about two thirds of the pension ( for a house deposit) Later that year I took a smaller tax free lump sum and then later still I took a few grand in taxable income. I could take a UFPLS payment if I wanted. So fully flexible.

With regard to an annuity, you normally exchange uncrystallised funds for an annuity income. The annuity provider will pay you the 25% tax free as part of the process of setting up the annuity. You can buy annuities with just crystallised funds AFAIK, but it is a lot less common.

DRS1

You're confused now? Just wait till you find out that different pension providers treat the split between crystallised and uncrystallised differently. Some (eg HL) do a hard physical split. Some (eg ii) do a percentage split. That can affect what TFLS you can take in the future.

I am not sure where you get the bit about "you effectively can take 20% tax free at some point in the future" from. You are maybe relating it back to the £100k you started with? Forget that. In your example you have £80k uncrystallised and £15k crystallised. Let's say your investment doubles so you have £160k uncrystallised and £30k crystallised. You can take £25% of the uncrystallised £160k as TFLS.

Crystallised does sort of relate to tax and the MPAA but only if you draw down money from the crystallised bit of your pension - in which case that money is treated as taxable income and can trigger the MPAA. But if all you do is draw the TFLS (£5k in your example) and you leave the crystallised £15k alone (still in your pension and still invested) then you don't pay any tax and you don't trigger the MPAA.

Typically the most common step to crystallise a pension will be taking the TFLS.

I am not sure about the buying an annuity bit because what you would do then is use the money in the pension to buy the annuity. There would be nothing left in the pension. I suppose it would be possible to take a £25k TFLS from your £100k pension pot leaving £75k as crystallised funds and then spend £50k of the crystallised funds on an annuity. If you did that you have left £25k of crystallised funds behind but it would be the TFLS which caused the crystallisation not the buying of the annuity. Also buying a lifetime annuity does not trigger the MPAA.

MarlowMallard

The key point here is "uncrystallised" = you can still take 25% tax-free in future, (as long as you don't hit the 268k limit). "Crystallised" = you've taken the 25% and all of the crystallised bit will be taxable income in the tax year you take it out, or later if you buy an annuity.

Say you have a 100k pot. You take 10k tax-free only. Then 30k left in the pot becomes crystallised (3x the 10k you took) and 60k remains uncrystallised.

Or, if instead you took 40k UFPLS out, 10k is tax-free, 30k is liable to income tax in that tax year and the 60k left remains uncrystallised.

You are paying income-tax on the 30k at some point, and on 3/4 of the other 60k, but the spread over tax years is different. You can buy an annuity with crystallised funds because you pay income tax later on the annuity.

Albermarle

Just wait till you find out that different pension providers treat the split between crystallised and uncrystallised differently. Some (eg HL) do a hard physical split. Some (eg ii) do a percentage split. That can affect what TFLS you can take in the future.

Also some traditional providers, like Scottish Widows set up a whole new 'Retirement Account' for crystallised funds, so very much a physical split.

EverythingCounts

https://forums.moneysavingexpert.com/discussion/comment/81956379#Comment_81956379

Thank you for the response.

Interesting what you’ve said about your Standard Life pension, I did wonder about taking the tax free element in parts and what that means for the taxable element. I guess it comes down to the pension provider.

I will certainly need to look into how flexible any pension provider is and what options they offer. I think taking the tax free element in chunks is an option I will look at, I might also split the taxable element between buying an annuity and drawdown which I guess complicates it a little further.

Having read the responses and thought it through some more, I suppose taking it all as an annuity means it’s basically crystallised by default at that point.

NoMore

The easiest way to think about it, is that crystallised means that its now taxable on withdrawal, uncrystalised means you can still take 25% tax free from it.

It's a way to track when you have took tax free amounts from your pension, but not necessarily the associated taxable portion.

There are other benefit crystallisation events (BCE) but for most people the above explanation is the simplest.

EverythingCounts

https://forums.moneysavingexpert.com/discussion/comment/81956386#Comment_81956386

Thank you for the response.

I’ll have to look out for how different providers treat the crystallised and Uncrystallised elements then.

Thanks for the explanation on taking the tax free element in separate chunks, so effectively you’re always taking 25% of whatever Uncrystallised funds you have left. Got it.

Albermarle

Interesting what you’ve said about your Standard Life pension, I did wonder about taking the tax free element in parts and what that means for the taxable element. I guess it comes down to the pension provider

It is a bit of a sweeping generalisation, but older pensions/traditional providers ( Standard Life, Scottish Widows, The Pru etc) can be less flexible.

Some of the newest providers( often with very low/zero fees) and auto enrolment providers, also offer less options. I think even in a couple of cases you have to transfer out as there are no withdrawal options.

The most flexible ones for consumers are the more modern SIPP providers, like HL, Fidelity, AJ Bell , Interactive Investor etc.

Financial advisors have access to providers with even more flexibility.

LHW99

https://forums.moneysavingexpert.com/discussion/comment/81956470#Comment_81956470

Ad as I understand it, with HL where they split off crystallised and uncrystallised, you end up with effectively two accounts, and are charged separate platform fees on both parts (not sure how many others do the same).

With II, as they don't split the two types, you continue to pay only one set of platform fees.

Depending how you want to access the pension funds, what you invest in and how large the pot is, different platforms may work out more appropriate / cheaper.

Veloflyer

It may be useful to note that you should also have your personal allowance (PA) to consider with any crystallized funds. This means that provided you have no other income, anything you withdraw from those funds up to the PA should be tax free. I believe it is tax efficient to make use of the PA every year.