Understanding how to draw down tax free out of pension

[chip*]

nickfrog said:

Mr Pointy said:

nickfrog said:

- is it right that we can pay in £2,880 each into our pension and that HRMC still tops up to £3,600 even if we pay £0 income tax?

Yes, that's correct. Note the limit once you go into drawdown though.

Thanks a lot - I am not sure I understand - are you saying that facility stops as soon as I am in drawdown (whether tax free or taxed) ?

When you start taking certain income from your DC pension, this trigger the MPPA reducing your annual allowance to £4,000 (to avoid recycling).

Non-tax payer gets tax relief on £3600 per annum i.e. I pay £2800 into my 18 months old daughter's SIPP, and she gets £800 from Rishi This money tree stops when you reach 75 though.

Specific details are all explained on the ever useful MAS website:

https://www.moneyadviceservice.org.uk/en/articles/...

[98elise]

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystalise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

[mikeiow]

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystallise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Sounds pretty accurate to me.
Certainly in my Aviva set-up, when I crystallise it, they transfer the 25% to me, and the 75% left remains in *precisely* the same funds, but marked as in drawdown.
Remember as soon as you touch a penny of *that* part, you trigger the MPAA and cannot put more than £4k into your pension in future (eg if you went back to work).

Assuming you are not concerned with the MPAA, I would suggest that logically you might want to use up your tax-free allowance from that drawdown pot (assuming you have no other income), so drawing £12,500 from the DC pot (separate to the TFLS) and perhaps re-investing that elsewhere.

[LeoSayer]

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystalise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Extracting all tax free cash in one go (if that's what you're planning) seems overkill unless you will invest or spend it all at the same time.

You would lose the tax free SIPP wrapper (but of course can add up to £20k per year per person into an ISA) and you lose the inheritance tax benefit of a SIPP.

You can't eliminate the LTA charge by crystallisation and tax free cash withdrawal only because there is another test for LTA charge at age 75 on whatever is left in the pot.

[98elise]

LeoSayer said:

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystalise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Extracting all tax free cash in one go (if that's what you're planning) seems overkill unless you will invest or spend it all at the same time.

You would lose the tax free SIPP wrapper (but of course can add up to £20k per year per person into an ISA) and you lose the inheritance tax benefit of a SIPP.

You can't eliminate the LTA charge by crystallisation and tax free cash withdrawal only because there is another test for LTA charge at age 75 on whatever is left in the pot.

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

[98elise]

mikeiow said:

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystallise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Sounds pretty accurate to me.
Certainly in my Aviva set-up, when I crystallise it, they transfer the 25% to me, and the 75% left remains in *precisely* the same funds, but marked as in drawdown.
Remember as soon as you touch a penny of *that* part, you trigger the MPAA and cannot put more than £4k into your pension in future (eg if you went back to work).

Assuming you are not concerned with the MPAA, I would suggest that logically you might want to use up your tax-free allowance from that drawdown pot (assuming you have no other income), so drawing £12,500 from the DC pot (separate to the TFLS) and perhaps re-investing that elsewhere.

That's good to hear.

Re the MPAA, I don't want to add anything more to my pension due to the LTA. I do have some property that takes me into the 20% tax band, so after I take the full tax free allowance I would probably take minimal amounts out for holidays etc. Again the fact I'm only planning to taking small amounts out after the tax free lump means LTA is a risk.

[nickfrog]

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

Thanks for highlighting the LTA. I didn't consider it. Having done a few simulations based on various investment growth this is a risk for me too at some point so it seems that ISAing tax free chunks is a decent mitigating measure, particularly if we time it right so that we get £80k between us at the end / start of a tax year, rinse and repeat every year.

[xeny]

nickfrog said:

Thanks for highlighting the LTA. I didn't consider it. Having done a few simulations based on various investment growth this is a risk for me too at some point so it seems that ISAing tax free chunks is a decent mitigating measure, particularly if we time it right so that we get £80k between us at the end / start of a tax year, rinse and repeat every year.

If you're using both years' ISA allowances, then every _other_ year. ?

[nickfrog]

xeny said:

If you're using both years' ISA allowances, then every _other_ year. ?

True.

[mikeiow]

98elise said:

LeoSayer said:

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystalise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Extracting all tax free cash in one go (if that's what you're planning) seems overkill unless you will invest or spend it all at the same time.

You would lose the tax free SIPP wrapper (but of course can add up to £20k per year per person into an ISA) and you lose the inheritance tax benefit of a SIPP.

You can't eliminate the LTA charge by crystallisation and tax free cash withdrawal only because there is another test for LTA charge at age 75 on whatever is left in the pot.

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Just on the point in bold: if you take 25% out, then yes, that 25% is outside of any inheritance tax benefit, but unless I am mistaken (always possible!), the remaining 75% remains inside that benefit protection.....and of course you can draw on the funds (taxed as income) to avoid further growth hitting the LTA at the second test, aged 75.
You can read more here .

The benefit of crystallising that chunk is that you are helping guard against hitting the LTA. You could chose to reinvest all the money into precisely the same funds your pension is in, just via ISAs and GIAs.

I would perhaps wait until you are closer to that LTA number before making any big crystallising draws - you could trickle them out directly to ISAs over a few years, and of course we may well not have the growth we have seen in recent years......but keep a watching brief on it!

[LeoSayer]

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Can I ask why you would choose lower risk investments if you're not planning to immediately draw on the remaining pot?

[Hawmaws]

Good thread. This subject is taking up a lot of my mental capacity at the moment

Can anyone explain how fixed protection 2016 works? Is it a one-off only usable against first crystallisation, or can I use it against each ‘slice’ until indexation takes the standard allowance above the fixed amount?

[Stay in Bed Instead]

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Only 25% less chance.

Have you received/made any pension contributions post April 2016? If not I think you can still register for FP2016 to retain a LTA of £1.25m

[Stay in Bed Instead]

Hawmaws said:

Good thread. This subject is taking up a lot of my mental capacity at the moment

Can anyone explain how fixed protection 2016 works? Is it a one-off only usable against first crystallisation, or can I use it against each ‘slice’ until indexation takes the standard allowance above the fixed amount?

It applies for all crystllisations while the protection is valid.

Each crystallisation will utilise a percentage of your LTA.

[Stay in Bed Instead]

anonymous said:

[redacted]

That's bks.

Emergency tax only applies to UFPLS payments, not the first regular pension payment in each tax year.

[98elise]

LeoSayer said:

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Can I ask why you would choose lower risk investments if you're not planning to immediately draw on the remaining pot?

It's sensible to choose lower risk as you move towards retirement age.

By lower risk I mean multiple funds and few trades rather than individual shares. I would use cash in ISA's for individual shares which is more of a gamble.

[98elise]

mikeiow said:

98elise said:

LeoSayer said:

98elise said:

I'm nearly 55 and have just retired. My SIPP is pretty healthy so a few good years could see me hit the LTA.

My plan would be to crystalise the lot then put the tax free portion to work in other investments, mostly our offset mortgage and ISA's for my wife and I, or possibly an overseas property let.

Are there any restrictions on the remaining funds, ie can I just continue to invest them as before, and the only difference is that all drawdown from that point is taxed?

I have other investments that pay my bills so will only need to draw down small amounts so it's highly likely my pot will continue to grow.

Extracting all tax free cash in one go (if that's what you're planning) seems overkill unless you will invest or spend it all at the same time.

You would lose the tax free SIPP wrapper (but of course can add up to £20k per year per person into an ISA) and you lose the inheritance tax benefit of a SIPP.

You can't eliminate the LTA charge by crystallisation and tax free cash withdrawal only because there is another test for LTA charge at age 75 on whatever is left in the pot.

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Just on the point in bold: if you take 25% out, then yes, that 25% is outside of any inheritance tax benefit, but unless I am mistaken (always possible!), the remaining 75% remains inside that benefit protection.....and of course you can draw on the funds (taxed as income) to avoid further growth hitting the LTA at the second test, aged 75.
You can read more here .

The benefit of crystallising that chunk is that you are helping guard against hitting the LTA. You could chose to reinvest all the money into precisely the same funds your pension is in, just via ISAs and GIAs.

I would perhaps wait until you are closer to that LTA number before making any big crystallising draws - you could trickle them out directly to ISAs over a few years, and of course we may well not have the growth we have seen in recent years......but keep a watching brief on it!

That's the plan, move money out to ISA's (Funds and S&S) and any excess into my offset mortgage.

I certainly think growth will be different in the next few years. I had a spectacular few years with Lindsell Train GE and Fundsmith, so was looking like I would crash through the LTA in a couple of years. Now it could be a decade!

[98elise]

Stay in Bed Instead said:

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

If I take out my full tax free allowance then my pot is much reduced so less chance of breeching the LTA. As long the money goes into SIPP and mortgage offset then it's still tax efficient but not subject to a cap. I would also then be happy to put the remaining pot into lower risk investments.

I'll sit down with a pension advisor before doing anything though..

Only 25% less chance.

Have you received/made any pension contributions post April 2016? If not I think you can still register for FP2016 to retain a LTA of £1.25m

Agreed it's only 25% but it helps. Than add that LTA increases year on year, and I would be taking some out annually, so there is a compounding effect on risk of hitting LTA.

[williaa68]

As well as a SIPP, I have a small DB pension with some AVCs attached. The AVCs would be less than 25% of the pension value, and less than 25% on the 20* pension basis too, which I think is relevant for LTA purposes. I dont particularly want to draw the pension early at 55 (not that far away) as the discount is a bit punitive, and it doesn't make much sense given the pension isn't that large anyway - about £15k a year at 65. However, I'd love to get my hands on the tax free lump sum sooner rather than later. Is there a way I can take the AVCs as part of my tax free lump sum but not touch the pension itself. I would ask the administrator (towers watson) but they aren't particularly helpful and so I'd like to ask the question armed with the answer if possible! Thanks in advance.

[LeoSayer]

williaa68 said:

As well as a SIPP, I have a small DB pension with some AVCs attached. The AVCs would be less than 25% of the pension value, and less than 25% on the 20* pension basis too, which I think is relevant for LTA purposes. I dont particularly want to draw the pension early at 55 (not that far away) as the discount is a bit punitive, and it doesn't make much sense given the pension isn't that large anyway - about £15k a year at 65. However, I'd love to get my hands on the tax free lump sum sooner rather than later. Is there a way I can take the AVCs as part of my tax free lump sum but not touch the pension itself. I would ask the administrator (towers watson) but they aren't particularly helpful and so I'd like to ask the question armed with the answer if possible! Thanks in advance.

The AVCs should be a pot that you can transfer to your SIPP without touching or affecting the DB part.

Some DB pensions contain a facility to take a tax free lump sum from a linked pot (eg. the AVC) without reducing the DB pension amount.

I think the questions to ask TW are:
- How do I transfer my AVCs to my SIPP?
- Do I lose any pension benefits by transferring the AVC to my SIPP?