I have always found it hard to keep a grip on the pension drawdown options. There are so many fiddly yet peskily important details to forget about.
So today we’ll try to capture all the crucial drawdown details in one place for future reference.
Let’s take it one step at a time…
What is a drawdown pension?
Going into pension drawdown is one of the options you have when taking money from a defined contribution pension of some description.
Defined contribution pensions have more aliases than a criminal mastermind, including:
- Personal pension
- Workplace pension
- Occupational pension
- Stakeholder pension
- SIPP
- Master trust pension
There’s even more out there if you look for them!
Meanwhile, a defined contribution pension is best described as not a defined benefit pension.
A defined benefit pension offers you a guaranteed income for life.
A defined contribution pension does not, and so is not as good. It is however typically cheaper and less burdensome for a company to offer to its workers than a defined benefit jobbie. Which is why defined benefit pensions are nowadays rarer than unicorn milk in the private sector.
If you’re under 60 and you work in the private sector, you most probably have a defined contribution pension.
This article focuses purely on your options if you hold a defined contribution pension. Mostly because that’s the type I have too – and because I have to draw the line somewhere.
I’m also going to assume that the earliest you can retire is age 55 (going up to 57 from 6 April 2028) and that you don’t have any other pension bells and whistles like lump sum protections and the like.
We can investigate the exceptions and edge cases together in the comments.
Pension drawdown: take a step back to go forward
When you crack open your pension pot, you can take some of your savings as tax-free cash (TFC)1 – which is every bit as good as it sounds.
The rest of your income needs are serviced by taxable cash.
There are three main options for releasing the taxable wedge from your pension, and we’ll come to those in a sec.
How much tax-free cash?
You can take up to 25% of your pension savings as tax-free cash.
Your tax-free cash is currently capped at £268,2752 (known as the lump sum allowance) or 25% of the lump sum and death benefit allowance (LSDBA) of £1,073,100.3
You can take your entire tax-free cash allowance in one go, or in stages. It’s up to you.
Options for your taxable pension savings
For every £1 you take in tax-free cash, you have to decide what to do with the other, potentially taxable £3:
Pension drawdown – you can take a flexible income from your pot while the rest of your funds are typically left invested.
Buy an annuity – you hand over a sizeable chunk of your loot to an insurance company. It then pays you a regular income for as long as you wear this mortal coil.
Cash grab – you can take your entire pension as cash NOW. Or some of it. This is the Lamborghini option. Or a Vauxhall Corsa in my case. HMRC will send you a birthday card if you go down this route. Sorry, that should read enormous tax demand.
Have it your way – mix-and-match the three options above, in any combination you like, Burger King-style.
Your provider may not offer all or even any of these options. In which case you can transfer your pension to someone who will.
Okay, I’d love to talk about pension drawdown now. But, to do that, I’ve gotta get some more confounding terminology out of the way…
Crystallised versus uncrystallised pension
There’s no escaping this.
Your pension stands astride a boundary. Not the line betwixt good and evil but between uncrystallised and crystallised.
Uncrystallised pension savings refer to pension assets that are not ‘in play’. They remain invested in your pension pot, poised in a superposition. All options are still on the table, because you haven’t yet entangled them in a withdrawal event. [Editor’s note: Great thinking @TA – using a quantum mechanics metaphor to simplify pension chat!]
Crystallised pension savings are assets that are ‘in play’ because you’ve withdrawn money.
For example imagine you withdraw 10% of your £500,000 pension as tax-free cash.
This crystallises £200,000 like so:
- £50,000 in tax-free cash
- A further £150,000 of pension savings that require you to select from the options described in the previous section. (This is the taxable £3 bound up with every £1 of tax-free cash you took).
To recap: your remaining £150,000 of crystallised funds can be put into drawdown, some portion can be used to buy an annuity, or you can stuff the lot into a holdall before going on the run from HMRC.
All that means that £300,000 of our original £500,000 pension is still uncrystallised. And 25% of that £300,000 can still hatch as tax-free cash.
Crystal clear-ish
Perhaps the best way to think of the metamorphosis between uncrystallised and crystallised pension is that income is taken from the crystallised portion and may be subject to income tax at your marginal rate.
Lots of sources describe crystallising pension assets as ‘cashing in’ your pension. This doesn’t make sense to me. You can leave crystallised funds invested and untouched for the rest of your life if you want.
Importantly, when you crystallise an amount, you lose your right to its associated 25% tax-free cash if you don’t take it at the time.
Incidentally, your pension is not subject to Inheritance Tax – no matter which state it’s in.
Pension drawdown rules
At last! With that foundation course out of the way, we can move on to the actual pension drawdown rules.
Pension drawdown is extremely flexible, subject to the confines of your provider’s scheme.
If you take 25% of your pension pot as tax-free cash then the remaining 75% can be put into drawdown as discussed.
From there, you can start taking an income from these crystallised funds. As frequently as monthly if your broker’s particular platform is game.
That’s one way of doing it.
However a better way for many people is to periodically take tax-free cash in chunks. For example, in amounts that don’t exceed your annual ISA allowance, so you can then tuck the cash away in an ISA where it can continue to grow tax-free.
This approach is known as phased drawdown or partial drawdown, because every tax-free withdrawal also crystallises additional assets in the 3:1 ratio described above.
Phased or partial drawdown
Phased drawdown isn’t a special pension drawdown mode you need to unlock. It’s just a name given to drawing down in stages, as opposed to taking all of your tax-free cash in a one-er.
Here’s an example of phased drawdown:
I’ve streamlined this example. There’s no need to crystallise the same amount every year with phased drawdown.
I’ve not stuck to my sustainable withdrawal rate in this example either. And it illustrates a mild investing nightmare, as the portfolio has gone sideways for two years on the trot.
Remember that any amount of the £30,000 crystallised segment can be taken as income too (or none of it), but these withdrawals are subject to income tax once you’ve smashed through your personal allowances.
Phased drawdown has two advantages versus the other method of withdrawing from your pension in stages: the uncrystallised funds pension lump sum (UFPLS).
Firstly, phased drawdown doesn’t trigger the Money Purchase Annual Allowance (MPAA) rules. Just so long as you don’t take an income from your crystallised funds.
In other words, you won’t limit tax-relief on your future pension contributions if you can live off your tax-free cash and/or other income sources for a time.
Secondly, tax-free cash from drawdown isn’t restricted to 25% of the standard limit if you have pension protections that exceed that limit.
Capped drawdown
Capped drawdown was a more restrictive set of pension drawdown rules that applied before the shackles were loosened.
You can’t choose capped drawdown as an option anymore. You can decide to remain on it though.
Pension drawdown tax
Any money withdrawn from your pension drawdown assets (aside from your tax-free cash) is subject to income tax as normal.
These withdrawals count as non-savings income that is taxed in the same way as wages from a job.4
The first £12,570 taken from your pension drawdown balance is tax-free due to the personal allowance. All the usual tax bands and rules apply thereafter.
Treat the family by dying before age 75
If you die before age 75 then any beneficiary can take an income from your drawdown pension tax-free. This is known as beneficiary drawdown but it isn’t available from all schemes. The same goes for annuities.
If you die before age 75 then any lump sum payments in excess of the lump sum and death benefit allowance are taxable at your beneficiary’s marginal income tax rate.
After age 75, all payments are made at the beneficiary’s marginal income tax rate.
Obscure exception 1: Income tax is payable at the beneficiary’s rate if you die before age 75, and payments are taken from uncrystallised funds that are not designated for drawdown within two years of the scheme administrator knowing about your death.
Obscure exception 2: Income tax is payable at the beneficiary’s rate if you die before age 75, and a lump sum is taken beyond two years of the scheme administrator knowing about your death.
Obscure exception 3: Income tax is payable at 45% on lump sums paid into a trust, if you die after age 75.
Note: Taking income from an inherited pension does not trigger the Money Purchase Annual Allowance.
Emergency tax on pension drawdown payments
Tax on pension withdrawals is deducted by your broker/scheme provider using PAYE.
Your first drawdown payment (or any that are deemed to be ad hoc) is likely to be taxed using an emergency tax code rather than your actual rate.
Look out for an ‘M1’ suffix on your tax code e.g. 1257LM1.
This indicates your payment is taxed on a Month 1 basis.
The M1 means HMRC will multiply that payment by twelve as they assume that you’ll receive the same amount of income every month.
For instance, if you take £20,000 (above and beyond your tax-free cash) to cover the year, HMRC will calculate that you must be living it large on a £240,000 annual income.
Obviously paying tax at that rate is going to take a massive bite out of your £20,000 income apple. It could be months before you’re refunded by HMRC.
It’s a patently ludicrous situation.
You can reclaim the tax (see below) but that takes time.
Cracking the code
After that initial tax bill shock, you’re on HMRC’s pension payment radar. They should issue you (and your pension provider) with a tax code that’s based on how much tax you’ve already paid this tax year.
Now you’re being taxed on a cumulative basis, which is how we’re all used to being treated when we’re paid a monthly salary.
A standard tax code like 1257L shows you’re being taxed on a cumulative basis i.e. the M1 has been lopped off.
With a cumulative basis tax code in play you should be taxed properly on any regular withdrawal schedule agreed with your pension provider.
So if they offer you payments on, for example, a quarterly or annual regular withdrawal schedule, HMRC should tax those on the basis that they amount to 25% or 100% of your annual income.
Any under or overpayments of tax will be clawed back or refunded through your future regular income drops, and HMRC will automatically issue new tax codes to your provider to make it so.
As mentioned, ad hoc payments are always treated on an M1 basis, so they have the potential to knock things sideways tax-wise.
Quilter has provided an excellent explanation of how pensions and PAYE interact. Many thanks to Monevator reader Tricky for linking to this in the comments.
Deescalation
I’d recommend having a conversation with your broker about how you can duck the emergency tax bullet – but it seems to be unavoidable because this is how PAYE works.
There do seem to be two ways to mitigate the tax hit on your first pension payment:
- If you plan to take a regular drawdown income then ensure your first taxable payment is only for a small amount – such as £100. The emergency tax rate will apply to this amount and HMRC will then issue updated tax codes that adjust for your subsequent, larger payments throughout the tax year.
This way, HMRC is effectively reclaiming the correct amount of tax from you. There’s lovely!
- If you’ve been issued a P45 for the same tax year as your first drawdown payment then ask your broker if that will enable them to apply an accurate tax code from the start.
Choosing your regular income schedule
Perhaps your broker manages their system on a VIC-20, or you want payments aligned with the lunar months?
Either way, your pension provider may not be able to provide you with a satisfactory schedule of regular payments.
In that case, my personal preference would be to sell down enough bonds and equities to cover myself for the time period in question e.g. a year. Then I’d park the cash in my pension – possibly using a money market fund if my broker’s interest rate is rubbish. Finally, I’d take monthly payments (or whatever schedule the provider can offer) from that cash balance to keep things square with HMRC.
Relatedly, Monevator reader Gizzard points out that some lenders will only look at monthly income payments when assessing your credit worthiness. So your clockwork annual payments may get disregarded as ‘unusual’ lump sums.
Reclaiming tax
Just for fun, HMRC have three different tax forms on the go for reclaiming tax on pension withdrawals. Choose from:
- P55 – if your withdrawal hasn’t emptied this particular pension and you don’t intend to take any more payments from it this tax year
- P50Z – if you’ve drained this pension dry and aren’t working
- P53Z – you’ve tapped out this pension and are still working
When you plan to take multiple withdrawals from a pension then HMRC will revise your tax code later in the year for under/overpayments. Thus we’re spared another tax form.
Pension drawdown charges
You shouldn’t have to pay anything for drawdown services these days.
See the SIPP row / Fee notes column of the Monevator broker table to find drawdown and UFPLS fees.
Fidelity, AJ Bell, Aviva, and Hargreaves Lansdown all charge nothing for drawdown. And they cap their platform charges at a reasonable rate if you choose an ETF-only portfolio.
Small pots
The small pots rule allows you to empty three defined contribution pensions worth up to £10,000 each but with two additional bonus features that you may wish to know about.
Firstly, the small pots rule works like the cash grab option we described earlier:
- You can withdraw all the cash from any of your pensions in one go
- Up to 25% is available as tax-free cash
- The remaining funds are subject to income tax as usual
However, you must empty a small pot completely when using this rule. You can’t leave the money hanging around, so watch out for any tax consequences that follow from withdrawing your 75% taxable cash.
The two small pots bonus features are:
- It doesn’t trigger the MPAA limit that caps tax relief on future pension contributions.
- Small pots’ 25% tax-free cash does not use up any of your normal tax-free cash because small pots aren’t tested against the lump sum allowance.
So you may be able to rearrange your pensions to squeeze out another £7,500 in tax-free cash using small pots.
Check with your pension provider to ensure your scheme is eligible for the small pots rule.
You may well pay the wrong amount of tax initially on a small pots withdrawal as the basic rate is automatically applied to the taxable element – regardless of any other tax you’ve paid in the year.
The rules are different if your defined contribution scheme is classified as an ‘occupational pension’ scheme, although few are, apparently.
Pension Wise
Finally, if you would welcome advice on how to make the most of your pension then know that you are entitled to a free Pension Wise advice session.
Doubtless even grizzled Monevator mavens would benefit from the chance to clarify things. You can also attend an appointment on behalf of a family member or a friend.
Given the life-changing nature of these decisions, I’m very glad that Pension Wise exists to offer a guiding hand. Even if only for 60 minutes.
As for us, that’s it for our tour of the pension drawdown rules.
Complexity seems to be the necessary by-product of the UK’s flexible pension system. I hope this piece goes some way to clearing up the fug surrounding it.
But let us know what we’ve missed in the comments below.
Take it steady,
The Accumulator
PS – check out HMRC’s pension tax manual if you’re having trouble sleeping at night.
- Also known as the pension commencement lump sum or PCLS. [↩]
- Unless you’ve already locked-in a higher lump sum or lifetime allowance limit. [↩]
- The pale shadow of the Lifetime Allowance. [↩]
- Though pension withdrawals do not count as earnings that determine how much you can contribute towards a pension. [↩]
Incidentally, your pension is not subject to Inheritance Tax – no matter which state it’s in.
Really good article and answered a lot of uncertainties I had. I have just turned 55 so can now access my pension I am still working so I want to carry on paying in to my pension for a couple of years yet. However, over the next year or two I will probably want to dip into some tax-free cash.
I just one question.
With regard to the pension not being subject to Inheritance tax, if part of the pension is crystallised but the tax free cash not withdrawn, does that tax free element remain as part of the pension for IT purposes or is it totally separate and therefore subject to IT?
Yes, that explanation of crytallised/uncrystallised is as good as any I’ve seen and rather more fun.
A lot of aggro is hidden in your phrase “Your provider may not offer all or even any of these options”. That seems particularly true of occupational schemes which can be quite rigid. And they don’t make moving your fund anywhere else easy either.
Aside from avoiding the emergency tax palaver, is there any potential performance benefit for the remaining pension portfolio to making withdrawals monthly rather than once a year, in the same way that pound cost averaging may help during accumulation?
I have no practical experience of this, but I understand that another way of mitigating the emergency tax situation is to make the withdrawal as late as possible in the tax year. This introduces an element of jeopardy as you are dependent on your pension provider processing the withdrawal before the year end.
If I take £20,000 on 30th April, and do the same each month, I will have £240,000 income *this* tax year.
But if I take £20,000 on 30th March, and do the same each month, I will only have £20,000 income *this* tax year.
I’m wondering whether the emergency tax code caused excessive tax deduction would be any different in the above two situations?
Whilst we should all maximise pension investments just before taking them, it’s worth checking the governments “Tax Free Cash Recycling Rules” (Google it). Which basically prevents you from dumping loads of cash into your scheme (and gaining a tax refund) before you retire, then drawing 25% out (tax free) immediately. It’s a bit complicated, read up.
It’s also worth making sure your partner can make use of their tax-free income allowance when retired. If you structure your investments correctly, the two of you have 2x the full tax-free income allowances. Keep it all in your own name, and you’ll maybe only have 1x tax-free income allowance. Worth a thought.
Read it twice, might just about understand it on the 3rd go. Thanks though, very informative, I think.
At last, something I can understand. I have never quite grasped the crytallised/uncrystallised concept and what this could mean to my ability to keep contributing to my DC pension while still working. 55 in the next couple of months. It seems to make sense to take 20K tax free each year to bump up ISA savings while still working. When I finish work I can take drawdown income up to personal allowance and top with ISA savings to meet my needs and minimise tax for a few years? I think that’s a reasonable approach unless missing something.
Hello, I took a UFPLS withdrawal in March, no HMRC forms required got my tax back in July, put the £££ into my sipp.
“Personally, I planned to withdraw once a year rather than monthly but I’m doing a rapid rethink in the face of this PAYE nonsense. By the looks of things, I’d have to reclaim tax every time for this kind of ‘ad hoc’ payment.”
No. I take an annual withdrawal from my SIPP and don’t pay emergency / extra tax. The trick is to make the withdrawal after 6th March, as there are no additional months left, when the assumption for tax purposes would be that you would make the same withdrawal again. I have been doing this for 8 years now with variable amounts each year.
I have always done my annual flexible withdrawal towards the end of the tax year as DavidV (#4) proposes*. Whilst this approach does mitigate some excess tax being paid initially it only seems to entirely eliminate the issue if a) your tax code is BR or b) you can get the timing bang on (which incidentally I do not recommend). With any other tax code, e.g. 1000L (or similar) the tax calculation seems to assume you will make other withdrawals before the end of the tax year and apportions any tax free amount accordingly. So, if for example, you make your one annual withdrawal in say late January**, they only apply around 10/12ths of your tax free allowance to it.
* albeit for reasons other than those David V gives
** everything takes a long time in ‘drawdown land’ and in my experience leaving an annual withdrawal much later risks it not completing within that tax year
Worth mentioning that if you do go down the UFPLS route, and you have no other taxable income (so you’re not using your personal allowance) you can £16,760 and not pay any tax at all.
@TA. Thank you for attempting to make sense of this morass of rules and special cases. If you have tried to create a fair and comprehensible system (let’s give them the benefit of the doubt), and then had to add layers of additional rules to cover all sorts of exceptions and edge cases, it is a good idea to think about how you could collapse this mountain of legislation back to something the average human can understand.
That is probably hoping for too much as all this complexity has itself generated further complexity in behaviour (see many of the comments) that may now be impossible to unpick. A classic case of “if that is where you want to go, I wouldn’t start from here”.
So, a question that is probably simple, but where it is surprisingly hard to get an answer:
If I start a SIPP, transfer it at a later date into a DB pension, then only take money out of the DB pension (ie no cash is ever taken from the SIPP, which now no longer exists) does that trigger MPAA? Or can I start a new SIPP later? You will guess that this has to do with changes to the lifetime allowance. Logic would seem to say yes, but when did logic have anything to do with pension law?
Its a complicated area to say the least, made worse as the rules continually changed over the years. You may want to double check, but I believe the small pots rule allowing three lump sums as you describe (without triggering the MPAA) refers to personal pensions and stakeholder pensions, and different rules apply to taking small pots from defined contribution occupational pension schemes. Also my understanding is you can continue making new pension contributions to uncrystallised funds (assuming provider permits), but you can’t make contributions to crystallised funds (for obvious reasons).
@ Alex
HMRC PAYE uses cumulative year to date earnings , and the cumulative tax free allowance to calculate tax. So in YTD April earnings £20k pcm with tax free allowance ~£1050 pcm means tax £19k (circa £3k at 20% the rest at 40/45%).
If you take it in March (the last month of the financial year) the situation is YTD earnings £20k YTD tax free allowance £12570 (20% of £7430 due) – hence the tax position auto corrects when taken in March
Are you sure you have the detail right, with regard to the Small Pots exemption? It was my understanding that the tax-free cash, when using Small Pots, is in addition to the ‘lifetime limit’ on tax-free cash. Hargreaves seem to agree.
One additional feature, of Small Pots, is that the complete pension pot has to be extinguished, which means that, for each £2.5k of tax-free cash, you will also find yourself with £7.5k of taxable cash- you can’t, as it were, put a ‘small pot’ into drawdown. So it might be worthwhile thinking about when best to use the Small Pot exemption.
Great article thanks.
I am struggling to find an answer to: can I still pay the max 60k into my pension each year even though I am now receiving my DB pension but still working? Really struggling on this one.
Anyone with similar experience?
Edit.. DB pension triggered through redundancy.
Thanks for a clearly written article. Have you offered your services to HMRC or pension providers coz they could do with being clearer. It’s complicated enough without the industry using different names for things or even just dumbing down so much it’s mis-leading.
My current example, everything I read before said only my first withdrawal has emergency tax applied, and after that the provider will have the correct code. However I hadn’t realised annual one-off UFPLS withdrawals are ALWAYS taxed on the Month1 basis, even if the provider has the tax code from the year before. As others have said taking it after 6th March makes that a moot point, but otherwise it’s a P55 (or the others) form to get the refund before doing a tax return.
@ Cruncher – any monies still in your pension account won’t be liable for inheritance tax.
@ PJ – Because equities beat cash then over the long-term I’m prepared to bet you’d see a slight advantage for monthly withdrawals due to longer exposure to the market. Fairly sure I’ve seen something like this crop up in a US study on sustainable withdrawal rates. Personally, I’d rather just make sure I have cash in hand for the year ahead, especially as I don’t want to have to keep recalculating SWRs etc.
@ David V and Alex – it would seem you’ve hit upon a great solution if @ coyrls experience is universal.
@ coyrls – great tip. Thank you. I was hoping someone had a better answer than I could find. But wait, here comes @ Al Cam to rain on our parade! I might have known it couldn’t be that simple.
@ Al Cam – is there a problem with making the withdrawal after 6 March as coyrls suggests? Also see @ Boltt’s comment.
@ John Boy – good shout. I must do a pension recycling article one day but the guidance is ambiguous to say the least.
@ Griff – haha. Makes me go boss-eyed too.
@ Stephen Gibbs – yes, that’s my approach as well.
@ KayBee – that is encouraging! Who runs your scheme?
@ Matt – yes, though you get the same result with phased drawdown which seems better? I guess there’s an argument for UFPLS where you don’t care about the MPAA rules and it’s cheaper to withdraw using that method with your broker?
@ old_eyes – ha, yes agreed, you wouldn’t start from here. I don’t know the answer to your question but Al Cam may have a view.
@ JP – you’re right that the small pots rules are slightly different for DC occupational pensions but I left that bit out because apparently those are rarer than hen’s teeth. [Cue avalanche of comments from Monevator reader’s with DC occupational pensions.]
@ Jonathan H – I cross-referenced four sources on small pots and none mentioned that invoking that option allows you to take extra tax-free cash. Which isn’t to say you’re not right. What they do mention is that a small pots smash-and-grab doesn’t trigger a check against the LTA. So perhaps that does allow you to take extra TFC? The full implications of abolishing the LTA don’t seem to have been entirely worked out yet. Would you mind posting the link to the HL guidance for me?
I think you’re right to emphasise the tax implications of the small pots move. I’ll make that crystal clear in the piece at some point.
@ Cruncher. Re you question, if you crystallise a part of your pension but don’t take the tax free cash you lose the right to take it cash free- it’s just part of the pension pot for taking taxable income. So not worth doing, unless there is a trick I am missing. (Potentially you might have wanted to crystallise a pot to avoid future growth taking it over the LTA, but not wanted the assets outside a tax shelter. I did this a few years back, not having a crystal ball to tell me the LTA would cease to be relevant, but did take the tax free cash out and moved it into ISAs as fast as I could)
My experience of taking 12 months projected cash out of my pension in May* last year , taxed as Month 1, is fairly positive. I whacked my Form P55 in straightaway, and got the tax back from HMRC in July. UFPLS rather than phased drawdown but I think that wouldn’t affect timing
* May rather than April because I had to transfer funds from the original provider who only had 2 options: annuity purchase or take the lot in one go
@TA (#18):
No, not in theory. However, yes in practice!
As I mentioned in my comment (#11) you run IMO the very real risk of the transaction not completing within the tax year. This is almost certainly what @DavidV (#4) refers to as ‘jeopardy’.
Nothing in ‘drawdown world’ happens quickly and in my (and others) experience there is also a lot of uncertainty around the timings too. From memory my fastest transaction took around 21 calendar days (initiation to net cash in my bank a/c – usually a with tax refund to follow) and the slowest took more than twice that time! FWIW, I have done seven annual drawdowns (also for different amounts) and whilst in that time there have been changes [that should have made it easier/faster] my overriding impression is that if anything it has got worse/slower with more fatuous box ticking added from time to time too. I have always completed within the tax year though – which in reality is the overriding objective.
That @coyrls has managed it* successfully for eight years hints to me that perhaps his scheme allows him to select his payment date and guarantees to hit it. My provider has failed (more than once) to meet agreed timescales – which you can only find out when you initiate the drawdown – but has always compensated me for inconvenience, etc. Perhaps @coyrls can clarify and advise how much notice/preparation he/she gives to each drawdown transaction.
To complete the picture: as I have to do self assessment I have used my annual tax return to claim back any tax overpaid – this has always gone smoothly and quickly. However, I understand others have had problems getting overpaid drawdown income tax returned to them.
*after 6th of March drawdown completing within the tax year
Re @old-eyes question: I have no experience of the scenario he describes [SIPP to DB] and I am not sure if his question is just theoretical or he has a real case in mind
@TA (#18); @old-eyes (#13)
Re SIPP to DB:
After re-reading @old_eyes recent FIRE side chat, and his Q at #13 again (and noting the LTA clause) I now think I know what he is getting at. I think he is asking if he opens a new SIPP tomorrow will it be subject to the MPAA or not?
Good question – I do not know the answer. And I can see you may have very good reason(s) for asking.
Some things that might help clarify the matter are:
a) did you ever have any other DC/SIPP in the past that has been flexibly accessed. If the answer to this is yes then the MPAA will apply.
b) were you over 55 (or was it 50?) when you did your SIPP to DB transfer
c) have you asked the DB scheme you transferred to – if anyone knows they might and they have probably been asked the Q before
d) lastly, may be worth noting that HMRC define the MPAA as follows:
“The MPAA is a reduction to the AA for individuals who have flexibly accessed their money purchase pension savings”
FWIW most DB schemes (outside the public sector) have not accepted transfers for yonks!
Excellent article – thanks.
“Your pension is not subject to Inheritance Tax – no matter which state it’s in.” This, to my mind, is one reason why I weight pension contributions higher than ISA contributions. But how does the inheritance of a pension work in practice? Do the inherited pension funds (whether crystalised or not) remain within the pension regime so that the beneficiary receives a pension “pot” of potentially crystallised and uncrystallised pension savings?
TA – ah, I take your point (though master trusts are occupational pension schemes and I expect these are increasing in popularity – I assume they are subject to the same
small pot rules as other occupational pension schemes?).
@old_eyes, HMRC’s pension tax manual might help provide some pointers. Its not for the fainthhearted (more for advisers and technical experts and the like), but contains a minefield of information (including triggers for the MPAA). Might help with discussions with schemes/providers or advisers at least who can clarify understanding.
@Nutkin in my sadly recent experience two separate pension providers transferred the existing pensions to a whole new pension product in my name.
They both appear to have cashed in the existing pension and transferred as cash into the pension.
For standard life I had to pick new funds to invest in, the other may have instantly bought the same fund in my pension. They are both now effectively fully crystallised.
So they are both in drawdown and I can draw down on them tax free regardless of age, I could be 20 and still draw down. Sadly I am not physically 20 any more.
It also appears that these new pensions are also inheritable and I’d should die before 75 they will also be tax free.
Great article. A lot of practical information here and served with a good humor between the lines.
With the current rules, assuming I am no longer working and I don’t have any other sources of income, my plan for private pension drawdown would be using UFPLS method. I would be drawing £1396 each month. This is the maximum amount that I could take without paying any income tax in a given tax year. It makes slightly over £16k (£12570+25% tax free bit) a year. It also (hopefully) ensures that emergency tax would not be imposed by HMRC.
Following 4% rule, I would need to have a pension pot worth slightly over £400k to draw that kind of money as mentioned above. Most UK households (not even individuals as that would be even worst) do not have such money in their privatte pension pots.
So I guess my conclusion is that most of us who live in UK and consider FIRE, do not need to worry about tax on private pension. At least not until state pension age.
Speaking of which, speculations about pushing state pension age until 71 deserve speculation about potential french style revolution. Even private pension access would be hen set at the whooping age of 61.
There is one other advantage of taking a monthly income over a lump sum. Some mortgage lenders disregard the lump sum amount when assessing how much they will lend you. This situation contributed to me selling my buy to let property recently.
Hargreaves Lansdown work to a drawdown calendar. Provided your request is done on time they will make the payment for that month.
https://www.hl.co.uk/retirement/drawdown/payment-calendar
It has been a few years since we did any drawdowns but we will start again this March.
We always did the bulk of the drawdown in March. The advantage of this is that you have a much better idea of your other annual income then and so can optimise for tax.
This was such a useful explanation on a subject I had naively neglected until now. Although it’s beyond the remit of this site, I would be interested in any advice or input people could provide on the options and best choices to make if you have a pension in two countries and decide to reside outside of the UK in retirement. Options largely being to move your UK pension to an approved pension provider in your country of residence OR retain your pension in the UK and navigate the double-tax exemption.
Timely article for me personally. I’m just at the point of starting to access some of my SIPP. Thanks, it sums it up very well.
I also would recommend the free PensionWise call. I didn’t feel like I needed advice but it was very useful to run through things with someone knowledgeable and independent.
One other point to note about UFPLS v flexible access drawdown is that with UFPLS the whole amount you crystalise is paid out to you (the tax free part plus the taxable part). If you crystalise the same amount with flexible drawdown, the tax free part is paid out to you, but the taxable balance can be left in the SIPP and paid when you choose, or not at all.
This is very useful to me because I worked enough this tax year to pay higher rate tax. I’m looking for a new contract and will hopefully be working again soon for a while. The ability to take chunks of tax free cash, while leaving the taxable crystalised funds untouched until I’m not working is very useful in optimising my income tax.
@ Gizzard – that’s really good to know and worth paying attention to.
@ Al Cam – thank you for taking the time to come back on those points. Re: ad hoc payments, I very much get the impression that mileage varies depending on provider.
@ JP – excellent if sadistic point about going through HMRC pension’s tax manual 😉
Here’s a link to it for anyone who’s interested: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual
Be afraid. Be very afraid.
@ All – great thread! So much knowledge out there.
@Al Cam (#23).
Yes, I asked the question for the reason given.
Thanks for the advice. No I have never received any money from a DC pension directly, so I think I am probably OK. However, will check with my DB provider. It might also be a good test of PensionWise!
I just checked my query with PensionWise and got this answer: “MPAA is triggered by “flexibly accessing” a pension pot, it is not triggered by DC-DB transfers”.
The only issue they raised with me was checking the limit on lump sums. In my case not an issue.
Thanks to @TA and @AlCam for their suggestions.
Also of course my thanks to @JP for his disturbing challenge!
@ALCam #22 Yes, my platform, Interactive Investor allowed me to specify the date on which my one-off withdrawal should be paid, all be it with a constantly changing (and improving to be fair) process. I was with Alliance Trust prior to its takeover by II and their process required you to write a letter to make a one-off withdrawal, with II it was originally a form that had to be posted, this was replaced by an online form in 2021 but its convenience was undermined by the requirement to print it out and sign it after completion, they did allow a scanned copy to be sent via a secure message, though. In 2023 the requirement for a signature was removed and a form that could be submitted online was provided. With all these methods I submitted my request in February requesting a withdrawal in mid-March. They did miss one payment date but after ringing them, the withdrawal was sent to my account via CHAPS (free) the next day, which I thought was good service.
When I came to make my withdrawal request in February this year, I discovered that the process has been changed again, now an ad-hoc one-off payment has a separate process from setting up a regular payment (previously they used the same form with a box to say if it was a one-off or regular payment). With this new process, the ability to specify a payment date has been removed and they say the payment will be made within 3-10 days of submission and so my plan is to submit my request around 6th March.
II say the deadline for making a withdrawal from a SIPP for this tax year is 18 March but I won’t be leaving it that late. Apart from one late payment (which was only a day late and still in the tax year), I haven’t had any problems making my withdrawal in March. I think platforms gear up for a flurry of activity at the end of a tax year. One thing that I have always done is to make sure that I have the amount needed for the withdrawal in cleared cash in my account. I imagine that if a platform had to sell investments or wait for a trade to settle it would cause delays.
@old_eyes (#31):
Based on the little research I have done, I tend to think you might be OK too – but I am definitely not sure about this!
No advice given – just some random thoughts from a bloke on the ‘net.
Testing PensionWise is a great idea – of course they might not know either and you will be relying on them to say so if that is the case.
A few other things occurred to me overnight:
a) MPAA did not exist before 2015 and became effective in next tax year IIRC;
b) Your DB pensions alone ensure you will always be (at least) a HR tax payer, so I assume you are only interested in, so-called, IHT features* of a new SIPP;
c) If I assume you have not contributed to any pension for at least the last three years and the MPAA does NOT apply you could pay in up to £180k to a SIPP this tax year (£60k plus 3 times £40k of carry forward) [or maybe even £200k in 24/25] – which might be handy if you want to wind down your business, but I would check out any business tax reliefs, etc first – or even take some specialist [tax] advice on closing your business. Things like entrepreneurs relief come to mind.
* I have long held the view that these features are not the intended path and may therefore be vulnerable – but, of course, that is just my take on things
@TA (#30):
Re: “Re: ad hoc payments, I very much get the impression that mileage varies depending on provider.”
I used to think that too.
However, a key lesson since I crystallised my DC/SIPP is that nothing with SIPPs is ever straightforward or speedy in practice even though it appears that it should be! My admittedly very limited research indicates problems are wide spread across providers. Personally, I am amazed that there is so little push back from the punters.
It could simply be that @coyrls providers ‘form’ needs them to state their desired payment date. I checked mine again this morning and whilst it asks for dates (up to and including the 28th of the month) for regular payments (monthly, quarterly, half-yearly, or even yearly) it does not for an adhoc payment.
Hence, it would be great to get some further details along the lines I described at #22 from @coyrls.
@coyrls (#36):
Thanks for the additional info – very interesting.
My ad hoc withdrawal sequence basically goes as follows:
a) phone up provider to initiate process (this call takes somewhat longer that you might assume as they have an ever increasing set of questions/etc to work though); a useful thing to establish during this phone call is their anticipated execution timescales and advise them of your needs (reminding them about minimising my time out of the market has served me well);
b) request a gross amount and identify which investments to sell (by either paper form that has to be posted out to me (as a quote), checked, completed, signed, and returned by post; or online: I have used both and found the online version – which was only made available last year – to be so awful (and IMO somewhat insecure!) that I reverted to paper again this year);
c) provider works out how many units to sell;
d) units are sold, payroll runs and in due course I get the net proceeds paid to my bank a/c.
A lot of my delay’s are around the use of snail mail (e.g. this years quote arrived at my home address nine days after it was dated) but their on-line system that I used last year was just so TERRIBLE, I could not face using it again. My choice I know.
@AlCam #39 Wow, that is so different II’s process is pretty streamlined now, as you can see here: https://www.ii.co.uk/ii-accounts/sipp/income-drawdown/take-one-off-payment
Also there is no selling of units to be done by II, as I do all the necessary transactions to create the required cash balance prior to making my request.
It seems to me that if timing is an issue with an unreliable provider then a compromise is to build in an extra month e.g. ask for a Feb 6th withdrawal:
If they hit the date then you pay a bit more tax than you should but not a massive amount. Income withdrawn (for the year ahead) should cover you until the refund is processed.
If they don’t hit the date then your annual withdrawal will most likely arrive in March – hooray.
@AlCam (#37)
“b) Your DB pensions alone ensure you will always be (at least) a HR tax payer, so I assume you are only interested in, so-called, IHT features* of a new SIPP;”
Not entirely. One of the disadvantages of a DB pension compared to a DC pot is that the survivor benefits are typically half the income to the retiree. If I die first that leaves my wife with a substantially reduced income, but the outgoings will not fall by the same amount. A SIPP could help to ameliorate that gap.
“c) If I assume you have not contributed to any pension for at least the last three years and the MPAA does NOT apply you could pay in up to £180k to a SIPP this tax year (£60k plus 3 times £40k of carry forward) [or maybe even £200k in 24/25] – which might be handy if you want to wind down your business, but I would check out any business tax reliefs, etc first – or even take some specialist [tax] advice on closing your business. Things like entrepreneurs relief come to mind.”
Since the LTA has only just been relaxed in this tax year, I am not sure that the carry forward rules will still apply. Another one to test with PensionWise.
As far as closing the business down, I don’t think Business Asset Disposal relief works as the assets are me, a couple of computers and a second-hand car. The goodwill in the business is entirely my personal relationships, and I can’t see those being valued very highly. So despite the fact that I get mail monthly offering to buy my business, I doubt it is saleable as a going concern.
The options for closing it down appear to be Voluntary Strike-off and Members Voluntary Liquidation. Which option is best depends on how much cash there in retained profit when I pull the plug. Voluntary Strike-off is quick and simple, but only allows you to claim the 10% rate on distributions up to £25k. Members Voluntary Liquidation requires the services of an Insolvency Practitioner at a cost, but gives the 10% tax rate on all moneys.
Still exploring the options. And thanks again for your suggestions.
Now that I no longer need a big tax free lump sum to pay off the mortgage I think I will go the monthly UFPLS route when the time comes.
If anyone does this then please advise of any pitfalls (besides triggering MPAA). I don’t think H-L have any fees or charges for it.
Here is hoping for the Personal Allowance to be raised to £15,000 at least so that you can get your first £20k of income with no tax via UFPLS.
My first UFPLS will certainly be no more than £1000 to see if the emergency tax nonsense occurs!
@old_eyes (#42):
Thanks for the additional info.
b) If allowances/bands remain frozen as advertised (to 27/28) then I think your wife’s survivor pension (45% IIRC) plus a full state pension will almost certainly make her a HR tax payer before then. So wrt the ‘survivor’ SIPP: at least HR relief on the way in and HR tax on the way out – vs dripping it into ISA’s at hopefully no more than HR tax on the way in and nothing on the way out; worth thinking through IMO.
c) definitely worth double checking the carry forward rules
Not the worst problems. All the best.
Thank you for a useful guide through the pensions maze and for the useful, constructive comments.
The current government will abolish the LTA from 6th April this year. Labour say they will re-instate it. If Labour re-instated the LTA in its previous form then I suppose crystallising a SIPP in advance of the election could be an option. I would be interested in the @TA and readers’ views on the options for managing this tax liability, which, without any details remains a ‘Known Unknown’.
Thanks @coyrls for the heads up on a March lump sum withdrawal and @TA re phased – I’ll Check it out.
As it happens I turn 55 on 1 March so I plan to “double dip” £16760 tax free each side of the tax year. I wouldn’t want to be doing this on 1 April, but as someone who worked in the industry for 15 years+ unless a provider says there’s a cut off to get a current tax year withdrawal through and you miss it, they would have to pay compensation if you end up paying more tax than you should had they acted promptly. Naming no names, but this was a regular enough occurance where I worked…
WFIF AJ Bell emailed me last year with their end of tax year cut off dates for various actions and from memory they were pretty late in March.
@SemiPassive (43)
There was a discussion of the mechanics of UFPLS withdrawal, specifically with H-L, in the comments on a recent post on @ermine’s blog. While I understand the process was perfectly efficient, I don’t think it was as automated as regular payments under flexible drawdown. I seem to remember that the commenter was making a withdrawal only once a year and, from how he described, it the process did not seem to be set up for automated regular payments. I suggest discussing this with H-L’s pension helpline before firming up your strategy.
@coyrls (#40), @TA (#41)
Whilst my end-to-end timings are clearly longer, one thing worth noting is that the time out of the market for me may well be shorter. For example, this year my units were sold and the net cash was in my bank either 4 or 5 calendar days later – depending on which system you consult (and that included a two day weekend). FoC same working day CHAPS payment vs default three working days BACS helps a lot.
Furthermore, since I started my DB pension my drawdown tax code no longer has any personal allowance – so I have no need now to worry about the apportionment of that to my drawdown.
I still choose to take my ad hoc annual drawdown towards the end of the tax year primarily for the reasons @Naeclue gives at #29.
Giving yourself some headroom/breathing space vs execution timelines is generally a good strategy.
As usual, the devil is in the details and is very scenario dependent too.
To steal somebody else’s words:
“I can imagine some of my younger colleagues from the old workplace being flummoxed when they come to retire and discover getting the cash out of a SIPP isn’t just like a bank account where they can do it all on a phone app.”
Some further related – and in places somewhat detailed – chatter (including those stolen words, the possibility of using your personal tax account, UFPLS, unusual things that can go wrong, interaction between different systems in play, etc) is given at https://simplelivingsomerset.wordpress.com/2024/01/11/mustelids-mulling-a-new-year-at-megalithic-sites/
Thanks – a timely article for me as I have just started my SIPP drawdown. I wanted to regularly draw down cash from dividends that build up in the SIPP without selling funds down. The dividends had built to an amount making it worth starting to figure out the process.
I think one aspect of this process is how it works with individual SIPP brokers. I wanted to do UFPLS but with HL I discovered it is easier to do Phased / Partial Drawdown as it can all be done online. So I went the partial drawdown route.
The way it worked with HL was I chose a fixed amount to “crystallise” consisting of a cash amount and the complete holding of CSH2 ETF where I had “parked” some cash making sure there was enough cash to pay out the tax free amount. They then paid out the TF cash to my bank and moved the ETF holding and remaining cash into a new opened drawdown account. So I now have a SIPP with the uncrystallised funds and a “SIPP Income Drawdown” account from which I can take income.
I just had one wrinkle with the online application. For the application it is a fixed £ amount decided when you apply. My chosen ETF had increased in value so it stalled with a secure message asking how I wanted to handle this. They can’t make the decision for you – I contacted them and said to reduce the cash amount to be crystallised since a unit of CSH2 ETF is currently over £1000. It was all sorted within an hour after my call to them and TF cash arrived a few days later. This does rather make the online application complicated when choosing ETF funds to move into drawdown, the valuation will most always change! Next time I will just choose cash to move to into drawdown (as per @Ermine on a recent SLIS blog and comments thread). After this was all set up HL sent a secure message with the details and the % of lifetime allowance used up.
With HL there is no drawdown charge but the SIPP drawdown account will attract an additional 0.45% platform fee for any funds held in it (capped at £200 for ETFs etc).
Next steps are to do further online drawdown applications for the dividend cash each quarter and withdraw income from the drawdown account – ad-hoc income drawdowns can be done online or regular income payments can be set up. HL have an emergency tax calculator for income withdrawals here: https://www.hl.co.uk/retirement/preparing/tax-matters/emergency-calculator – this suggests if I take £1047 of income no tax will be deducted. I will start with that early next month.
It might be worth pointing out that an advantage of UFPLS / Phased Drawdown compared to crystallising the whole pension pot is the potential to get more TF cash out of it – because hopefully the uncrystallised funds can increase in value. Once you’ve crystallised funds into a drawdown account (or similar) the fund growth is all taxable income.
@Matt (#46):
Re compo: good to know, and I agree.
If you are trying to not just get the drawdown out before the end of the tax year but also re-invest the net proceeds in an ISA then IMO it becomes a bit more complex; as the ISA allowance is use it or lose it.
All the strategies I know for managing this risk require (albeit temporary) additional cash.
As I say, devil is in the details and somewhat scenario dependent too!
@JCB
(Just my opinion) My pension is over the old LTA – and indeed probably over most of the numbers discussed for it’s reintroduction at a different level. It’s too late for me to retrain as a Doctor or a Judge. If I was over 55 I would take all of my tax-free lump sum (£268,275) before the election – on the basis that this just reduces my political risk a bit. Who knows what the new rules might be? I’m hoping that the election is late enough, and the process of working out what to do about the LTA takes long enough, that I get to 55 and get to do this anyway.
@Finimus — if you withdrew all of your tax-free lump sum (£268,275), then according to @BillD’s post (above), any fund growth from the £804,825 that would be crystallised in the process would be taxable. Doesn’t sound ideal!
@Wodger #52 I should have said that the crystallised funds + growth in the drawdown account are only taxable when taken out as income. So it’s not an immediate tax problem. If the £268k TFC allowance is used up it doesn’t make any difference for @Finumus I think?
Best and clearest summary I have read .
One question. Assuming pot is with one of the big platforms, when crystallising and transfering balance to flexible drawdown would the underlying investments be transferred or are they sold and bought back similar to bed and ISA?
My self and Mrs Hari have SIPPs , we have drawn tax free cash from both and have subsequently made smaller contributions, up to the level of £3,600 gross, that have not been crystallised.
HL and interactive investor treat this situation in a very different manor.
HL regard it as 2 separate accounts , one crystallised and one uncrystallised, each having separate account fees but independent portfolios.
II regard it as one portfolio but with a % of the account being uncrystallised / crystallised
With ii his is cheaper as one set of account fees but the investments are fungible, intermingled, rather like a tank of petrol, whilst HL is like having a main and reserve fuel tank.
With HL you might maintain an equity portfolio in the uncrystallised and bonds in the crystallised, potentially growing the remaining tax free cash amount more.
It’s worth being aware how your provider deals with this situation if it applies to you.
Personally I prefer the ii approach ,( lower fees)
@Bill
AJ Bell keep the underlying investments as one portfolio in a SIPP they designate an amount as crystalised and as uncrystalised.
I’m in the process of doing my first part crystalisation under flexible drawdown. The tax free part is being paid out to me. The taxable part is staying in my SIPP untouched for now. I’m not sure exactly how they keep track of two separate pots but I’m pleased that I don’t have to manage them as separate accounts.
@Bill #54
I’m with ii and they say: “We use a notional split of the assets rather than a physical one. This is the most common approach amongst SIPP providers. We wouldn’t classify any cash/asset as being uncrystallised or crystallised.”
HTH
@old-eyes (#42):
Re carry forward, see: https://www.ii.co.uk/pensions/contributions/carry-forward-rule#:~:text=You%20can%20only%20carry%20forward,%2D22%20and%202022%2D23.
and note all the rules that apply.
I think this means that opening a new SIPP this tax year paying in £1k before the end of the tax year would mean that next tax year you could pay in £119k of earnings! Again, just some random thought from a bloke on the ‘net.
@old_eyes:
p.s. given your foreseen pension income [in 24/25] some tapering may be applied to the standard 60k annual pension allowance in that tax year
@Bill, for Hargreaves Lansdown at least the designated securities and cash are transferred to a flexi access drawdown account when you crystallise. As mentioned by others, not all platforms move assets to a separate drawdown account in any case, so there would be no need to sell.
I take a UFPLS each January, near my birthday. This year I completed form P55 (took 5 minutes for me) and received my refund 22 days later. No big deal.
@Naeclue I think it would be easier to follow as separate accounts, and that’s what I was expecting.
OTOH I like being able to manage the SIPP investments as one and not having to allocate investments across two accounts.
My AJ Bell SIPP dashboard shows me 3 numbers – total SIPP value, amount I have not accessed, amount I have accessed (the crystalised amount left in the SIPP after the cash free amount has been paid out). They told me that all three numbers get updated as investment values change. I don’t know how they calculate this, and they couldn’t explain on an online chat.
@PC, @Naeclue, @Bill, @Hariseldon, etc
Woh, I actually managed (albeit inadvertently) to dodge a whole additional layer of complexity wrt drawdown.
Primarily to manage my LTA exposure (remember that?), I fully crystallised my DC/SIPP in one go and took the full [25%] PCLS; the remainder was moved into a [flexible] drawdown account.
My DC was an employer scheme and OOI the PCLS was paid from the original DC scheme before the balance was transferred [as cash – but was properly reconciled (at the providers risk) as if it had been in specie!] to the providers drawdown account type – but on the same discounted fees, etc. Also turned out the providers drawdown scheme provided access to many more funds, etc than the old employers scheme.
As you can probably imagine, none of the nitty gritty details of this transfer were very clear up front! I worked them out retrospectively from the transaction records of the various accounts, and had them subsequently confirmed – although that took quite some effort and time.
May also be worth noting that at the point of transfer there was no longer any visible link to the former employer! However, it seemingly has not actually disappeared as I have benefited from further fee reductions negotiated by my erstwhile employer.
@PC, I am not surprised they could not explain this on the phone as it is not straightforward. For a start, you would also need to keep track of the amount of tax free cash taken as this is capped. I am surprised that is not shown in your dashboard as well.
Off the top of my head, here is conceptually how they might keep track of things. The dashboard numbers change due to 3 main events. Crystallisation events, change in value of portfolio securities (and income) and withdrawal of cash from crystallised funds.
If
T = Total account value
C = Crystallised amount after TFC taken
F = Tax free cash taken
U = Amount not accessed
Initially U = T, C=0, F=0
1) Crystallisation event, amount x crystallised
F = F + x/4
C = C + x – x/4
T = T – x
U = U – x
2) Portfolio value changes by x
C = C + C*x/T
U = U + U*x/T
T = T + x
3) Drawdown from crystallised funds amount x
C = C – x
T = T – x
In reality the crystallisation event is more complicated as the tax free cash is capped, you may for some reason choose not to take it all and historically there may have been LTA charges. UFPLS can be thought of as event 1 followed immediately by event 3. There may be other events of course, such as annuity purchase (event 3) or transfer in/out from/to other schemes.
@Al Cam, we fully crystallised as soon as we could after we reached 55, but that was because the LTA was looming. Full crystallisation certainly simplified things as well.
With respect to the new rules, there is no longer a reason to crystallise to avoid LTA charges, but someone still might want to do that if they are over, or close to their old LTA. The tax free PCLS is limited to 25% of the fund value, but is also capped, so if you are over your old LTA the proportion of funds that can be accessed tax free is reduced below 25%. The bigger the portfolio, the lower the proportion of tax free PCLS.
A potential downside of crystallising early is having the PCLS cash outside the pension tax shelter. This can be a pain if you are intending to invest it, as we were, as the unsheltered income generated becomes taxable and a significant CGT liability can build up.
@ naeclue
Yes I guess that’s what they do and yes I’m surprised they don’t show how much tax free cash I’ve taken, except in the cash statement.
It’s not clear to me how I’ll work out how much tax free cash is still left to take. The value of the uncrystalised amount is constantly changing, so 25% of it is constantly changing, although as you say there is a maximum limit which won’t change.
Second Al Cam’s mention of using BR code…I called hmrc to check that was against my Fidelity drawdown and indeed BR against my part time job…as main allowance consumed… just…by a db pension. With benefit of hindsight I wished I hadn’t crystallised 75% of my SIPP…I can’t recall justification for the cash… better to have a single annual UFPLS …if I could have another go!
@PC, it is several years since we crystallised, but from what I remember it did take a few weeks and the amount of tax free cash was subject to fluctuation throughout that period. If your pension is such that you are likely to be near the tax free cash limit it is probably best you keep track of the amount you have taken if AJ Bell hide that number away. If you get close to the limit you might want to consider full crystallisation. It is not clear cut whether fully crystallising is worthwhile though as it depends on personal circumstances.
@SemiPassive (43), as DavidV (47) said, we have a massive discussion about penions with me sharing my experiences of UFPLS drawdown over at @Ermine’s place in one of his posts, here:
https://simplelivingsomerset.wordpress.com/2024/01/11/mustelids-mulling-a-new-year-at-megalithic-sites/
I won’t repeat all that here, it was too long a discussion! Well worth a read though. (Did it inspire this monevator post??)
There is one extra thing I discovered that I will point out though: the 3 small pots ‘trick’ which Hargreaves Lansdown can do.
Basically they moved £10,000 from my SIPP into 3 separate small pots. (£30,000 total).
You can then draw down each of these small pots individually straight away without triggering the MPAA.
This allowed me to keep the option of returning to paid pensionable work/definitely FIRE-ing for an extra 18 months before I did a normal (non-small pot) UFPLS and triggered the MPAA.
Seems this could help you?
@Naeclue (#65):
I certainly never thought that the LTA would ever disappear. However, as I mentioned above, I am convinced that the “IHT features” of SIPPs (possibly enhanced IMO by abolition of the LTA) is not the intended path.
I just wonder if there is a sting in the tail still to come?
@Al Cam, I agree with you about the IHT features of DC pensions being under threat. For an acquisitive chancellor, it would be such an easy thing to levy a death charge, or extend IHT to pension funds. Trusts are of course subject to decennial IHT charges, so the idea that pensions should be immune to IHT because the money is held in Trust doesn’t really stand up to scrutiny.
This is one of the reasons we have decided to start drawing from our SIPPs again. Regular gifts from income are still IHT exempt.
@Naeclue:
Interesting to hear that you have changed course a bit and are presumably opting for more gifting whilst living?
All this stuff really is over complicated and very situation dependent. Which probably does not bode well for any of us as we get ever older!
My personal take is that having abolished the LTA, such a chancellor could now introduce something along the lines of US RMD’s!
@Al Cam, yes I guess RMDs may be a possibility instead of or as well as a death charge. The advantage RMDs would offer to the government would be more immediately taxable income, which is likely to be attractive to a future chancellor.
The IHT mitigation strategy now involves more gifting. As I think I previously mentioned as well, giving to charities will now be done mostly through the gifting of shares instead of Gift Aid, to avoid CGT on share disposal.
@AlCam (#58, #59).
Thanks for taking so much interest in my slightly unusual situation. Yes I had spotted that you have to have an active SIPP in order to carry forward.
I was thinking of using the pension as a tax efficient way of taking money out of my business as it begins to slow down. So carry forward less of an issue.
@old_eyes (#74):
Having recently read your FIRE side story, I was somewhat intrigued by your initial question and sort of followed my nose. I would imagine you have quite a few options/paths to consider and some very specific objectives to tackle too. Personally, I would not rely on any “IHT features” of SIPP’s – but that is just my view. In any case, I’m sure you will work it all out.
Wonderfully relevant article to those of us of a certain age, and some very useful comments as well.
I FIRE’d the best part of a year ago and recently crystallised my pension pot with one provider. The process went through relatively smoothly but a mildly annoying little quirk that only became apparent to me after the transfer completed was that any pending dividend or interest payments scheduled on the holdings at the time of transfer got paid back into the previously emptied uncrystallised pot, thus i didn’t actually achieve the 100% complete transfer i’d been seeking. No big deal on the scale of things, but another admin item to clean up at some point. In hindsight, better timing on my part and not holding any interest bearing cash investments might have avoided this little inconvenience.
Interesting reading about the different providers way of doing things. Anyone experience of how Fidelity do things and the speed?
My birthday is 30march so I’m interested to know whether in a few years I’d squeeze a years worth of tax free out for my first year at age 55 with less than a week to the new tax year, and then another years worth out a few days after the 5th april
@Al Cam (72) @Naeclue (73) The introduction of RMDs here is my biggest fear. I see in the US they have just raised the age it applies, but I’m old enough definitely to be in the danger zone. If introduced here at US-levels, it would totally scupper my efforts to avoid being an HR taxpayer.
Wow there are a lot of comments here already, I’m definitely late to the party! I have a few observations, if I may…
@TA “For every £1 you take in tax-free cash, you have six months to decide what to do with the other, potentially taxable £3” I’m not sure where this “six months” has come from, but no pension provider would allow this. They need to know immediately what to do with the residual crystallised funds to send it to the right place. They wouldn’t hold the cash in a suspense account for 6 months.
It was a little potentially misleading to finish one paragraph with UFPLS (with no explanation of it) right before 2 paragraphs stating that phasing doesn’t trigger the MPAA. As some comments above have stated, an UFPLS is always 25% tax free cash and 75% taxable at the marginal rate each time. It also always triggers the MPAA because of that flexible taxable element.
Your “Obscure exception 1” isn’t correct, the benefits are tax free from uncrystallised funds paid to the beneficiary. Unless you meant they’re not paid until 2 years after the death, which would be a duplicate of obscure exception 2.
Also, for “Another obscure exception – number 3” the legislation was released earlier this month, we now know exactly how it will be taxed post-legislation changes from April. Unfortunate timing of this article, maybe?
There is going to be a Lump Sum Death Benefit Allowance (LSDBA) which will remain tax free if death before age 75, anything over this will be taxed at the beneficiary’s marginal tax rate. This LSDBA is the same as the current Standard Lifetime Allowance of £1,073,100. There are also rules around this being reduced if anyone takes their PCLS pre-5th April, or that known as the Lump Sum Allowance (LSA) post-6th April. This article explains the new LSA and LSDBA rules rather better than I can here: https://www.ftadviser.com/pensions/2024/02/06/transitional-tax-free-amount-certificate-when-could-it-be-useful/?page=3. Including the transitional certificate for anyone who will suddenly be entitled to more tax free cash from April 2024 because they didn’t actually draw the full 25% before then; such as when crystallising DB pensions. Definitely worth a read; especially for those with automated monthly phasing/UFPLS because the first one in the new tax year will mean you can’t apply for the extra LSA.
For the many trying to time one annual drawdown to mitigate the Month 1 emergency tax rate, some pension providers have set their deadlines as early as the first week or two of March to ensure it’s done in the same tax year. Or try to ensure, as others have pointed out.
@JonathanH #16 Small pots do not count towards the tax free cash limit, but you need to have some allowance available in order to draw the small pots in the first place.
@Jibber #17 Defined Benefit income doesn’t trigger the MPAA or impact the Annual Allowance in any other way.
@old_eyes and @Al Cam #various You do not need an active SIPP to use carry forward. You just had to be a registered member of a pension scheme in the last 3 tax years from which you’re wanting to carry forward. A DB scheme counts as per the tax manual (which I read regularly for my job, sadly!) https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm025400 It would be restricted by the amount of gross relevant UK earnings you have in the tax year you want to do it, though. Also, I really enjoyed your FIRE-side chat last week 😀
@SemiPassive #43 and @DavidV #47 A lot of personal pension providers now allow monthly UFPLS, but you would need to ask them directly if their system can cope with it.
@PC #66 Indeed the maximum limit on your tax free cash will not change, if you don’t have any LTA Protections currently (noting to everyone that the 2016 ones can still be applied for until April 2025, if you’re eligible), then your maximum total will be £268,275 minus the actual monetary tax free cash you’ve already withdrawn.
I think that was everyone, sorry it is such a long comment!
@Planalyst(#79):
Thanks for your input re need,or otherwise, for an “active SIPP” to use carry forward.
I did wonder if DB alone would suffice, hence my use of “I think” at #58.
The third bullet point in the ii link I provided in the same comment, that starts “Contributed ..” is, at best, a tad confusing. One could read this as meaning some contributions in that three year period are required – in which case, being the beneficiary of DB schemes [for that period] would not cut it.
Also, your link to the HMRC manual IMO does not explicitly cover public sector schemes and is possibly unclear about the situation if you are a member of a private sector DB scheme that has been fully bought out by an insurer and you are therefore the beneficiary of an annuity.
Obviously, the best/easiest/cheapest outcome is if DB membership alone cuts the mustard – but I trust you can see why I am not sure if this is the case?
@Planalyst
Yes that’s the way to think of it – the amount of tax free I still have to take will simply be 25% of the uncrystalised part of my SIPP (which AJ Bell shows as a separate number) .. up to a limit, in my case of 25% of 2016 fixed protection = £312,500.
(Unless I’m missing something)
@Planalyst (#79) – “You do not need an active SIPP to use carry forward. You just had to be a registered member of a pension scheme in the last 3 tax years from which you’re wanting to carry forward. A DB scheme counts as per the tax manual (which I read regularly for my job, sadly!)”
Thanks for the correction. I am a beneficiary of a DB scheme (and so therefore a member), but have not contributed in last three years. However, I do not intend to take advantage of the carry forward, as I will be contributing from my business and There is not a huge amount I could pull out of my company in a year without compromising ongoing activity. Even if Labour instantly reverse all the Tory changes to LTA and what have you, I can at least move some money into a useful place.
@AlCam (#75) “Personally, I would not rely on any “IHT features” of SIPP’s – but that is just my view.”
I think I agree, but this is not about IHT issues (as there is none between spouses), but backfilling some of the gap in my wife’s income if I die first. Paying into a SIPP from my business is better overall from a tax perspective (as I understand it) than taking salary or dividends and putting it into an ISA. I’ll have to run the sums again.
@DavidV (#78):
I understand your concern.
However, as things stand it is just a what if. Albeit one that could be attractive to HMG for the reasons @Naeclue gives with possibly OK optics too (ie why not tap wealthy pensioners some of whom have been ‘dodging’ income tax, IHT, etc).
If it came to pass, the impact would probably depend on the finer details of the scheme, e.g. pensioners in the US get a slightly higher tax free allowance, etc.
When I pulled the plug seven and a bit years ago I had that tax objective too.
However, things have changed and it will now take something rather dramatic for me to not be a HR tax payer no later than when I draw my state pension. The direction of travel seems fairly clear, and the last budget IMO, in particular, moved the emphasis firmly in favour of employees vs retirees!
Interesting times!
Jam, DavidV and others, thanks for your input, I will have a look on Ermine’s blog when I get a spare few hours.
I have actually worked on some SIPP platforms and aware that some providers (far from just HL) split into pre and post crystallisation sub accounts (or accum and decum accounts as sometimes referred to), and some allow regular UFPLS transactions to be scheduled as well as one off ad hoc ones.
In fact if you only took UFPLS payments in their entirety, depending on provider, you might just keep an accum account as there would be nothing left from the UFPLS to transfer into and sit in a decum account.
But I haven’t worked on H-Ls platform so only have a perspective on what types of transaction they can (or can’t) handle as a pre 55 year old client.
Anyway I shall be enlightened after visiting Simple Living In Somerset 🙂
@ Jam – re: 3 small pot trick – it sounds like they took £30K from a single SIPP and then distributed that into 3 other accounts worth £10K each, enabling you to benefit from the small pots rule? Is that right? Sounds like a useful trick to have up your sleeve if so.
@ Planalyst – thank you very much for your excellent comments. I’ve updated the piece to take into account the new LSDBA clarity.
The six months element came from the government! Trust them not to know:
https://www.gov.uk/personal-pensions-your-rights/how-you-can-take-pension
“You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on.”
My description of UFPLS vs phased drawdown was intended to show that they are the same thing bar the two advantages for phased drawdown. That’s why I didn’t think it necessary to explain UFPLS separately – it’s already covered.
Re: obscure exception 1:
See the below and let me know if they have it wrong or I’ve misinterpreted:
https://techzone.abrdn.com/public/pensions/Tech-guide-DC-death
“Death before age 75
The payments can normally be paid tax free. However, payments from any uncrystallised funds will only be tax free if the funds are designated for drawdown within two years of the scheme administrator first knowing about the member’s death. This doesn’t apply to funds already crystallised.
The designation of uncrystallised funds outside the two year period will result in the payments being taxed as income on the recipient at their marginal rate.”
I think Jonathan is right that the small pots rule is a way to squeeze out extra tax-free cash:
https://adviser.royallondon.com/technical-central/pensions/benefit-options/Lump-sum-and-lump-sum-death-benefit-allowances-from-April-2024/
“Small lump sum payments (payments under £10,000) are not tested against either of the allowances.” [that is the LSA and the LSDBA]
HL put me on an emergency tax code for my first withdrawal 6 days before the end of the tax year.
@John B (86) Yes that is what I would expect. However, the whole point is that an emergency tax code taxes you on a month 1 basis. As there is only one month remaining in the tax year, you should have had approximately the correct amount of tax deducted. Boltt explains it well in comment (15).
Great article but this bit below I don’t understand, or specifically the ISA bit. A couple of commenters said they also do this.
“..However a better way for many people is to periodically take tax-free cash in chunks. For example, in amounts that don’t exceed your annual ISA allowance, so you can then tuck the cash away in an ISA where it can continue to grow tax-free..”
If you don’t need the SIPP money now why withdraw it and stick it in an ISA? This can’t be about asset allocation right, as you pretty much have access to same assets in a SIPP and an ISA. There is no tax benefit in doing this is there? You are basically moving your tax free lump from a pension to an ISA. why bother?
@John Michael Simpson – my approach given I reach 55 this year is to take £80K each year from my uncrystallised funds while still working. The tax free element (£20K) will supplement my existing ISA. My thinking is to drawdown from the ISA once I have given up work to bridge the gap until the state pension. The key is that you can drawdown £16,760 from your remaining uncrystallised funds without paying any tax (£12,570 personal allowance + 25% tax free element). Drawing down from the ISA will supplement the £16,760 and would result in tax free income. This obviously all changes once the state pension kicks in as this would more than use up the personal allowance. I think I have articulated all this correctly!
Very good paper here by a pension provider. Page 10 in particular shows examples of taxation applied depending upon how you have expressed your desired frequency of payments throughout the tax year: https://www.quilter.com/siteassets/documents/platform/guides-and-brochures/18784-a-guide-to-income-tax-and-your-pension.pdf
@Gibbo thanks for response. Isn’t it the same though if you just leave your money in your pension until the first year you stop work.
At the point, you work out how much you need on top of the tax free 16760 that year, say you need another 10K so you withdraw 10K tax free from the pension (crystalizing 30K in the process) and drawdown 16760. You get the 26760 tax free same as if you had previously moved it into an ISA.
@ John – The main advantage is to head off adverse tax changes to pensions. If the rules change, you might have a year to get your tax-free cash out. But you may have many years worth of ISA capacity to deal with. It may be best to take it out at your own pace and on your own terms.
You may also be close to your lifetime limit. Take out the tax-free cash, pop it in an ISA, and it’ll grow tax-free. But growth of that ‘25%’ in your SIPP will not be tax free beyond £268,275. Not a problem I expect to face, mind you.
That said, ISA savings can be a liability in certain situations e.g. if you’re being means tested for social care. Or if you’d like your assets to be inherited by a non-spouse.
So I’d think about the risks you’re most exposed to.
@Tricky (90) I’ve not yet studied it in detail, but that looks like a very useful resource. Thank you.
@The Accumulator (#85). Yes, that is it exactly and it was very useful indeed.
I was lucky to spot this in the small print of HL’s terms and conditions before I did a non-smallpot withdrawal which would have triggered the MPAA.
@David (#93):
I agree – shame I did not know about this paper years ago.
I think there is a typo on page 11, re month 11 cumulative: IMO it should state 91.6% and not 96.1%
@JohnB (86) I take back what I said in my comment (87). Apologies.
Although I still would have expected H-L to use an emergency/month 1 tax code in the absence of a code from HMRC, I now realise after reading the paper linked in @Tricky’s comment (90) that this will indeed result in more tax being deducted than is owed. Boltt’s calculations in (15) apply when a normal cumulative tax code has been issued by HMRC.
@TA My better understanding of the emergency tax situation after reading the paper linked by @Tricky (90) leads me to conclude that my comment (4) is misleading.
@Al Cam (95) Yes I agree that on page 11 96.1% should be 91.6%. As you see from my above two replies I have already learned much from the paper!
@Accumulator – thanks for explaining. Makes sense.
@ Tricky – thank you very much for linking to the Quilter – the clearest explanation of the tax situation I’ve read.
@ David V – thank you for updating – yes, I think you’re right it seems to all depend on whether you have an ‘Month 1’ tax code or are being taxed on a ‘cumulative basis’. If you’re taxed on a Month 1 basis then it doesn’t matter if, say, you withdraw your money in March, your income will still be scaled by 12. The trick is to get on to a cumulative basis tax code (presumably by agreeing a regular income withdrawal period with your pension provider and getting the first emergency tax code payment out of the way) and then you should be taxed relatively smoothly. Would you agree?
It seems like any ad hoc payment will always be taxed on a Month 1 basis which is another strike against UFPLS (due to the tax hassle factor).
re Tax and timing UFPLUS withdrawls.
A small ufplus at the end of the year also refunded the excessive tax on one at the start. It’s hard to know how much personal tax allowance would be available so a late year UFPLUS can sweep that up too.
@DavidV, they did take eye-watering levels of tax, which I got back via an early (for me) tax return.
@miner2049er with a 17 March birthday coinciding with the HL payment cutoff, I had a huge battle to get them to take an instruction in the weeks before for action on that date “but you can’t tell us in advance, you’re not 55 yet”. For your birthdate, I think the chances are very slim.
The big question this year is what changes if you crystalise either side of the tax year end. Just what record keeping re LTA is being unravelled.
@JohnB (#100):
I submitted my tax return online on the 6th of April following my first ad-hoc drawdown. The refund was in my bank account less than two weeks later. FWIW, I usually do my tax return the following January, but for the amount I was over-taxed on that payment I was keen to get it back soonest.
The following years I returned to January [tax return] submission as the cumulative issue is relatively small beer if you take any ad-hoc drawdown towards the end of the tax year.
If you subsequently get a drawdown tax code that includes no tax free allowance (e.g. BR) then the whole things simplifies considerably.
Interesting story re your DoB; mine falls the other side of the tax year boundary so I have never experienced or even heard about that issue before!
@TA (98) I must emphasise that I have no practical experience yet of drawdown in any of its flavours, so I am just speculating here. My revised opinion after reading the Quilter paper that if you set up flexible drawdown with regular, say monthly, withdrawals the emergency code is a non-issue as the tax will soon normalise once the proper code is issued. For ad hoc withdrawals it would seem best to make a small withdrawal to start to trigger HMRC to issue a code. Once this is in place a larger withdrawal can be made, preferably as late in the tax year as possible. Extrapolating from Martin’s (99) experience it seems this strategy could also work for ad hoc UFPLS withdrawals.
Just as a follow up to (mainly) DavidV – thanks for your post #4 and the likes of coyrls, Boltt and Al Cam – I read the first 30 posts of these Comments (as they were at the time), forgot about things and then this morning asked my SIPP provider (HL) if I could make my first transfer of 2023-24 for £12,570 and, if I did so > 6th March, would I get the full £12,570 and not subject to tax. Apologies if I had misunderstood any earlier postings.
The reply was that I would be placed on HMRC’s emergency code (1257/LM1). It seems that the emergency tax code assumes the payment is made in April, the first month of the tax year regardless of which month is made.
Therefore, the code says you can receive £12,570 a year without deduction of tax, broken down over the year into 12 equal chunks. It means the first £1,048 (i.e. £12,570 divided by 12) of any taxable payment can be paid tax free; the next £3,142 will be taxed at 20% and the next £7,286 taxed at 40%. Any amount in excess of £11,476 would be taxed at 45%.
I would therefore be taxed £4,035. Not quite what I had in mind. Returning to these Comments this evening then I can see the Quilter paper (#90, thanks Tricky) and understand better now.
I assume I would be able to claim this back using the P55 form – and from earlier posts this sounds like it would be July time.
I did ask if I made a request for £100 now (before 6th March) and then £12,470 after 6th March would this avoid be taxed but received the feedback that they are not tax specialists and could not tell me which tax code HMRC would update them with following the first payment. They did confirm assuming I have the full personal allowance (£12,570) then I can take this full amount without taxation.
I think I may simply put 2023-24 aside (lesson learnt: should have been more organised & earlier in the year) & set up a regular monthly request for 2024-25 for £12,570/12 i.e. £1047.50 a month starting in April 24
FWIW, I agree with DavidV (#102)
@ Slow Hare – thank you for sharing. Your experience exactly mirrors the description provided in the Quilter paper.
@ Martin, David V and Al Cam – good point. Quilter say in their paper that they can only facilitate tax refunds if you make more than one withdrawal in the tax year. Otherwise it’s off to HMRC with you. That said, most people here are reporting timely refunds which is encouraging.
Thanks for a great article. Just what I need as I am about to hit 55 and am considering my options.
However, I am a bit confused about “You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on.” from https://www.gov.uk/personal-pensions-your-rights/how-you-can-take-pension .
If I take a 25% lump sum I thought I could leave the rest (chrystalised) and only take money from this pot some time in the future which could be a few years out. What am I missing?
The “taking” comment should be “decide what to do with it”, and the option you want is “investing it to get a regular, adjustable income (sometimes known as ‘flexi-access drawdown’)”, except you invest it and don’t take the income
I read that dependants/nominees flexi-access drawdown does not incur income tax following death before 75, even if above ILSADB.
Do others agree and is this just a straight win over calling it a Lump Sum and having to pay income tax? Why would anyone take Lump Sum option?
Also not sure how they are going to deal with ILSADB when there are say 4 nominees some of whom choose Lump Sum and some don’t, and different parts falling below/above ILSADB.
There is much coverage of accumulation & theoretical decumulation but very little of the practical, real world drawdown phase.
This thread has been great uncovering many questions. I find it odd that even talking to Customer Service about drawdown they have not mentioned some of the points raised above about their own processes!
Feels like re-inventing the wheel each time but one needs to know the correct questions to ask.
@ Tim C – you are correct. I’ve updated to clarify. Income and lump sum payments are treated differently if you exceed the lump sum and death benefits allowance.
Some schemes don’t allow beneficiary’s drawdown so I guess that’s one reason for lump sums (other than needing a lot of cash in a hurry and hang the tax consequences.)
You’d think that if you took beneficiary’s drawdown then you could just whack up the ‘income’ amount to withdraw the lot i.e. it’d be a lump sum payment by another name but with no tax unpleasantries. But perhaps they’re not that flexible?
The comments are racking up, so I’ll try to keep this one brief this time!
@Al Cam #80 A DB does suffice for the carry forward calculations, whether active/deferred/pensioner member, as per the HMRC manual link I added before. As for it having been through a buy out, an annuity deferred/pensioner member would still count.
@PC #81 You’re not missing anything 🙂
@TA #85 That 6 months window is a nice theory, shame it can’t work in practice!
Re: obscure exception 1. It is possible for a beneficiary to take a lump sum from an uncrystallised pension on the member’s death, it doesn’t have to be crystallised first to be paid as a death benefit.
Though, generally designating to a beneficiary’s drawdown is more tax efficient if the deceased was under 75, so it’s what I would expect most beneficiaries to do, rather than a lump sum.
The small pots rule does technically allow for slightly more tax free cash. However, the rule to draw it is still that you have to have some LTA available now, and some LSA available after April. Therefore, if you want to take a pension as a small pot, you can’t do it if you have previously fully crystallised 100% of LTA or drawn 100% of the LSA. (This is the reason I delayed my reply… I watched yet another webinar on the new LSA/LSDBA rules this week and asked the presenter about this directly so I could reply with confidence on the new legislation!)
@TBC #106 Don’t worry about the 6 months thing, it’s not done in practice. You can leave the rest designated in a crystallised pension plan in perpetuity, if you like!
@TA #110 You beat me to answering Tim C!
And, with an under-75 death, you can indeed designate to beneficiary’s drawdown and then take the lot later as a lump sum completely tax free. There isn’t anything stopping the beneficiary, apart from potentially the pension scheme’s system limitations. Though, I would imagine most would facilitate lump sums, if they can cope with drawdown in the first place.
@ Planalyst – Really appreciate you taking the time to come back with these additional clarifications. Will update the piece when I get a mo. Dropped that six month thing based on your experience. As you say, nice in theory…
Thank you TA
So if I understand it, on that example of phased drawdown, out of the 30k you will have £12570 tax free. In essence getting 12.5k + 10k tax free and only paying tax on 17k ?
@ John – yes, that’s spot on.
Excellent article. Thanks @TA.
The sheer complexity of the pension rules and the uncertainty over how exactly the LTA will be reintroduced under Labour, and what will happen with the AA, is mind bending.
I don’t normally read the DT (way to the right of my politics), but IMO they’ve nailed the absurdity of the pension rules and the possible future changes to them in this article today:
https://www.telegraph.co.uk/money/pensions/private-pensions/three-new-pension-allowances-you-need-to-know-about/
I felt I was loosing the will to the live when I got to the bit about the bodged abolition of the LTA and the rules on TTFACs (although, thankfully, it’s not something I’ve had to navigate, at least yet).
I discovered from a conversation with Hargreaves Lansdown that they can pay out through the Small Pots ‘scheme’ even if your SIPP is way over £10k in value. When I read your article I assumed I had to have an entirely separate pension fund up to the value of £10k to benefit from this.
But somehow HL can work their magic and create this small pot out of your main SIPP. Hurrah!
The big plus of Small Pots for me is not triggering the MPAA, as I hope to have a lump sum in a couple of years to pay in to my pension. Plus, to take out £10k in tax free cash would mean putting a further 30k into drawdown and my £10k wouldn’t benefit from future growth, so I’ve effectively crystallised some of my tax free cash.
Small pots doesn’t do that.
Does this make any sense or have I got the wrong end of the stick?
@Colin Thames #116
I used the 3 small pots trick with Hargreaves Lansdown myself, see comment #69 above.
It is a very useful option and enabled me to draw out £30,000 from my main SIPP without triggering the MPAA.
Thanks @Jam. Good to know it works.
@The Accumulator – it might be helpful to change the line “The small pots rule allows you to empty three defined contribution pensions” to add, “or your SIPP provider may create up to three ‘sub-pots’ to take advantage of this rule” ? I had completely missed the significance of this idea, as the existing line suggests the pensions have to be separate (and small!).
Good to know that HL offers this. Anyone know if ii and AJ Bell offer it too?
Fabulously useful article and comments thread!
What an absolutely ludicrous amount of time, money and talent is being continually squandered implementing, advising, understanding and complying with all these absurdly complex rules…
A massive ongoing redirection of human talent and time away from wealth-generating productive activity into vast amounts of admin, compliance, calibration of income, calibration of withdrawals, etc.
There is no way that net-net this doesn’t amount to an overall loss to the nation’s wealth vs. the alternative of there being no allowances, and a simple lean system which incentivises people to be as productive as possible. What a shambles!