Drawdown philosophy

Veloflyer

I'd welcome some advice if I may.

I have an ILG ladder with Bell. It is all uncrystallized at present. To tie me over until SP kicks in, I'd like withdraw an annual amount of cash - for the sake of argument, let's say 30K - to pay for day to day expenditure. My thinking is to drawdown/crystallize 72K, use the 25% tax free to achieve a lump sum of 18K, and make use of the personal allowance of (let's say) 12K to draw an additional monthly income of 1K from the crystallized portion.

Assuming there is enough uncrystallized funds, repeat the drawdown to achieve 18K for the following year. I'd just roll over the income bit ….

My thinking is this would seem to be tax efficient, would stretch out the 25% and would not waste my PA for the year.

Thoughts most welcome.

Supplementary question - I assume I would need 30K in the cash account each year before crystallizing?

GenX0212

Don’t you have to sell the Gilts first in order to crystalise anything, doesn’t that undo the point of holding them in the 1st place?

If you have £72k in the 1st rung of your ladder however then fair play and ignore my post.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82154056#Comment_82154056

I believe I don't have to sell or have 72K in the cash account to crystallize 72K. I think I do need 30K in the cash account if I want to withdraw 30K cash though - the tax free amount plus the income from the crystallized, but to be clarified. First gilt will mature next year when I need the cash. I believe this goes straight into cash account. This will cover the 30K cash requirement.

QrizB

Using that approach you will run out of tax-free cash before you run out of crystallised funds. So you'll end up paying income tax on those crystallised funds eventually (unless the plan is not to touch them and leave them for your heirs).

Why not just take the £30k as the gilt matures, £7.5k tax-free and £22.5k taxable? You'll pay £2k in tax now but won't be paying tax on the same money later.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82154118#Comment_82154118

Assuming I have 500K in the SIPP then using my method, it would seem I pay no tax for 7 years - the amount of time the uncrystallized funds would last to yield a tax free amount of 18k/ann. For sure I'd have to pay tax on the crystallised from then on. Not sure whether your method or mine is the most tax-efficient! I feel a spreadsheet coming on….

mrklaw

normally you would design the gilt ladder to land the necessary amount each year at maturity (plus coupons), It’ll land as cash uncrystallised then you crystallise all of it. Take 25% tax free and the rest in drawdown can be taken as monthly FAD to be HMRC friendly

so if you wanted to sit in the tax free personal allowance you’d have eg 16760 landing each year part maturity part coupons.

It’s not clear where you’re crystallising 72k from as you don’t say how much each rung of thr ladder is or if you have other DC funds you’re using for that

Triumph13

The key thing is not to overcomplicate things. The only things that really matter for you, as far as tax efficiency goes, is that you use your full personal tax allowance every year and don't draw out more 'excess' tax free cash than you can shelter in an ISA.

The simple answer, as long as you have enough gilts maturing each tax year, is just to take each maturing gilt as an UFPLS. You many need to delay the UFPLS in some cases though - eg I don't think there is an ILG maturing in 29/30, so you would leave the maturity proceeds of the March 2029 one in the pension until the new tax year.

Veloflyer

normally you would design the gilt ladder to land the necessary amount each year at maturity (plus coupons), It’ll land as cash uncrystallised then you crystallise all of it. Take 25% tax free and the rest in drawdown can be taken as monthly FAD to be HMRC friendly

Yes - I get that and thanks - and as QrizB stated before I guess.

so if you wanted to sit in the tax free personal allowance you’d have eg 16760 landing each year part maturity part coupons.

It’s not clear where you’re crystallising 72k from as you don’t say how much each rung of thr ladder is or if you have other DC funds you’re using for that

I'd crystallize from the uncrystallized funds in the SIPP - the ILG is held within it. My thinking was I'd enjoy 7 years paying no tax from 500K - with an assumed PA of 12K /ann taken as income. Each rung of the ladder will pay the 30K for the required spend - apart from 29/30 as Triumph states below

The key thing is not to overcomplicate things. The only things that really matter for you, as far as tax efficiency goes, is that you use your full personal tax allowance every year and don't draw out more 'excess' tax free cash than you can shelter in an ISA.

Agreed - I like simplicity. As regards tax implications, fag packet calc suggests it doesn't matter too much between the two methods as regards tax paid in the long run. Certainly agree to use the full PA each year.

The simple answer, as long as you have enough gilts maturing each tax year, is just to take each maturing gilt as an UFPLS. You many need to delay the UFPLS in some cases though - eg I don't think there is an ILG maturing in 29/30, so you would leave the maturity proceeds of the March 2029 one in the pension until the new tax year.

Sounds a neat enough plan.

mrklaw

ok looking back at OP - was a little confused as you mentioend ILG then turn to tax/tax free with potentially different amounts. Fundamentally the question is ‘can I just draw 12k taxable and 30k tax free each year’?

so you could using FAD (assuming you have enough tax free available as 25% of your total pot)- you’d just end up moving more and more into drawdown/crystallised.

have you estimated if that works overall for you, tax wise? if you use up most/all of your tax free over this period - then you’re at state pension I guess which will eat your personal allowance so every withdrawal will be taxed if you have no TFC left. Still basic rate until 50k so if you’ll stay under that threshold should be ok.

but if you’ll stay under high rate tax after state pension, whats wrong with paying some tax during the bridge? could leave more of your overall pot to grow more tax free cash and be slightly more efficient overall.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82154695#Comment_82154695

Thanks for responding - all useful stuff. Perhaps not clear on my part.

ILG ladder in the SIPP matures at @30K/ann which equates to what I need or spend/ann

Assuming I have 500K uncrystallized in the pot, then initial thoughs were to take 18K partial TFLS plus 12K income and pay no tax.

This would necessiate crytsallizing 72K/ann. I believe I don't have to cash in 72K to do that.

500/72 means I could do this for @ 7 years - which would last beyond SP age - at which point, as you say, will mean any withdrawals will be taxed.

However, as per your last para, I could indeed pay some tax during the bridge - and thus crystallize less each year. This would clearly make any partial TFLS last longer - as I'd need less each year.

I think in essence, and all other things being equal, my initial thinking basically means I pay the same amount of tax in the long run later rather than sooner. Fair point about the tax free amount having the potential to grow - should it be invested rather than in ILGs perhaps.