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  • FIRST POST
    • GSP
    • By GSP 29th Dec 17, 10:26 AM
    • 189Posts
    • 45Thanks
    GSP
    780k pot how much would you drawdown each year
    • #1
    • 29th Dec 17, 10:26 AM
    780k pot how much would you drawdown each year 29th Dec 17 at 10:26 AM
    Hi,
    I am four months into drawdown fund of 780k. The wife will be eligible for a fund of 150k in 4.75 years time. SPA age for me is 12 years time, my wife 15 years and we have to make 5 years contributions for full SPA.

    She has given up work and we intend to have some good holidays though keeping an eye on the fund.
    I have been reading posts regarding safe withdrawal rates etc. Some posters are cautious, but some say enjoy what you can.

    I will be having reviews with my IFA but with differing opinions out there be interesting to know how much people would withdraw each year. Excluding shopping, all regular household bills are less than 500 a month, no loans or mortgage.

    Thanks
Page 4
  • jamesd
    Mentions of me taking chunks out to put into "S&S ISA's". How much interest interest do these pay as the rates on the normal cash ISA are very low. Is the money best left where it is in my pension fund to grow more, over the longer period.
    Originally posted by GSP
    That's ISAs, not just S&S ISAs. Most of my ISA money will soon be in the IF ISA type, having been moved from S&S.

    Money in pensions doesn't inherently grow more or less than in ISAs. Most of the same investment options are available in both. Pensions tend to have slightly higher charges, though. If you hold fund A's pension version in a pension you can hold its ISA version in an ISA and expect the same performance. Both versions and one for holding outside either will be available. There's no investment performance reason to keep money inside pensions rather than ISAs.

    Interest on uninvested cash in a S&S ISA is normally less than a cash ISA. Interest on bond funds varies but is normally more. Dividends from share funds vary based on how the money is invested but is normally more. I expect to average more than 10% interest plus some capital growth within my IF ISA, after allowing for bad debt.

    As to LTA, does this really only come into effect if the pot exceeds 1million, or is transactions of the pot up to that figure.
    Originally posted by GSP
    The extra charges start after taking out more than a million. Since it's an "optional" tax that you, in your situation, can avoid by pre-planning to avoid ever getting to that point, you should do that. Since it is best done with the help of annual use it or lose it allowances you should get started on that as soon as you can.

    Tax planning like this is part of the core knowledge and work of IFAs. Minimise current tax, minimise future tax potential, routine stuff that they get tested on in their qualifying exams.
    • kidmugsy
    • By kidmugsy 3rd Jan 18, 1:22 AM
    • 10,881 Posts
    • 7,436 Thanks
    kidmugsy
    Both ISA and basic rate band are use it or lose it annual allowances and it appears that you should be trying to fully use both.
    Originally posted by jamesd
    Agreed. Ditto seizing the chance to pay extra 17/18 contribution to his wife's pension.
    Free the dunston one next time too.
  • jamesd
    Pot was c800k, took a lump sum out but it has already grown back again to the 780k figure. We must be in a very good period of pension growth given my fund has only been going 4 months.
    Originally posted by GSP
    We've been in a good - bull - market for most of the time since early 2009. A great time to be invested. That growing back partly illustrates the challenge you have to stay clear of the lifetime allowance charge in the future.

    I have an end year pension statement which says I have used 10.6% LTA. Do you know if this okay at this stage, or needs addressing.
    Originally posted by GSP
    Needs addressing to ensure you never go above 100%. 26.5k is a quarter of the crystallised amount so yes, 106k was the crystallised amount and that's 10.6% of the million Pound lifetime allowance that applied at the time. 89.5% to go before you start paying an extra 20% or 40% tax on later withdrawing, with no tax free lump sum when above it either.

    The current 780k would include about 106k - 38k = 68k of crystallised money unless you have a split out value for that part. So about 712k uncrystallised and that would use 71.2% of a million Pound lifetime allowance, taking you to 10.6% + 71.2% = 81.8% of the lifetime allowance. That's perilously close.

    Say you crystallised no more and saw 5% growth. You'd go over the 89.5% you have left in just over five years (25.7% growth to go over). I assume you're planning to live a lot more than five years and it's fairly urgent to act fairly soon to avoid that.

    Say you crystallised half of the 712k now. That'd be 356k crystallised using 35.6% of the lifetime allowance. Uncrystallised you'd have 356k (35.6% of the lifetime allowance) and 53.9% unused lifetime allowance. That's a much healthier position. ( 53.9 / 35.6 - 1 ) * 100 = 51.4% growth to go over. At 5% a year that takes 9 years instead of 5 years to go over. Still pretty close, though.

    What if you crystallised three quarters instead, 534k? That would use 53.5% more lifetime allowance and leave you with 178k uncrystallised and 100% - 10.6% - 53.5% = 36% of the lifetime allowance available. ( 36 / 17.8 -1 ) * 100 = 102% growth to go over. That takes 15 years at 5%. Still looking like you'll eventually go over and that's before allowing for any growth on the crystallised part for the age 75 check.

    So, what to do?

    1. US stock markets are at a cyclically adjusted price/earnings ratio that's correlated with a one in four chance of a big drop. Drops are good for lifetime allowance calculation because each allowance percentage gets out a bigger percentage of your money. You're not selling low because you just buy outside the pension what you sold inside.

    2. But you don't want to wait a long time because growth will take you over if you give it time.

    So I suggest that you consider crystallising with 25% of the lifetime allowance each year. That gives a fair chance for a handy big drop but doesn't wait too long if one doesn't come along. If a big drop comes along, exploit it by crystallising all that remains.

    Next posts cover the tougher challenge of the growth in the crystallised money and tax effects of the money outside the pension.
    Last edited by jamesd; 03-01-2018 at 3:13 AM.
  • jamesd
    So, on to the crystallised pot and the tougher challenge of having the growth in this take you over the remaining unused lifetime allowance when you reach 75. The first part of that is crystallising early enough so you have lots of unused lifetime allowance. You can do some of that but starting to crystallise earlier helps and the pensions freedoms make that easier. I'll be crystallising about 100% of my pensions at 55 to save as much lifetime allowance as possible for crystallised pot growth.

    You can start out by planning to take taxable money with your whole basic rate band. It won't be enough but it'a a start. VCT or EIS buying can cover the tax on that.

    But you won't have enough basic rate band available to do the job. I think someone else mentioned the workaround for that: you take out twice the basic rate band for a while. Half taxed at 20% and half at 40% is neatly covered by VCT 30% relief. Do that for a few years and you'll get yourself plenty of safety margin.
  • jamesd
    Now the money outside the pension. Lots of tools for this.

    1. Give money to a spouse, they have their own tax allowances to benefit from.
    2. Annual capital gains tax allowance. Use it every year by selling something that went up and buying something almost identical. That wayyou don't accumulate huge gains.
    3. Two ISA allowances, fully use them every year.
    4. Dividend allowance.
    5. Personal savings allowance and for your wife, starter rate for savings. Your income will be too high for the starter rate.
    6. VCT dividends are tax exempt, a handy feature. No CGT either.
    7. VCT and maybe EIS buying if there is any tax due.

    This takes more thinking about than when the money is in a pension but using ISAs and the allowances and reliefs you should be able to keep to a tax cost that's almost zero.

    Inheritance planning comes into play as well. Pensions are normally outside the estate and treated well at death. At least under current rules. But you have to be dead to give and it's hard to enjoy others benefitting from your generosity when you're dead. I trend to prefer the idea of giving while alive.
    Last edited by jamesd; 03-01-2018 at 3:42 AM.
    • westv
    • By westv 3rd Jan 18, 9:37 AM
    • 4,545 Posts
    • 2,138 Thanks
    westv
    jamesd, do you sleep?
    • GSP
    • By GSP 3rd Jan 18, 10:23 AM
    • 189 Posts
    • 45 Thanks
    GSP
    I can't believe all this information. Thanks so much jamesd. I don't know what a lot of it means at this stage, but will take it line by line.

    Does this mean I actually have to spend a million pounds before I was taxed for exceeding the allowance?
    Also, would should my IFA know all this information you have posted? He will be retiring himself in the next five years, maybe sooner. I wonder what his appetite is for coming up with advice of this magnitude, and a plan.

    As for westv's comment, I should be the one awake all night.
    • GSP
    • By GSP 4th Jan 18, 11:29 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Sorry just bumping this thread one time as had a couple of questions in my last post and in case jamesd is around as he has been nocturnal lately.
    Thanks
    • kidmugsy
    • By kidmugsy 4th Jan 18, 11:52 PM
    • 10,881 Posts
    • 7,436 Thanks
    kidmugsy
    jamesd, do you sleep?
    Originally posted by westv
    I suspect that none of the three or four jamesds sleep.
    Free the dunston one next time too.
    • goRt
    • By goRt 5th Jan 18, 6:23 AM
    • 256 Posts
    • 153 Thanks
    goRt
    I can't believe all this information. Thanks so much jamesd. I don't know what a lot of it means at this stage, but will take it line by line.

    Does this mean I actually have to spend a million pounds before I was taxed for exceeding the allowance?
    Also, would should my IFA know all this information you have posted? He will be retiring himself in the next five years, maybe sooner. I wonder what his appetite is for coming up with advice of this magnitude, and a plan.

    As for westv's comment, I should be the one awake all night.
    Originally posted by GSP
    The statement relating to 1m isn't factually correct, it's close.
    Spend is the wrong term, withdraw is the correct term, but still not the correct measure.

    LTA is correct, however it is tested at various benefit crystallisation events (bce), in attempting to simplify things for you interpretation errors have occurred, statements made in good faith have then been selected out of context.
    This is an area too complex for a forum and you should seek professional advice, use pension Wise's free facility or read and digest this:
    https://www.gov.uk/guidance/pension-schemes-value-your-pension-for-lifetime-allowance-protection

    I did post up the correct position earlier in this thread but was ignored.
    As a tax payer, it's your responsibility to get this right.
    • goRt
    • By goRt 5th Jan 18, 6:45 AM
    • 256 Posts
    • 153 Thanks
    goRt
    Sorry just bumping this thread one time as had a couple of questions in my last post and in case jamesd is around as he has been nocturnal lately.
    Thanks
    Originally posted by GSP
    To follow on from my post. The simple/safe approach is to take your 25% PCLS now which crystallises your entire pot. Then bleed off from the SIPP all the fund growth each and every year. That way you avoid the issue on the LTA test at 75.
    This applies to people with 'large' funds like yourself.

    How to shelter the withdrawn monies and how to withdraw tax efficiently every year are secondary to the need to withdraw.

    The more complex option involves annual withdrawals (25% PCLS is always taken) to balance the 220k left below the 1m, guessing future CPI increases to the LTA and future fund growth - way too high risk/complex for here.
    • zagfles
    • By zagfles 5th Jan 18, 8:43 AM
    • 13,196 Posts
    • 11,203 Thanks
    zagfles
    The statement relating to 1m isn't factually correct, it's close.
    Spend is the wrong term, withdraw is the correct term, but still not the correct measure.

    LTA is correct, however it is tested at various benefit crystallisation events (bce), in attempting to simplify things for you interpretation errors have occurred, statements made in good faith have then been selected out of context.
    This is an area too complex for a forum and you should seek professional advice, use pension Wise's free facility or read and digest this:
    https://www.gov.uk/guidance/pension-schemes-value-your-pension-for-lifetime-allowance-protection

    I did post up the correct position earlier in this thread but was ignored.
    As a tax payer, it's your responsibility to get this right.
    Originally posted by goRt
    That's about LTA protection, which I don't think applies to the OP.
    • zagfles
    • By zagfles 5th Jan 18, 8:45 AM
    • 13,196 Posts
    • 11,203 Thanks
    zagfles
    I can't believe all this information. Thanks so much jamesd. I don't know what a lot of it means at this stage, but will take it line by line.

    Does this mean I actually have to spend a million pounds before I was taxed for exceeding the allowance?
    Also, would should my IFA know all this information you have posted? He will be retiring himself in the next five years, maybe sooner. I wonder what his appetite is for coming up with advice of this magnitude, and a plan.

    As for westv's comment, I should be the one awake all night.
    Originally posted by GSP
    No the LTA gets used up (and possibly tax applied) at benefit crystallistion events. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100

    And yes your IFA should know all about this, if not sack him!
    Last edited by zagfles; 05-01-2018 at 8:56 AM.
    • Gerbert
    • By Gerbert 5th Jan 18, 11:37 AM
    • 11 Posts
    • 0 Thanks
    Gerbert
    I have a question about keeping below the LTA at the age-75 BCE for DC pensions in a SIPP. There has been a lot of advice in this thread and elsewhere to crystallise early and then regularly remove amounts from the drawdown fund to stop it going above the LTA ready for the automatic BCE that is triggered on one's 75th birthday. That make sense.

    My question is about the tax-free lump sum: at the first crystallisation event, when 25% becomes available tax-free and the rest becomes the drawdown fund, does that 25% become logically (and for tax purposes) quite independent of the SIPP, even if the corresponding funds are left where they are, within the SIPP, with potential investment growth into the future? Or will such growth then be examined at age 75 and included in the LTA calculation?

    In other words, to avoid hitting the LTA at age 75, if the PCLS is left in the SIPP is it necessary to remove growth from the PCLS as well as from the drawdown fund? I have googled around but cannot find anything definitive on this. (Maybe the answer is meant to be obvious; but not to me)
    • Fermion
    • By Fermion 5th Jan 18, 12:03 PM
    • 83 Posts
    • 32 Thanks
    Fermion
    does that 25% become logically (and for tax purposes) quite independent of the SIPP, even if the corresponding funds are left where they are, within the SIPP, with potential investment growth into the future?
    Correct, it's moved out of the SIPP/Drawdown investment wrapper to wherever you want and it's value remains static for LTA recalculation purposes (even if you bought a Lamborghini with it and it's value goes up dramatically!)
    • Gerbert
    • By Gerbert 5th Jan 18, 1:39 PM
    • 11 Posts
    • 0 Thanks
    Gerbert
    Thanks Fermion. To put my mind at rest can I just pursue a bit further the question of how that would work in practice though? If I had say 800K at the time of first crystallization, invested in a selection of trackers, ITs, open-ended funds etc, is it really true that all the moneys can be left there, undifferentiated between PCLS (initially notionally 200K) and drawdown fund (600K), the SIPP looking identical to how it looked before? To make the arithmetic simpler assume there is no inflation and the LTA remains at 1000K throughout. At this point 80% of the LTA would have been used so 20% remains unused.

    Now suppose the whole fund grows at not quite 5% pa and in say 10 years (suppose this is just before age 75) it is worth another 60% ie 1280K. This breaks down (notionally - for the SIPP itself is still undifferentiated) as the PCLS = 320K plus drawdown fund = 960K.

    Now the 75th birthday hits and we have second (final?) crystalisation: and the only growth that is taken into account for BCE purposes is that in the drawdown fund viz 960K - 600K = 360K, which is 16% over the 20% of the LTA remaining. So I would need to have removed 160K from the drawdown fund before this to avoid an LTA charge at age 75, BUT NO PART OF THE INCREASED PCLS AMOUNT. Correct?

    (Apologies for asking pretty much the exact same question a second time, but I wanted to be sure I have understood it right. I did try looking at the HMRC docs where the answers to this and other questions are meant to be found, but found the wording less than clear. I don't suppose you can point out where this is specified?)

    Thanks again anyway.
    Last edited by Gerbert; 05-01-2018 at 1:46 PM. Reason: spelling etc
    • Fermion
    • By Fermion 5th Jan 18, 2:13 PM
    • 83 Posts
    • 32 Thanks
    Fermion
    Correct - one you take your 25% out of your SIPP/Drawdown account you can do what you like with it. If like me, you invest it back in S&S ISAs you ignore any fund growth when recalculating at age 75 - you just use the static 25% figure. It has to be that way, some people use their 25% lump sum to invest in holiday properties etc or to pay off their mortgages, if HMRC insisted that you tracked the growth it would be impossible to value.
    • NoMore
    • By NoMore 5th Jan 18, 2:32 PM
    • 188 Posts
    • 150 Thanks
    NoMore
    @fermion I think Gerbert is asking can he leave his PCLS within his SIPP, invested in the same things as the rest of the SIPP and enjoy his returns.

    I don't think he can do that, taking the PCLS necessitates taking it out of the SIPP. He can of course re invest it elsewhere, which I think is what you are explaining
    • goRt
    • By goRt 5th Jan 18, 4:56 PM
    • 256 Posts
    • 153 Thanks
    goRt
    @fermion I think Gerbert is asking can he leave his PCLS within his SIPP, invested in the same things as the rest of the SIPP and enjoy his returns.

    I don't think he can do that, taking the PCLS necessitates taking it out of the SIPP. He can of course re invest it elsewhere, which I think is what you are explaining
    Originally posted by NoMore
    Correct, the PCLS is taken out of the SIPP, it cannot be left within the SIPP wrapper.
    • Gerbert
    • By Gerbert 5th Jan 18, 6:06 PM
    • 11 Posts
    • 0 Thanks
    Gerbert
    Yes, I am asking about leaving the PCLS entirely within the SIPP. The next question was going to be "How, when you take some money from the drawdown fund, does HMRC know that you mean it to come from there and not from the PCLS, given that the drawdown fund and PCLS are all so to speak 'mixed up' in the SIPP?" but NoMore and goRt have now thrown doubt on the idea that that is even possible.

    So the alternative answer is that crystallising and taking 25% entails literally removing that 25% entirely from the SIPP. That's a bother.

    I am glad I asked the same question twice now. Is everyone on board with that answer? Fermion too?

    Thanks again.
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