Pension Withdrawals and Tax

[Foss62]

I retired (was actually made redundant) nearly two years ago, but a decent settlement meant that, as well as making maximum contributions to my pension, I have not needed to withdraw anything from my pension in that period.

I am now coming to the point where I will need to start making some withdrawals, and am intrigued by how the process actually works. I do have a financial advisor who consolidated my existing personal pensions - so will obviously get advice from that quarter, but I would like to go to her armed with some knowledge and questions.

I assume actually asking to make a withdrawal (my fund is with Fidelity), is a simple online matter, but my limited knowledge suggests I have basic choices here that I will presumably need to specify in the process, namely TFLS vs Regular Income vs Irregular taxed withdrawals?

If I take a TFLS then I assume I get exactly the amount I ask for and my remaining TFLS allowance will be reduced accordingly, from either £268K or 25% of my pension pot if that is smaller than the old threshold.

So, some questions: At what point is the total pension pot value determined? Is it as at first TFLS withdrawal? The fund value will of course vary from day to day and may well at points reach a higher total value than when the first lump sum was taken. Also the government website just talks of one or more TFLS - is there a limit to the number of these that can be taken (other than their total value)?

If I take a taxed withdrawal then I presume the fund provider tells HMRC who will issue an emergency tax code, but the end result would mean c.15% tax on anything over my personal allowance (I don’t get the State Pension yet) and under the next tax band?

How much mixing and matching can be done (and who monitors it all)?

[98elise]

When I took my 25% TFLS my provider (H&L) moved the other 75% from my "SIPP" account into a new "SIPP Income Drawdown" account.

Both accounts remain but as I took all my TFLS the SIPP account shows £0.

I suspect if I'd taken a partial TFLS then only a corresponding 3x the value would have transferred to the SIPP Income Drawdown account, and any remaining funds would have stayed in the SIPP.

That way growth/tax can be administered differently for each account. The SIPP one still has the 25% tax free element, the SIPP Income Drawdown doesn't

[SS2.]

98elise said:

When I took my 25% TFLS my provider (H&L) moved the other 75% from my "SIPP" account into a new "SIPP Income Drawdown" account.

Both accounts remain but as I took all my TFLS the SIPP account shows £0.

I suspect if I'd taken a partial TFLS then only a corresponding 3x the value would have transferred to the SIPP Income Drawdown account, and any remaining funds would have stayed in the SIPP.

That way growth/tax can be administered differently for each account. The SIPP one still has the 25% tax free element, the SIPP Income Drawdown doesn't

Same here, although I left some in my SIPP and it works exactly as you've laid out.

Also, I still contribute a decent amount each year so I have no immediate plans to take anything from the drawdown account. If I did, I would be further restricted as to how much I could contribute to my SIPP in each tax year.

[Jockman]

SS2. said:

Same here, although I left some in my SIPP and it works exactly as you've laid out.

Also, I still contribute a decent amount each year so I have no immediate plans to take anything from the drawdown account. If I did, I would be further restricted as to how much I could contribute to my SIPP in each tax year.

Sounds about right. I’m assuming we’re talking DC Pensions here. If you only take TFLS then MPAA rules don’t apply. If you take TFLS and drawdown then your future contribution allowance reduces to MPAA.

On the original point I think you’re talking about a crystallisation event. If,say, you have a £400k pot and you want to take £75k from it to pay off the mortgage etc etc then your Administrator will crystallise £300k of it to release the £75k ie 25% tax free. In this example you now have TWO Pension pots. One crystallised with £225k sitting in it that cannot be used in future calculations and one with £100k sitting in it as uncrystallised. This can be used for future crystallisation along with any growth and future contributions along the way.

Your limit is Circa £268k as you say. Be careful of other pension pots you have and from which you take any TFLS. They all count collectively towards the £268k.

[Sheepshanks]

Ours is all done by an IFA, but one thing that was a bit tricky when he set it up was that he wanted to do automatic phased drawdown and not many SIPP providers could do the automatic bit, but I see Fidelity do now: https://adviserservices.fidelity.co.uk/products-in...

In our case our money is all invested elsewhere - the SIPP provider (Standard Life in our case) just does the SIPP admin.

As far as we're comcerned, it all happens by magic and we get payments (one each) and payslips every month. Getting a monthly payment was vital for my wife - she couldn't get her head around getting money in lumps on an ad hoc basis.

[alscar]

My first withdrawal was 6 months after I retired which coincided with the start of the new tax year.
I have 2 Pensions - 1 a CETV converted DB and 1 a DC.
I discussed with my FA what first years annual income I needed “ net “ and he simply arranged 25% TFC of the annual from the CETV pot as a lump sum with the balance then coming monthly with payslips.
Emergency tax was paid month 1 and then corrected month 2 and onwards.
I had other income as well and do annual SA so any shortfall or surplus tax paid was picked up at tax year end.
I repeated the exercise in year 2 with similar numbers and last year because I withdrew the balance of the entirety of the TFC as early inheritances for my childrens house purchase finds obviously then had to increase the drawdown as such.
The £268,750 is the maximum allowed to be taken in aggregated TFC unless you were lucky enough to already have FP from prior year agreement which I was lucky enough to benefit from.

[Mazinbrum]

You can tell Fidelity you want to crystallise for example 40k, they will give you 10k tax free cash, the rest goes into a drawdown account (you only need 10k in cash in your SIPP as nothing happens to the remaining 30k, although showing in a separate drawdown account nothing is sold or moved, it’s sort of a virtual account if that makes sense). You then instruct Fidelity how much you want every month and they will pay you the same as PAYE deducting the relevant tax. With a simple spreadsheet you can calculate how much you need to crystallise to achieve your desired income. Eg 40k would give you 36514 after tax.
In any one tax year you don’t have to take out all of the money in the drawdown account, it just stays invested.

[Foss62]

Thanks for all the replies. So it sounds like the best option for me would be to tell Fidelity to split the account so that 25% would represent the TFLS and 75% the drawdown.

These new accounts could be identical in terms of investments etc.

I would be very close to the maximum lump sum, and I don’t see this government increasing it - the opposite is more likely!

The big advantages would be that the entire pension would still (hopefully) grow, and I could draw as needed from the lump sum bit without troubling the taxman - for quite a few years.

A disadvantage would be that growth of the lump sum part would (presumably?) become taxable - but a high tax bill related to that would come with the compensation of high growth.

[SunsetZed]

Foss62 said:

Thanks for all the replies. So it sounds like the best option for me would be to tell Fidelity to split the account so that 25% would represent the TFLS and 75% the drawdown.

These new accounts could be identical in terms of investments etc.

I would be very close to the maximum lump sum, and I don t see this government increasing it - the opposite is more likely!

The big advantages would be that the entire pension would still (hopefully) grow, and I could draw as needed from the lump sum bit without troubling the taxman - for quite a few years.

A disadvantage would be that growth of the lump sum part would (presumably?) become taxable - but a high tax bill related to that would come with the compensation of high growth.

Make sure that you're using the £12,570 personal allowance each year as well. If you're not it would make sense to take that from your pension pot each year and spend less of the lump sum.

Again if you think that you're going to tip into 40% spending during retirement it would make more sense to use some of your pension now and save some of your lump sum in the future to avoid that.

No reason that you can't invest at least part of the lump sum in the same funds as the pension is currently in using other wrappers such as ISA's for tax free growth.

[alscar]

Also keep in mind that on the assumption that Rachel doesn’t try and change the rules in a way there’s no point in necessarily taking TFC if you aren’t going to need to spend it to cover your usual annual outgo.
The caveat to this is if you think you can invest it and get a higher return that the pot would currently get via Fidelity accepting that tax would then be due unless you move it into an ISA etc.
Obviously if you are concerned that the rules may change and you have plans for the entirety of the TFC that’s a different debate.
Finally if you get your sums wrong year 1 you can simply amend the drawdown requirements for year 2.

[Sheepshanks]

Foss62 said:

Thanks for all the replies. So it sounds like the best option for me would be to tell Fidelity to split the account so that 25% would represent the TFLS and 75% the drawdown.

These new accounts could be identical in terms of investments etc.

I would be very close to the maximum lump sum, and I don t see this government increasing it - the opposite is more likely!

The big advantages would be that the entire pension would still (hopefully) grow, and I could draw as needed from the lump sum bit without troubling the taxman - for quite a few years.

A disadvantage would be that growth of the lump sum part would (presumably?) become taxable - but a high tax bill related to that would come with the compensation of high growth.

I guess if you're at the TFLS limit it doesn't make any difference, and, do your own checks, but I don't think you need to physically separate the money - as far as I know it can all happen virtually.

My SIPP account just shows: Total Pension, Tax Free Cash Remaining, Total Withdrawals. I'm only taking Tax Free Cash from mine, on a monthly basis.