Explain (partial) crystallisation/drawdown etc. to me like I'm 5(0)

InvesterJones

A change of circumstances has suddenly caused me to change focus from optimising accumulation, to planning decumulation, and I haven't yet found a simple guide.

I have more in ISAs than pension wrappers, and currently far from a full state pension, so my modelling is going along the lines of:

A) Before pension age: live off savings/ISAs/gilts/GIA

B) After DC pension age but before SP: withdraw £12570 (in today's money) taxable, £4190 tax free, from SIPP - here's where my knowledge fails - this is done by requesting a partial crystallisation of £16760, which will then be 25% tax free lump sum and £12570 into a drawdown account, from which I can then withdraw the full lot, or perhaps better, monthly, to ease tax reporting? [Question 1].

This would trigger MPAA on first withdrawal from drawdown account, but I'm modelling no further qualifying income so I don't think that matters? [Question 2]

+ make up remainder of living costs from ISAs and gilts [Question 3 - can I use a gilt ladder in a GIA to harvest capital gains and do those gains count towards personal allowance?]

+put £2880 into SIPP from ISAs/gilts to receive uplift as still allowed with no qualifying income and under MPAA

C) After SP age: Reduce crystallisation from B by the amount of state pension I receive, make up remainder of living costs as before.

Is my understanding anything close to correct or possible? [Question 4] It is trying to make the 25% TFLS last as long as possible by leaving as much as possible uncrystallised to grow. Looking back I will probably laugh at something I've got entirely wrong! But if it's correct I can start putting the numbers in to see if it's feasible.

I'm also weighing up the option of adding voluntary NI contributions to get closer to a full state pension - this could become very worthwhile if the current generosity is maintained, or a waste if the rules change. Either way, increasing SP would reduce the personal allowance available so it's not quite a 1:1 benefit if I would otherwise manage to stay below a tax threshold, though that's not the end of the world.

I also realise I haven't considered annuities - where are they bought from (e.g. uncrystallised) and could they be a sensible way to top up say SP to the personal allowance? [Question 5]

Many thanks for your patience! Keen to learn.

dunstonh

- here's where my knowledge fails - this is done by requesting a partial crystallisation of £16760, which will then be 25% tax free lump sum and £12570 into a drawdown account, from which I can then withdraw the full lot, or perhaps better, monthly, to ease tax reporting? [Question 1].

It will be done by a UPLS of £16,760. The 75% segment would never end up in a crystallised fund as it would go direct to payroll.

UFPLS is available on regular monthly or other frequencies, but typically at this moment in time most DIY providers don't offer that. It's commonplace with IFA providers. So if you're going DIY, you would do it on a lump sum basis.

This would trigger MPAA on first withdrawal from drawdown account, but I'm modelling no further qualifying income so I don't think that matters? [Question 2]

No, it doesn't matter if there's no intention to return to work.

+ make up remainder of living costs from ISAs and gilts [Question 3 - can I use a gilt ladder in a GIA to harvest capital gains and do those gains count towards personal allowance?]

Any income form the gilts held in a GIA is taxable subject to usual allowances.

Is my understanding anything close to correct or possible? [Question 4] It is trying to make the 25% TFLS last as long as possible by leaving as much as possible uncrystallised to grow. Looking back I will probably laugh at something I've got entirely wrong! But if it's correct I can start putting the numbers in to see if it's feasible.

It's close enough.

I also realise I haven't considered annuities - where are they bought from (e.g. uncrystallised) and could they be a sensible way to top up say SP to the personal allowance? [Question 5]

Assuming you mean lifetime annuities or pension fixed-term annuities, they are bought using the 75% segment of the pension. You can also buy annuities outside of the pension wrapper. Some platforms also offer fixed term annuities and Lifetime annuities on platform. That's a fairly new option, and at this time there isn't a DIY provider that offers that functionality yet. It's only available via IFAs.

DRS1

[Question 3 - can I use a gilt ladder in a GIA to harvest capital gains and do those gains count towards personal allowance?]

Yes you can have a gilt ladder in a GIA. If you have it there you would want low coupon gilts with a clean price below 100.

No the gains do not count towards your personal allowance. The gains are free of CGT (and income tax - unless you buy a gilt strip by mistake). However the coupons count as interest and will eat up some of your personal allowance but they can go into the PSA and I think the starter rate for savings so I think you may be able to have £6k of coupons without paying more than 0% tax as long as your taxable pension draw (and any other non savings non dividend income) is kept to the personal allowance.

I also realise I haven't considered annuities - where are they bought from (e.g. uncrystallised) and could they be a sensible way to top up say SP to the personal allowance? [Question 5]

I am not sure about using the annuity to top up SP to the personal allowance. That suggests a reducing amount and annuities are either level or increasing (I suppose you might have reduction with an annuity which increases in line with RPI where RPI goes down in a year but you can't rely on that!)

You would typically buy an annuity from uncrystallised funds and take the related TFLS at the time you buy the annuity. But I believe it is possible to use crystallised funds to buy an annuity.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82055120#Comment_82055120

Thank you. So UFPLS for DIY would likely be a lump sum by lump sum application, and I'd receive the full £12570 as income in one go.

What had peaked my interest in partial crystallisation was flexi-access drawdown as described here: https://www.peoplespension.co.uk/help-and-support/faqs/member/what-are-the-differences-between-fad-and-ufpls/

which seems like I could take partial amounts of the tax-free portion - £4190 tax-free each year, and have £12570 non-tax-free move into a flexi-access drawdown account, from which I could withdraw at a rate of my chosing (and count as income).

The end result seems much the same, though perhaps less administration with FAD?

Of course, finding a platform that I like which offers that to DIY is another matter..

DRS1

I think one difference between UFPLS and FAD is that for DIY platforms it is easier to set up FAD to give you monthly income (you take the TFLS upfront and then spread the taxable pension income over 12 months and on your figures there should be no tax deducted) than it is to find a platform which allows you to take UFPLS on a monthly basis.

dunstonh

I am not sure about using the annuity to top up SP to the personal allowance. That suggests a reducing amount and annuities are either level or increasing (I suppose you might have reduction with an annuity which increases in line with RPI where RPI goes down in a year but you can't rely on that!)

You could do it with an annuity on a platform. With that method, the annuity pays the income into platform cash. Then the income drawn from platform cash can be at a variable level. Any excess could be reinvested.

However, as mentioned before, this method is currently only available via IFAs.

which seems like I could take partial amounts of the tax-free portion - £4190 tax-free each year, and have £12570 non-tax-free move into a flexi-access drawdown account, from which I could withdraw at a rate of my chosing (and count as income).

You could do it that way. Seems to be a bit of a faff though for such a small amount. Drawing it as a single amount and sticking it in your savings account and transferring money from that as you need it would be so much quicker.

Triumph13

Stepping back a bit, is there any need for you to try and nail your withdrawals sop exactly? I presume you have more in your pension than you are going to be able to get out tax free, especially after putting £3,600 back in each year? In that case, you are going to be paying tax on the extra whenever and however you take it, so you might just as well pay some now rather than later, and stop fretting about getting your sums right to the penny.

You can also crystallise more of your pension than you currently need, eg if you wanted £20k to live on in the year you access your DC pension, you could just crystallise £110k, giving you £27.5k of tax free cash - £20k of which you put into your ISA. You draw £12.5k of the crystallised funds to use your PA and leave the remaining £75k of crystallised funds sitting in your SIPP to fund withdrawals for the next few years. You then only have to mess about crystallising funds every few years. I'm not particularly suggesting that's what you do, just pointing out that money is fungible.

Albermarle

As per the previous poster. The £12570 is only a factor when you actually withdraw it as taxable income.

As a sort of example of the flexibility it offers, I withdrew £75K in tax free cash from my SIPP ( needed for helping with a house purchase).

£75K arrived in my bank account, and £225K went into a new Sipp Drawdown pot. A significantly smaller amount stayed in my original SIPP account as still uncrystallised funds.

Later I withdrew £6K in taxable income from the drawdown account, but after that it lays untouched for now. My personal allowance is already used up elsewhere.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82055651#Comment_82055651

Well it depends on what the SP looks like. At the moment it's not clear I have more in the pension than I can get out tax-free, hence trying to keep as much uncrystallised and growing as possible. If a) I manage to do all possible voluntary contributions and b) it still exists in as close to generous form as currently, then yes, I might have more than I can get out tax-free so would switch thinking.

ian16527

https://forums.moneysavingexpert.com/discussion/comment/82056314#Comment_82056314

I use Flexi drawdown for what you are suggesting. Its easier for me as I have a small DB pension and a small annuity so still pay tax on these and keeps the tax man happy. I stopped working at 57.

The advantage to only moving what you need each year to your drawdown account is that any gains in the main pre retirement account will still get the 25% tax free portion when you need to move it over to drawdown. If you move it all into drawdown, then any market gains will be liable to tax as well when you access it.

I usually drawdown what I need to live on each Feb and use the TFLS part as holiday/ extra spending money for the year