Can I stagger my TFLS over time?

Cugel_the_notsoclever · 22 August 2019 at 7:18AM

Hi. I am thinking about retiring early, but am very much of a newbie. I want to know whether it might be possible to take the 25% tax-free lump sum portion of my pension over time, or whether it all has to be taken up front? I have a Personal Pension currently worth about £300,000 – so my tax-free lump sum would be ~£75k. But, I don’t need that as I can live off my savings for a few years so I was wondering if I could take a smaller amount as a TFLS – say £5k in the first year, and then another £5k the next year? I am thinking of switching my PP to a SIPP, so if I was able to take a small-ish amount of the TFLS each year until I had used up the 25%, then that might be quite useful as the rest of it could be left to accumulate income within the SIPP. However, I am finding it hard to find information on this anywhere and so I am presuming that it is not possible to take the 25% TFLS over a prolonged period like this. Is that correct?
P.S. I am not thinking about using UFPLS and withdrawing an amount annually of which 25% is tax free, what I am wondering is if I don’t take the whole 25% TFLS up-front, do I lose it? I suspect that I do, but I am finding hard to confirm this.

Sea_Shell · 22 August 2019 at 7:34AM

As I understand it yes you can. It's what we're planning on doing. You don't lose it (although there are some rules about once you get to 75 which I don't fully understand)

For each withdrawal you make, 25% of that amount is taken tax free.

Eg if the Personal Allowance is £12,500, then that represents 75% of what you can take Gross. So you can actually withdraw £16,666, of which 25% is tax free, and then the balance falls within your PA.

If your scheme allows, you can also do this monthly on the same basis...£1041, gross of £1388.

We're planning to draw this, and anything we don't spend, we're going to re-invest into our ISA's so as to be able to draw on it tax free, in full, in the future. We also have a cash savings float to spend in a downturn, if we don't want to touch the invested funds (we'll still pull them from the pension, but move entirely into ISA, into a similar investment)

Dazed_and_confused · 22 August 2019 at 7:35AM

If you don't need it why are you taking it at all???

Dazed_and_confused · 22 August 2019 at 7:36AM

The op did say,

P.S. I am not thinking about using UFPLS and withdrawing an amount annually of which 25% is tax free,

EdSwippet · 22 August 2019 at 8:15AM

Cugel_the_notsoclever wrote: »

I am presuming that it is not possible to take the 25% TFLS over a prolonged period like this. Is that correct?

Not really correct. You can do what you want. The phrase to look for is 'pension crystallisation'.

You can crystallise a pension in several ways (annuity, cash out, etc), but the one you want to achieve what you are after is: moving to flexible drawdown but then immediately deferring all taxable drawdown. The crystallisation (move to flexible drawdown) releases 25% of the amount crystallised as a tax-free lump sum. The remainder moves to a separate 'pot' from which you can draw taxable amounts, but crucially you can crystallise just a part of your pension, and you do not have to start taking withdrawals from this immediately, but can put it off until you are ready. Sometimes known as 'phased flexi-access drawdown'.

So for example, say you have £100k in your pension. In year one you could crystallise £20k, take £5k tax free, and leave the £15k invested until later, no tax until withdrawn. The remaining £80k uncrystallised continues to grow, so that you can repeat this until the entire £100k is crystallised.

As noted above though, better to leave this alone entirely if you do not need the money since that will help your eventual 25% tax free amount grow. Also, be sure that you are using up your £12k annual tax free allowance. That might argue for taking some drawdown from the taxable part, if it is still effectively tax free.

Albermarle · 22 August 2019 at 9:17AM

One point to note is that your current PP might not be able to facilitate this type flexi access drawdown /gradual taking of the tax free cash, especially if it was originally set up many years ago . It's mainly related to IT issues .
You need to check with them and they may suggest you just transfer to their latest version .
Before making any changes , check the charges for any new PP offered including any discounts , and the same for any SIPP you might move to .
A PP and a couple of SIPPS ( HL & Fidelity) will not charge extra for flexi access drawdown, as they have an all in charge , although their basic charges are not the cheapest. Most of the apparently cheaper SIPPS do charge extra for drawdown/with drawals.

cobson · 22 August 2019 at 9:17AM

You might want to check with your provider what options are available as a few don't allow for part-crystallisation under flexi-access drawdown and require you to crystallise your full pot. If thats the case you can always transfer to another provider.

gm0 · 22 August 2019 at 12:11PM

Cugel,

You seem to have grasped there is a difference between UFPLS and FAD. "Partial" FAD (crystallise a bit at a time) seems to be the flexible access of choice for most except people with LTA issues who may wish to "do the lot" - single FAD full 25%/75% before it grows and then draw to keep the cash value down to the limit.

As others have pointed out not all existing pensions support all methods or partial crystallisation So you are fed the line by outsourced scheme operators that you can only do x,y,z. You may therefore be offered no drawdown at all, or a single pension commencement event vs transfer out in an existing scheme. Transfer to a modern one is indeed the answer to get access to a more flexible mechanism *if* it is needed. But before you do this:

Understand the difference between your existing employer or personal pension(s) in terms of protection level which could be e.g. 90% vs total 85k for SIPP failure. Most are fine with it to get the flexibility and fund selection access but understand what changes here for you before jumping not after.

Understand the charges now vs after the move - ifa (if relevant), platform, funds, trading - discounts - legacy funds and employer platforms can indeed be old and bad (limited selection of high cost mediocre active performers) or they can be good i.e. provide low cost trackers at a low aggregate fee. Depending upon your investment strategy in drawdown this will either be too limiting - or it won't based on your scheme(s).

Work out what is needed when - sufficiently accurately - to assess sequence of return risk age 55-70 ie when other savings are run down and the pension "must" be accessed. Nothing wrong with leaving it invested and inside the IHT favoured wrapper - but say 100% equities right up to the "must draw" date might be a bit spicy for many. Buffering somewhere is a sensible precaution (inside or outside to taste). You need a "good enough" plan - that you can stick to and ignore short term volatility

In the end only you can work out your "sustainable" 40 year investment strategy vs desired drawdown amount vs existing fund equation. After all like Jack Vance you might live to 93.

The DIY drawdown research and analysis rabbit hole can be quite deep. I found McClung (Living off your money) very useful as an introductory tour of backtesting options on "how to do it". It's worth a look even if you conclude you can't be bothered with the complex versions of DIY. If your finances allow a lowish withdrawal rate then your "will it last" risk and need to add complexity reduces though you can still try to optimise if you have the time and interest.

Cugel_the_notsoclever · 22 August 2019 at 1:24PM

Thank you very much to everyone who has commented here. This is all very new to me and I am guilty at times of muddled thinking. I don’t have a SIPP yet, but what I do have is a personal pension worth just over £300,000 and which I am thinking of switching to a SIPP when I retire. My PP provider is fine but they don’t offer a SIPP; my employer contributes 5% so it makes sense to stick with them until I press the button. For retirement, I was thinking of switching to a SIPP and investing in investment trusts; I haven’t identified a likely SIPP provider yet.
I also have a defined benefit pension (deferred) which at the moment would probably pay out around £7k p.a. I might be able to push this DB pension to pay out the full amount early without penalty (that would probably be around £9k p.a.) as I have a long-term illness. I am going to fill out the incapacity retirement forms for the DB scheme this weekend and see what happens.
What I had been thinking was if I get £7k from the DB scheme, then I could take £5k from my other pension and stay within the £12K personal allowance. After I posted my query on here this morning, it dawned on me that if I took £5k as part of my TFLS, then that would probably not affect my personal allowance. With a pot of £300k in a SIPP, I can probably take £5k p.a. without affecting the capital too much and hopefully achieve some growth on top.
Apart from the pensions, I have £400k in a S&S ISA and £230k in cash/premium bonds. No mortgage, no kids, no debt. I reckon that I can live on £24k p.a., and I had been thinking that if I take £12k from the pensions, then I could use my cash pile for the rest and let it run down over a few years while also continuing to use my £20k annual ISA allowance. Having a small DB pension makes me feel more sanguine about staying 100% in equities for now. I could of course take the full £75k lump sum from the PP and use that to feed into the ISA as well, and maybe that's a good idea, but I need to think about that.
I will have a look for the McClung book. I read Lars Kroijer's book last week, I think I've got a lot of reading and homework to do over the next few months. There is no great hurry over this, my rather vague time frame is to take the plunge some time in the next six to nine months. My work used to be quite enjoyable, but has become less so and more stressful recently and this has prompted me to think about whether I can afford to retire early. The issue of how long I need to plan for, and how long I might live is a tricky one. I was diagnosed with follicular lymphoma eight years ago; it took five years for it to become life threatening after which a combination of chemotherapy and immunotherapy managed to drive it out of my bone marrow and other organs. So, it can be treated but not cured and it will be back at some point. The consultant I saw at the Christie last week said that I could live for another twenty years. I am 58 now, so if I live as long as Jack Vance, then I will be very happy indeed.

midlandsimon · 22 August 2019 at 3:27PM

Your personal allowance is not affected by your Tax Free cash payment. Only taxable income ran through the PAYE system or 'earned income' goes towards that. Be careful when starting to take a taxable income through as soon as you run a penny through the PAYE system, you will activate the Money Purchase Annual Allowance which restricts future contributions into the plan to £4000 p.a rather than the usual annual allowance of £40k.
I have a SIPP with a company called InvestAcc and have phased my tax free cash over a period of time and have it paid monthly to me. Be aware though that each time you crystallise funds, they need to be paid out to you within 12 months. So I make one crystallisation of the plan at the start of the year then take that split over 12 monthly payments.
You will be able to access your Unit Trusts through the SIPP, my funds are currently managed through a DFM within the SIPP but would work in a similar way to yourself.

Albermarle · 22 August 2019 at 3:50PM

a pot of £300k in a SIPP,

+

I have £400k in a S&S ISA and £230k in cash/premium bonds

+

I also have a defined benefit pension (deferred) which at the moment would probably pay out around £7k p.a.

+

No mortgage, no kids, no debt.

+the state pension at some point.

Unless you spend a bit crazily, then it seems highly unlikely you will ever have a problem with your retirement income. So begs the question how much time you should spend doing homework on complex financial issues, when you will probably be 99% OK whatever you do ( within reason )
Remember one of the joys of having a lot of money is you don't have to worry about money too much !

Can I stagger my TFLS over time?

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