Pensions and drawdown

[98elise]

I'm looking at pensions planning at the moment and have some questions about drawdown. I've read the Hargreaves Lansdown guide and I want to be sure I have understood it.

I'm looking to semi retire at 55, or at least get out of the corporate rat race. This would mean a significant income drop so I may want to start using my pension. Lets say my SIPP pension pot was 400k at that point, and I had 100k remaining on my mortgage (made up figures for simplicity)

If I understand correctly I would need to move the whole pot "into drawdown" and could then take the 100k tax free and pay off my mortgage.

The remaining 300k could then continue to be invested in the SIPP as before, and I could take regular (or irregular) payment which would be taxed as normal (alongside any other income)

The only negative that I can see is you cannot then put the 300k into an annuity (which I do not want to do anyway). Once in drawdown thats where it stays.

Is my understanding correct?

Are there any other issues with moving the whole pot into drawdown at 55?

I'm seeing an IFA soon but its good to know the basics before we talk.

[Ginge R]

98elise said:

I'm looking at pensions planning at the moment and have some questions about drawdown. I've read the Hargreaves Lansdown guide and I want to be sure I have understood it.

I'm looking to semi retire at 55, or at least get out of the corporate rat race. This would mean a significant income drop so I may want to start using my pension. Lets say my SIPP pension pot was 400k at that point, and I had 100k remaining on my mortgage (made up figures for simplicity)

If I understand correctly I would need to move the whole pot "into drawdown" and could then take the 100k tax free and pay off my mortgage.

The remaining 300k could then continue to be invested in the SIPP as before, and I could take regular (or irregular) payment which would be taxed as normal (alongside any other income)

The only negative that I can see is you cannot then put the 300k into an annuity (which I do not want to do anyway). Once in drawdown thats where it stays.

Is my understanding correct?

Are there any other issues with moving the whole pot into drawdown at 55?

I'm seeing an IFA soon but its good to know the basics before we talk.

Whether or not that's suitable, your premise is broadly correct, yes. A lot too, will depend on your intentions for the rest, and you say you're going to be semi retired.. what are your income expectations and what is your pension pot ultimately going to continue to look like? In principle, you have a straight choice between Flexi-access drawdown and Uncrystalised funds pension lump sum (UFPLS) drawdown (phew). Flexi wins nine times out of ten.

UFPLS may be at least as good as good in some situations - does your provider offer it? If you want tax-free cash and income *at the same time* - UFPLS might work out cheaper than Flexi, especially if there are no scheme transfer costs. Another situation is if you *are* continuing to work and want to max out your lifetime allowance (LTA) and then take a mix of income and PCLS. Then, when calculating your final LTA, HMRC allows rounding down of the percentage used.. Flexi involves two points worth of rounding down, UFPLS allows just one. It might not be a biggie for one payment but over the years the difference could be sizeable.

For most, it's not relevant and for most Flexi drawdown is best. It can be complicated though, and most people crave simplicity. Why it has to be like this is anyone's guess. The Treasury obfuscates and creates a quagmire which alienates and disadvantages in equal measure.

Crystallising your entire pot, ie, taking full tax free cash, also means you only have a notional 300k to draw from, which may place further strain on it. That could, of course, be offset by the reduced demand on you by having no mortgage. But, more generally, if you're semi retiring relatively young, remember that your intended levels of withdrawl from a smaller pot may not be sustainable which might mean that if you do decide to annuities, there may be a reduced fund that can be used to purchase one with, when you're older.

[audidoody]

Once you move into flexi drawdown your contributions back into the pension are limited to £10k a year.

[PurpleMoonlight]

You are incorrect that you cannot purchase an annuity once you crystalise into drawdown. You can still do so at any time.

[98elise]

Ginge R said:

98elise said:

I'm looking at pensions planning at the moment and have some questions about drawdown. I've read the Hargreaves Lansdown guide and I want to be sure I have understood it.

I'm looking to semi retire at 55, or at least get out of the corporate rat race. This would mean a significant income drop so I may want to start using my pension. Lets say my SIPP pension pot was 400k at that point, and I had 100k remaining on my mortgage (made up figures for simplicity)

If I understand correctly I would need to move the whole pot "into drawdown" and could then take the 100k tax free and pay off my mortgage.

The remaining 300k could then continue to be invested in the SIPP as before, and I could take regular (or irregular) payment which would be taxed as normal (alongside any other income)

The only negative that I can see is you cannot then put the 300k into an annuity (which I do not want to do anyway). Once in drawdown thats where it stays.

Is my understanding correct?

Are there any other issues with moving the whole pot into drawdown at 55?

I'm seeing an IFA soon but its good to know the basics before we talk.

Whether or not that's suitable, your premise is broadly correct, yes. A lot too, will depend on your intentions for the rest, and you say you're going to be semi retired.. what are your income expectations and what is your pension pot ultimately going to continue to look like? In principle, you have a straight choice between Flexi-access drawdown and Uncrystalised funds pension lump sum (UFPLS) drawdown (phew). Flexi wins nine times out of ten.

UFPLS may be at least as good as good in some situations - does your provider offer it? If you want tax-free cash and income *at the same time* - UFPLS might work out cheaper than Flexi, especially if there are no scheme transfer costs. Another situation is if you *are* continuing to work and want to max out your lifetime allowance (LTA) and then take a mix of income and PCLS. Then, when calculating your final LTA, HMRC allows rounding down of the percentage used.. Flexi involves two points worth of rounding down, UFPLS allows just one. It might not be a biggie for one payment but over the years the difference could be sizeable.

For most, it's not relevant and for most Flexi drawdown is best. It can be complicated though, and most people crave simplicity. Why it has to be like this is anyone's guess. The Treasury obfuscates and creates a quagmire which alienates and disadvantages in equal measure.

Crystallising your entire pot, ie, taking full tax free cash, also means you only have a notional 300k to draw from, which may place further strain on it. That could, of course, be offset by the reduced demand on you by having no mortgage. But, more generally, if you're semi retiring relatively young, remember that your intended levels of withdrawl from a smaller pot may not be sustainable which might mean that if you do decide to annuities, there may be a reduced fund that can be used to purchase one with, when you're older.

Thanks for that!

To add a bit more detail I have some property investments which at 55 should be enough to pay my normal living costs IF they are mortgage free. This will allow me to do something more interesting with my life

I'm self employed at the moment so I can take salary/dividends (taxed) and pay down the mortgages, or I can put the money into my pension (tax free), then aim to use the 25% tax free element to pay down the mortgages. That's why pulling the lump sum out seems sensible (to me anyway).

I may not need to draw down any regular income from the remaining pot until I properly retire.

[98elise]

audidoody said:

Once you move into flexi drawdown your contributions back into the pension are limited to £10k a year.

Thanks, that may or may not be an issue. I suspect any further contributions would be quite small as my income would be reduced.

[98elise]

PurpleMoonlight said:

You are incorrect that you cannot purchase an annuity once you crystalise into drawdown. You can still do so at any time.

Thanks, the HL document seemed to be saying you couldn't.

[Ozzie Osmond]

You don't have to put the whole pension pot into drawdown at the same time.

Each time you move a slice into drawdown you will get the 25% tax free sum available on that slice.

Example of flexibility: Assuming a £600,000 fund,

• Move one third of your fund into Drawdown - i.e. £200,000 leaving £400k invested to go on grossing up tax free
• Take £50,000 tax free cash, leaving £150,000 invested to go on grossing up tax free
• Take 10% income of about £15,000 a year
• After a few years review the situation and see if you need to adjust anything; otherwise wait until the cash runs out and then look at moving another slice into drawdown.
• Any time you want some more tax free cash just move another slice into drawdown.

NB
1. You can move pension into drawdown and then draw income of zero. This is brilliant because if it suits your circumstances you can take tax free cash on its own, leaving everything else invested. Kushdi.
2. You can juggle your drawdown income to stay just out of higher rate income tax.
3. OT, but if you're drawing tax free income from an ISA as well there's all sorts of scope for juggling...

Figures are illustrative only.

[JulianPH]

PurpleMoonlight said:

You are incorrect that you cannot purchase an annuity once you crystalise into drawdown. You can still do so at any time.

A very good point and one that many people don't realise at all (even the OP who had done research). Whilst an annuity has always been permanent, drawdown is not.

You can take your tax free cash (or Pension Commencement Lump Sum as it is now called for reasons that can only mean in the future it may not be tax free) and leave the rest invested, take the natural income from the investments or take an income higher or lower than the natural income - and you are always free to buy an annuity whenever you like, should you wish.

Also, the money remaining in your SIPP is outside of your estate for IHT.

[Simpo Two]

JulianPH said:

You can take your tax free cash (or Pension Commencement Lump Sum as it is now called for reasons that can only mean in the future it may not be tax free)

I suspect we are living in a golden time for getting money out of pensions early, and as the nation's financial pigeons gradually come home to roost the escape routes will gradually be closed off. If I was the Chancellor I'd be thinking 'How much of people's pensions can I get my paws on?'

And that is why I neither like nor trust pensions. They are utterly at the mercy of Government.

[sidicks]

Simpo Two said:

I suspect we are living in a golden time for getting money out of pensions early, and as the nation's financial pigeons gradually come home to roost the escape routes will gradually be closed off. If I was the Chancellor I'd be thinking 'How much of people's pensions can I get my paws on?'

And that is why I neither like nor trust pensions. They are utterly at the mercy of Government.

As is most other aspects of our lives!

[Simpo Two]

sidicks said:

As is most other aspects of our lives!

Yes but not to such a great degree I think. Money in people's pension funds is, relatively, very big and very important and exists over decades so impacts are greater. A little bit of stealth tax here or a budget twiddle there and sh-boom, you can lose £50K. Maybe only a few months' salary for some here, but a lot for Joe Public.

[PurpleMoonlight]

The PCLS will not be removed. Without it there isn't much benefit for the majority of pension savers.

The biggest risk is the withdrawal of higher rate tax relief on personal contributions.

[Ozzie Osmond]

PurpleMoonlight said:

The biggest risk is the withdrawal of higher rate tax relief on personal contributions.

I've said it before and I'll say it again - fill yer pockets lads!

At the end of the day it makes no sense to give the highest earners the most generous tax relief....

[98elise]

Ozzie Osmond said:

You don't have to put the whole pension pot into drawdown at the same time.

Each time you move a slice into drawdown you will get the 25% tax free sum available on that slice.

Example of flexibility: Assuming a £600,000 fund,

• Move one third of your fund into Drawdown - i.e. £200,000 leaving £400k invested to go on grossing up tax free
• Take £50,000 tax free cash, leaving £150,000 invested to go on grossing up tax free
• Take 10% income of about £15,000 a year
• After a few years review the situation and see if you need to adjust anything; otherwise wait until the cash runs out and then look at moving another slice into drawdown.
• Any time you want some more tax free cash just move another slice into drawdown.

NB
1. You can move pension into drawdown and then draw income of zero. This is brilliant because if it suits your circumstances you can take tax free cash on its own, leaving everything else invested. Kushdi.
2. You can juggle your drawdown income to stay just out of higher rate income tax.
3. OT, but if you're drawing tax free income from an ISA as well there's all sorts of scope for juggling...

Figures are illustrative only.

The thing is I need the cash to pay down the mortgage. I can either take the money as pay, or put it into a pension.

I'm currently 50, so looking to semi retire at 55. Using the notional figures my pension pot would currently 300k and mortgage debt 100k.

In the next 5 years I would earn the 100k (so 60k after tax as a high rate tax payer) and pay down the mortgage, or push that into the pension (so 100k) which can be extracted at 55 to pay the full mortgage debt off.

Of course I have then used all of the 25% tax free bit and will have been paying the full mortgage for longer so its not all win win.

[98elise]

Ozzie Osmond said:

PurpleMoonlight said:

The biggest risk is the withdrawal of higher rate tax relief on personal contributions.

I've said it before and I'll say it again - fill yer pockets lads!

At the end of the day it makes no sense to give the highest earners the most generous tax relief....

Why? The only reason its a "generous" Tax relief is that the tax man normally helps himself to a "generous" amount of my wages.

The fair thing to do would be to tax everyone at a flat rate, then give pension tax relief at a flat rate.

[JulianPH]

^^^ This. The most sensible way to ensure a fair tax system and proven to generate more tax revenue, I believe.

[LeoSayer]

Ozzie Osmond said:

At the end of the day it makes no sense to give the highest earners the most generous tax relief....

We have a progressive income tax regime. Reliefs are therefore the regressive.

I wish people would stop referring to pension contribution tax relief as if its some kind of handout. Pension contributions are nothing more than income deferred until retirement at which point it will be taxed.

Taking two bites of income tax would be very unfair and would undoubtedly lead to unintended consequences.

[PurpleMoonlight]

LeoSayer said:

We have a progressive income tax regime. Reliefs are therefore the regressive.

I wish people would stop referring to pension contribution tax relief as if its some kind of handout. Pension contributions are nothing more than income deferred until retirement at which point it will be taxed.

Taking two bites of income tax would be very unfair and would undoubtedly lead to unintended consequences.

The issue for HMRC is that the majority of people receiving higher rate tax relief on contributions are only basic rate tax tax payers in retirement. HMRC therefore sees this as tax lost not tax deferred.

The other problem is if you restrict tax relief to basic rate to be fair you need limit the tax on the pension resulting from those contribitions to basic rate too. Otherwise its double taxation.

[Ozzie Osmond]

LeoSayer said:

I wish people would stop referring to pension contribution tax relief as if its some kind of handout. Pension contributions are nothing more than income deferred until retirement at which point it will be taxed.

• The unpaid tax grosses up tax free for the saver's benefit until retirement
• There's a 25% tax free lump sum at retirement
• Many people will get tax relief at 40% going into pension and only pay 20% on what they draw out

Sounds pretty generous to me in circumstances where the alternative is simply to get nailed for immediate tax.

The full rate tax relief must surely be under threat in the same way as the "PCLS" someone drew attention to earlier.

OT: Note that tax relief in ISAs has effectively been cut by removal of the dividend tax credit so the apparently generous increase in annual ISA allowance isn't quite as generous as it looks. Many people will nonetheless continue to run ISA and pension side-by-side as two different flavours of tax efficient saving.