Sipp flexi access drawdown and LSA

yocky

Hi all

About to start drawing down from my II sipp. I think I'll be going with Flexi access and so thinking about the amount to crystallise at a time. Am I right in thinking that as long as you have enough cash to withdraw then crystallising the entire fund offers protection for the lump sum allowance? In other words, and for the sake of an example, if the fund is £1.268m with £1m in investments and £268k cash then crystallising the whole fund locks in that 268k LSA even if the investments then fall to 500k in which case if you hadn't crystallised then your LSA would only be £192k.

And if so then the only "cost" associated with this policy is lack of ability to take an annuity or UFPLS?

If the above is all correct I'm struggling to see why I wouldn't do exactly that.

NoMore

You would receive the 268k tax lump sum to your bank account, so yes you would get the max you can. What you then do with it is up to you.

Would you want/need 268k all at once ? Could be difficult to get it in tax advantaged wrappers by taking such a large amount at once.

yocky

Yeah as you replied I realised that the PCLS is a use it or lose it thing, I thought I could defer indefinitely but II is pretty clear it's to be taken at the point of crystallising the funds. And no, I don't want that lump sum up front.

So that being the case I guess little and often is the best crystalling policy?

NoMore

https://forums.moneysavingexpert.com/discussion/comment/81960853#Comment_81960853

There's no right answer, it all depends on your future plans, some people would use a tax free lump sum to pay off a mortgage for example, other's might use it to reduce future tax obligation by using it to replace some income tax.

yocky

https://forums.moneysavingexpert.com/discussion/comment/81960863#Comment_81960863

I've got this "ability to defer the lump sum after crystallisation" so firmly in my head that I didn't notice how dumb that question was.

Yes, I'll be timing and sizing my crystallisation events depending on the tax free cash requirement at the time which for me will be aimed at keeping within the 20% tax band each year.

poseidon1

Surely if you have a Sipp of the size you indicate, you will potentially be facing the IHT regime affecting DC schemes from 2027 onwards.

With this in mind, the prevailing ethos appears to be in favour of taking TFC sooner rather than later, since at least with that lump sum liquidity one has better scope to embark on proactive IHT mitigation strategies compared to leaving substantial funds locked up in Sipps.

Certainly with IHT on the horizon for Sipps I have had to consider changing my intended strategy of annual tax efficient UFPLS withdrawals throughout retirement.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81960989#Comment_81960989

Plus it is usually reccommended to take all the TFC before age 75, because if you die after that age your pension pot beneficiary would not be able to take any unused TFC.

yocky

I don't have dependants I'm trying to cater for in making these decisions. My entire strategy is based on tax efficient drawdown of the funds with half an eye on any potential changes to the LSA.

A family member would inherit the SIPP if I die before exhausting it but frankly that's a windfall for them that I think they probably should pay tax on, and not something I'm going to change my behaviour based on. Obviously I'd probably feel differently if I was the windfallee…….

DRS1

I have to admit that there is a bit of me that thinks if you have hit the LSA already you should crystallise and take out the £268k TFLS NOW. That £268k is only going to be worth less in 10 or 15 years time. Sure using UFPLS you can string it out over a long time (as long as you don't make any disastrous investments) but as you say you also run the risk that the government will take it into their heads to reduce the LSA. To be fair people don't seem to think that is likely but it is a risk - hopefully there would be some warning which may give you time to do something about it. Of course people did that in 2024 and 2025 and nothing happened.

What would you do with the money? Well there is an ISA - only £20k I know. There are premium bonds - only £50k but who knows you may win a £1million. Personally I would suggest building an index linked gilt ladder - with low coupons you don't need to hold it in a SIPP or an ISA as the taxable income will be peanuts. The gain on maturity will be free from CGT (under current law).

If you don't want to take it all at once think about taking enough TFLS each year to feed an ISA (on top of the UFPLS)

Albermarle

 with half an eye on any potential changes to the LSA.

The Govt is unlikely to make any changes as inflation is doing the work for them. Since the LTA reached £1.1 M, which was the precursor to to the £268 K LSA, it has not been increased for four years, so in real terms it only has a value just above £200K. I think you can presume it will not be unfrozen for some time.

Of course there is a half way house between taking the full amount in one go and taking out £20K pa. You could take it say in £50K slugs.

Veloflyer

Of course people did that in 2024 and 2025 and nothing happened

…but the investors' creed states past performance is not indicative of future results :)…I'd say it applies as much to HMG as to investments, particularly so in this tax raising environment.