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Preparing for retirement: Finding a path to a flexible income and lower taxes

The Greybeard is exploring post-retirement money in modern Britain.

Here at Greybeard Towers, the economy has taken a turn for the worse. Like many other freelance writers and editors I know, I’ve seen a softening in the marketplace in which I sell my skills.

These things happen. Ten years ago – exactly ten years ago, as banks imploded, and stock markets plunged – the same thing happened.

Back then we had kids still living at home, and the last few thousand pounds of a mortgage to pay off. Today, my wife and I are far less encumbered with fixed outgoings. Nevertheless, the experience has been instructive.

Firstly, it’s been instructive in that I took a decision to cushion the hit to our lifestyle by withdrawing a monthly income of several hundred pounds from my ISA-sheltered share portfolio.

This was a weird sensation, and left me – no, leaves me – feeling oddly guilty. For the first time in decades, instead of reinvesting dividend income, I am withdrawing it, and spending it.

Somehow, it doesn’t – yet, anyway – feel right.

All change

The second instructive experience has been less angst-inducing, but is still challenging.

Namely, I have decided to accelerate my plans for retiring. Or, rather, semi-retiring. I hope to carry on working, but I’ll also be taking a pension income.

As readers with long memories may realise, this wasn’t the original game plan.

For years I have planned to retire at 70, gradually winding down as my seventieth birthday approached. And – to be blunt – probably carrying on doing a few simple commissions for long-standing clients, if such opportunities came along.

But having just turned 64, with the state pension two years away, it seemed sensible to consider taking income from my two SIPPs.

Former pension minister Steve Webb’s much-vaunted pension freedoms have not only made that easier, but also introduced new options such as UFPLS1 flexible drawdown.

Frankly, why not take advantage of these freedoms?

From strategy to tactics

Right from the outset, the broad strategy seemed clear:

  • Disregard the annuity option. Some form of cautious drawdown on my assets should leave an inheritance for the kids, as well as hold out the prospect of a growing income.
  • To this end, take the natural yield, rather than eat into capital. With tax-free ISA income from a share portfolio, some freelance earnings, other investment income, two state pensions, and my wife’s occupational pension, that would be ample.
  • Although (as I’ve written before) I’m attracted to the more flexible end of the new pension freedoms – and in particular, to UFPLS – it would be necessary to figure out some way of mitigating the effects of the £4,000 Money Purchase Annual Allowance (MPAA) limit, which would severely restrict my ability to shelter freelance earnings in a SIPP, away from the beady eye of the taxman. This wouldn’t be a problem with an annuity, or with drawdown (as long as I didn’t drawdown any income, just tax-free cash), but would be a problem with UFPLS.

All good stuff, but I was uncomfortably aware that it was very high-level stuff, as well. The practicalities would need thinking through, and organising. And I would need to be very careful about avoiding any hidden bear traps.

Plus, of course, there was a significant element of irrevocability. Once I’d triggered drawdown, for instance, there would be no turning back.

A summer of careful reading and researching beckoned.

Here’s what I found, along the way.

A route to follow

One immediate realisation was that multiple pension providers offer an abundance of free literature, readily downloadable. I devoured stacks of it.

I could also send off for pension projections and illustrations – including my personal state pension forecast of £148.88 a week, or £7,768.35 a year, which was curiously empowering.

The government’s Pensions Advisory Service and Pension Wise websites also contain a wealth of useful information.

Not all the advice I obtained was through the written word. Determined to do things ‘properly’, I took up my option of a free pension consultation with the government’s Pension Wise service, booking a Pension Wise appointment, which duly happened in early August.

The adviser, named Colin, was incredibly knowledgeable, and we went the distance, going for the full hour. Well worth doing, and highly recommended.

Right from outset, it was clear that the inflexibility of traditional drawdown posed a challenge.

Essentially, I was turning on a tap, releasing a flood of income. Should the freelance market pick up, I’d face an awkward choice between turning down work or getting clobbered by higher-rate tax. Due to the MPAA rules – designed to clamp down on tax-rebate ‘recycling’ – once I’d sheltered £4,000 in a pension, any further earnings were taxable.

This in turn reinforced the attraction of UFPLS as an option.

While UFPLS is a form of drawdown, it’s a flexible form of drawdown. If the freelance market picks up and my earnings look to leave me exposed to a hefty higher-rate tax liability, I can simply turn the UFPLS income tap to the ‘off’ position. Like this I can maintain a level income, by using UFPLS as the balancing factor.

On the other hand, the initial plan of a monthly UFPLS income seems unrealistic. Providers do offer it, and apparently people do take it. But the paperwork seems disproportionate, with every UFPLS drawdown triggered by a completed UFPLS application form, and accompanied by an ensuing (and legally required) UFPLS illustration.

Being pragmatic, it probably makes sense to combine my two separate SIPPs into one, and going for three-monthly or six-monthly UFPLS payments, rather than monthly payments. The downside: to some extent, this will limit my ability to ‘flex’ income to avoid higher-rate tax.

Finally, the rules around the taxation of pensions after death seem unduly harsh. If I die after age 75, and my wife survives me, the remaining pension investments she will inherit are taxed as income. That’s not a good option for a sum that should amount to several hundred thousand pounds.

To avoid a massive tax hit – repeated again when the kids inherit it after my wife dies – it’s necessary to set up a dependents’ drawdown account, from which an income is taken.

More research is needed here, but at least I’ve got 11 years to undertake it.

Ready, steady… go?

So what have I done? Nothing, so far. But at least I know the broad outline of what I will do, when I push the button.

Our income, at the moment, is just about adequate without massive belt-tightening. (If you’re looking for a first-class writer and editor, get in touch…)

What have I learned? More than I thought I would.

Moving into retirement – and making the right choices – is a complicated business, unless one goes for the straightforward annuity option. I knew that already. Even so, I’m still surprised at the complexity of the choices I face.

The government, it seems to me, has brought into being a range of pension freedoms, but hasn’t invested the time and energy to provide a regulatory and tax framework to help retirees readily access those freedoms. That is regrettable.

Making the right retirement choice was difficult enough in the old ‘annuity versus drawdown’ environment. It’s tougher still, now.

Read all of The Greybeard’s previous posts on deaccumulation and retirement.

  1. Uncrystallised Funds Pension Lump Sum []

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{ 50 comments… add one }
  • 1 RobH October 9, 2018, 7:13 pm

    So great to have The Greybeard as a contributor, forging the way for those who are not so far behind him. Thank you once again. More de-accumulation, income generation etc articles please!

  • 2 Neverland October 9, 2018, 8:16 pm

    Its hardly surprising that the government has not bothered to to provide a regulatory and tax framework to help retirees readily access George Osborne’s legislation when:
    – they probably won’t survive another five years
    – there are lots of fees for financial advisers at stake

  • 3 2019er (formerly 2021er) October 9, 2018, 8:29 pm

    Great to see The Greybeard’s posts. For those of approaching retirement, invaluable insights. Circumstances and opportunity have combined to bring forward my planned retirement/semi-retirement by over two years. Suddenly, I find myself overly vexed by Osborne’s legislation, and even more vexed by what Hammond might do at the end of this month in terms of pension tax relief. Best laid plans etc.

  • 4 ermine October 9, 2018, 8:38 pm

    If I die after age 75, and my wife survives me, the remaining pension investments she will inherit are taxed as income. That’s not a good option for a sum that should amount to several hundred thousand pounds.

    I confess I’m struggling to drum up much sympathy for the conundrum. Unless there’s a very large age difference between you and your wife there’s probably a good argument for her older self taking it as income, and with a few hundred k she can suck up the tax and still afford a fair few cruises. Pensions are designed as a way of providing an income after you aren’t working, rather than an IHT dodge. That’s why you get the tax bung on the way in, remember…

    Kids.. ah, I recall innocent earlier times, when people expected ’em to make their own way in the world. I am sure I am out of kilter with the general sentiment on here, though I am perhaps not quite as hard line as our host.

  • 5 ermine October 9, 2018, 8:46 pm

    > repeated again when the kids inherit it after my wife dies

    Isn’t the usual advice here to bequeath the pension to your kids anyway, on the assumption that they are not earning much in the first part of their working lives, and/or this gives them a leg-up towards their own pension? They don’t have to be 55 to draw from the pension they inherited from you AFAIK, or they could leave it on ice and save themselves having to pay the equivalent into their own pensions if they have enough income for the extra income from your pension to shift them into higher tax rates.

  • 6 Willy October 9, 2018, 10:17 pm

    Does anyone know what happens in the following scenario? You have a pension pot of £400,000 and take £100,000 at 55 as the tax free cash with the balance going into drawdown. You leave the drawdown untouched for a few years and then decide to buy an annuity with £100,000 from the drawdown pot. The annuity will be added to your taxable income each year, but what is the tax position of the £100,000 used to buy it? Will HMRC see the £100,000 withdrawn and treat that as income for the year, so you are hit with a tax liability, or will it be exempt from tax as you’re buying an annuity (which itself will be taxed in future years)

  • 7 ermine October 9, 2018, 11:08 pm

    @Willy you do not pay take on the money used to buy the annuity, but you do pay tax on the annuity. Talk to pension wise to confirm, don’t rely on random punters on the Internet, even if they are the knowledgeable people on Monevator.

    This is definitely a time to consider taking financial advice, as the sort of annuity you describe is a regular annuity, but there is also a purchased life annuity, where some part of the annuity is deemed a return of capital, so the tax on the ‘income’ is lower because of the implicit return of capital. Under certain circumstances, an annuity that is paid directly to a CQC accredited care home is entirely free of income tax, though hopefully this is not an issue in your case 😉

    The annuity should, of course, be contingent on your age, but also on your lifestyle and/or medical history. Answering these questions right makes a big difference to your return on capital, I have seen this process done for a relative and the experience is like when I sat Modern Optics at university – I didn’t understand the questions, never mind knowing the answers. Paying for expertise is worth doing, and there probably aren’t enough years left ahead of her for the usual objections to IFA fees to add up enough to count.

  • 8 Willy October 9, 2018, 11:33 pm

    Ermine, thanks for the reply. I’m not even too near drawdown yet so an annuity is a fair way off even if I consider one at some point. Also reading of cases where someone takes 25% tax free cash, and HMRC not only decides to tax it but also treats it as though it will be a regular monthly salary and amends your tax code as appropriate. So you spend ages trying to get the tax back which they shouldn’t have taken in the first place.

  • 9 ermine October 9, 2018, 11:48 pm

    > Also reading of cases where someone takes 25% tax free cash, and HMRC not only decides to tax it but also treats it as though it will be a regular monthly salary and amends your tax code as appropriate.

    That’s rough, and most likely to be cock-up on the part of the SIPP provider, though operator error on the part of the punter can never be ruled out 😉

    When drawing an income after your lump sum, if you are the sort to draw out the annual amount in one go, you will find yourself on emergency tax (ie your first amount projected x12 as your annual income). You can either suck that up and claim the refund, which in my case has taken less than a month each time, or take out annual amount /12 in April which gets your tax code sent to your SIPP provider and then annual amount *11/12 the next month, which won’t be taxed at a nutty rate. HMRC need your first withdrawal and runs the projection on that, it seems.

  • 10 The Investor October 10, 2018, 9:13 am

    @ermine — Cheers for adding your insights here, this is all still some way from my own wheelhouse (although no longer in the distant lands of cars that can fly and holidays to Mars. 😉 )

  • 11 Brian Bennis October 10, 2018, 1:40 pm

    Whilst taking UFPLS triggers the Money Purchase Annual Allowance, it’s possible to avoid this with Flexi-Drawdown. If you select Flexi-Drawdown and you only take tax free cash and you don’t draw income, you retain the full Annual Allowance. By way of example, you have a £400k pension fund that is uncrystallised (ie you’ve taken no tax free cash). You need £10k in tax free cash. You crystallise £40k of your pension fund, of which £10k is paid to you as a tax free cash payment. The remaining £30k is now crystallised, meaning you can’t draw any further tax free cash from it. But if you don’t draw an income, you’re entitled to the full Annual Allowance. Having had your £10k, you have £390k left in your pension fund. £30k is crystallised. £360k is uncrystallised, on which you can draw further tax free cash (up to 25%) in full or part. You can invest your crystallised and uncrystallised parts of your pension in exactly the same way.

  • 12 YoungFIGuy October 10, 2018, 1:43 pm

    @Willy – I haven’t heard about the tax-free part of lump sums being incorrectly taxed, but it is common knowledge that lump sums, in general, are often taxed incorrectly. For example: https://www.moneywise.co.uk/news/2018-04-10/beware-emergency-tax-codes-pension-withdrawals

    Unfortunately, the PAYE tax-code system hasn’t been ‘updated’ to adequately deal with pension freedoms. The general guidance I give to people is to get all your ducks in a row BEFORE you take lump sums. Speak to your pension provider/adviser in advance, get the HMRC forms ready. With good preparation, you can get refunds quite quickly. With bad preparation, people wait over a year. Providers are fully aware of the problem, it reflects poorly on them, even if there is little they can do about it.

    You can find more detailed guidance, including the HMRC forms you may need here: https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

    [p.s. there are some little ‘tricks’ you can use, entirely legitimate, to avoid getting hit with the emergency tax code. But these are a little fiddly, and it’s best to talk to your adviser/provider.]

  • 13 Willy October 10, 2018, 8:19 pm

    YoungFIGuy, Thanks for the info.

  • 14 Vanguardfan October 10, 2018, 10:33 pm

    Thanks for this, always interested in decumulation musings.
    I’m afraid though that I disagree with your view of the death benefits on pensions. I think the tax treatment is very generous (and much more generous than in the pre pensions freedoms era). If you die before age 75, your beneficiaries pay NO tax at all on the inherited pension pot. After 75, yes it is subject to income tax, but only as it is withdrawn- and since pension funds are designed to provide income in later life, that seems entirely reasonable. And your kids won’t get ‘clobbered again’ – if your wife leaves the fund in drawdown, and doesn’t use it all, then they can inherit it and again only pay tax when they withdraw money.

    I agree with the poster above that phased drawdown is what you want to avoid the MPAA – crystallise enough such that the 25% tax free lump sum covers what you want to withdraw to spend, and then don’t withdraw from the drawdown fund until either it’s unavoidable or you don’t need the headroom in your annual allowance any more.

  • 15 Vanguardfan October 10, 2018, 10:46 pm

    Btw, I also agree that the freedoms have brought complexity. But I’m not sure what additional framework you think the government should provide? The tax rules are not, in my view, more complex than they need to be given the need to be similar across all options and to stick to the principle of taxing income on the way out, once the PCLS has been paid.
    And I have seen some of the offers from the mainstream pension providers for ‘pension income accounts’ and they look pretty user friendly (if rather more expensive than a DIY job through a SIPP, but that’s to be expected).
    I think the main difficulty for most people is the prospect of keeping money invested over the long term and trying to decide how much they can sustainably withdraw, and cope with investment uncertainty. At least with annuities you know what you’ve got coming in – and that counts for quite a lot I think. I think there is evidence from Australia that over caution is proving to be as big a problem as reckless over spending!
    I think, the govnt/regulatory bodies could do a lot more to create clear default pathways for drawdown, and promulgate simple ‘rules of thumb’ for withdrawals.

  • 16 YoungFIGuy October 10, 2018, 11:04 pm

    I agree with Vanguardfan r.e. tax treatment and the difficulty in determining a sustainable withdrawal under uncertainty.

  • 17 The English Investor October 10, 2018, 11:08 pm

    I find The Greybeard’s posts to be really interesting. As I’m nowhere close to reaching the pension age to start drawing from my pension pot, those are not topics that I master. Thanks for being such a trove of information on retirement and tax issues.

  • 18 E&G October 11, 2018, 7:22 am

    The purpose of state support for retirement (i.e. tax relief) is to enable people to provide a comfortable life for themselves in retirement and not burden the tax payer. The government have rightly taken steps to ensure that support isn’t abused by higher earners seeking to avoid tax and funding their lifestyles on the backs of taxes that are rightly due. So it looks like they have the regulatory framework just about right if it’s giving the author a conundrum.

  • 19 Drawdown-errrr October 11, 2018, 1:27 pm

    Good article and a lovely read but those of us taking drawdown income from a pension pot should be very careful – it seems the author has mixed up ‘UFPLS’ with ‘FAD (‘Flexi-Access Drawdown’).’ Whilst not wanting to be nit-picky the difference between the two is nuanced but crucial – i.e. taking UFPLS will indeed affect your Annual Allowance limit (MPAA) and also have implications on your pension Lifetime Allowance tax charge (LTA – yet more acronyms!) though FAD might not. This is a horribly complicated field and quite technical, and despite having a PhD (where you’d think I have the ability to research something) I still baulk at it! Brian Bennis is on the right lines though. Thus, before you drawdown any income, be sure to know what you’re doing/seek advice in case you trigger a set of circumstances that are irrevocable. Hope that helps.

  • 20 The Greybeard October 11, 2018, 2:28 pm

    The author certainly has not mixed-up UFPLS with Flexi-Access Drawdown! And the author also has a PhD. In any 1,200-word treatment of a topic like this, there is a limit to the amount of detail that it is possible to go into. The article talks mainly about an income from UFPLS because that was the option that appeals most, and as the preamble makes explicit, the idea was to explore its practicality, especially from an MPAA point of view. (LTA is not relevant in my case.) UFPLS is also arguably the most flexible of the new pension freedoms, with distinct advantages covered elsewhere in previous articles. So… concise, yes. Mixed-up, no.

  • 21 Drawdown-errrr October 11, 2018, 2:55 pm

    Jolly good – and apologies if i caused any offence.

  • 22 Brian Bennis October 11, 2018, 4:49 pm

    @Drawdown-errrr – “…Brian Bennis is on the right lines though.”
    Thanks. It is a complex area, but (spoiler alert) the sort of stuff we write about on SIPPclub. We also feature Monevator heavily, including in an article a couple of weeks ago (click my name above this comment and you’ll go straight to it, then read the big pink box). As MPAA is quite involved, I’ll write an article about it for next Monday’s newsletter, so (shameless plug), please sign up when you click my name above. Cheers!

  • 23 Cigano99 October 11, 2018, 4:58 pm

    Nice post and interesting comments on tax efficient de-accumulation strategies – I have always assumed that one of the reasons to consider UFPLS for SIPP withdrawals would be to potentially benefit from the 25% Tax Free on any subsequent growth/increase in value of the remaining uncrystallized investments which over a 20 years retirement would hopefully be significant, but i’m now wondering if i might have misunderstood that ? if part of the pot is deemed crystalized but remains invested and grows in value are you able to take 25% of the growth amount tax free and the rest at nominal rate when you eventually withdraw it ??
    Clearly lots to learn in this area, appreciate any further insights from Monevator readers who have experience in this area

  • 24 The Greybeard October 11, 2018, 5:21 pm

    @Cigano99: There’s coverage of UFPLS elsewhere on Monevator, but yes, the opportunity to benefit from future growth is a core attraction. The 25% tax-free is 25% of the crystallised amount. So UFPLS’ defining advantage as an income-taking strategy is that it serves to maximise the uncrystallised proportion of the overall SIPP, compared to traditional capped drawdown and flexi-access drawdown. There’s nothing whatsoever wrong with the suggestion of flexi-access drawdown, but that’s the downside. In the end, it’s horses for courses, I think: you make your choice based on what’s best for you. What doesn’t help, when trying to figure that out, is how complicated it has all become.

  • 25 Brian Bennis October 11, 2018, 5:26 pm

    @ Cigano99 – you can rest easy, as your original thought was correct.
    You’re entitled to draw 25% tax free cash from uncrystallised funds, even if you have crystallised part of your pension. If you scroll up to my first comment, numbered 11, you’ll see in my example that £360k is left in uncrystallised funds, enabling you to draw out £90k tax free. However, as the amount you draw is a percentage, should your fund value grow appreciably in the coming years, 25% could be much larger than £90k. By the same token, as fund values can fall as well as rise, if things go badly wrong and your fund value diminishes, you’ll end up with less tax free cash. Such is the uncertainty of drawdown.

  • 26 The Investor October 11, 2018, 6:33 pm

    @Brian — Thanks for contributing your knowledge. 🙂 You’re obviously always very welcome to keep the link under your name whenever you comment but please make that a one-time promotion in the comment itself.

    Nothing personal either way but we are always wary of the site comments becoming a promo/spam fest. Cheers!

  • 27 Brian Bennis October 11, 2018, 6:43 pm

    @The Investor – absolutely. We hate spam just like everyone else!

  • 28 MrOptimistic October 11, 2018, 8:01 pm

    Well having turned 65 last week this blog is very welcome so thank you. Whilst I was expecting a lot of paperwork it’s actually been a tsunami of the make your mind and reply in 10 days kind. Pensions freedom has brought a lot of options and what do options mean playmates? Yes, decisions. One shot, can’t change your mind kind. The GMP residue is especially interesting deal with 🙂

  • 29 dearieme October 11, 2018, 8:56 pm

    My wife is not earning at the moment so can contribute only £3,600 gross to her SIPP. She’s MPAA’d. I thought I might appoint her as one of the directors of my company. Instead of paying her a salary I would have the company contribute £4k p.a. to her SIPP. That’s legit, I take it?

  • 30 Drawdown-errrr October 11, 2018, 9:04 pm

    Greybeard – I’m not sure your comment in your post (no 24) is accurate – in it you say: “So UFPLS’ defining advantage as an income-taking strategy is that it serves to maximise the uncrystallised proportion of the overall SIPP, compared to…flexi-access drawdown.”

    I think both approaches crystallise exactly the same amount of your pension.

    (source: https://www.moneymarketing.co.uk/ufpls-vs-drawdown/ and https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/flexi-access-drawdown-vs-ufpls/).

  • 31 Brod October 12, 2018, 2:05 pm

    @ Drawdown-errrr – And now your second link has added small pots to the mix. Ho-hum. Which don’t trigger MPAA events so in the event you get a windfall, you could recycle it into your pension. But them you need to have earned income so that means… aaaaggghhh!!!!!

    Still, a minimum of 2 years away for me.

  • 32 ermine October 12, 2018, 3:20 pm

    @dearieme

    Instead of paying her a salary I would have the company contribute £4k p.a. to her SIPP. That’s legit, I take it?

    Yes, according to the FT, from the MPAA angle it is a third-party contribution.

    You’re working hard for an extra 20% of £400 p.a. though 😉 And exposing her to the liabilities of being a director, although I suppose if you are a director yourself your household is already exposed to that.

  • 33 Lawman October 12, 2018, 7:19 pm

    Greybeard: Well done. I started the same process a few years ago. The big benefit of UPFLS is that I leave my money to grow tax free; and draw only what I need and when. I find it easier to draw in March – just before 05/04 – to avoid the mess of having excessive income tax deducted.

    Of course the effective tax rate is 15%.

    On death, after age 75, your heirs can themselves do the same sort of draw down; but without the 25% tax free. Thus it is a great way of providing for your descendants; and free from IHT.

  • 34 Hari Seldon October 12, 2018, 10:39 pm

    There is something wrong when we have two PHD’s arguing about taking their pension, not much chance for the man on the Clapham omnibus….

  • 35 Grey lady October 13, 2018, 4:05 pm

    I have a stakeholder pension that I was contributing £300 a month which was made up to £3600 p.a. and declared as such on my self assessment tax return. Just realised now that for about 10 years I was a higher rate tax payer. Should I have received more than the £600 a year tax relief for those years?

  • 36 Lawman October 13, 2018, 5:18 pm

    Grey Lady No. 35:
    1. If you paid in £300 per month that is £3600 p.a. net to which HMRC adds £900 to give you £4,500.
    2. If you pay HR income tax on the top £4,500 of your income, you are entitled to an additional £900 tax rebate. Claim this via your tax return.

  • 37 Naeclue October 14, 2018, 12:28 am

    I find this article rather confused and I am unsure the author has fully grasped what advantages the pension freedoms have delivered. To start with the statement “taxation of pensions after death seem unduly harsh” is just not true and is much better than before pension freedom came in. Up to age 75, beneficiaries are able to draw down the remaining pot free of tax. After 75, beneficiaries pay tax at their marginal rate as they drawdown, just as with any other source of income. Not in the least bit harsh, especially compared to losing 40% through IHT, or the 55% lump sum death benefit tax that applied before pension freedom.

    If the author wants flexibility to make withdrawals and not trigger MPAA, then simply take multiple PCLS withdrawals instead of UFPLS. However, with both PCLS and UFPLS, the author should be careful not to breach the lump sum recycling rules. This would probably be ok though as additional pension contributions would be contingent on freelance income and so not “pre-planned”.

    I am a little confused as to why the author wants to go into drawdown at all. From the article, it would seem more appropriate to draw an income from ISAs until such time as he wants to stop making pension contributions. One reason not to do that would be if there was likely to be an issue with the LTA. For example, I took my entire 25% PCLS at 55 in order to mitigate the charge for likely exceeding my LTA at the age 75 test.

  • 38 Vanguardfan October 14, 2018, 4:17 am

    Naeclue, I completely agree. Whilst Greybeard may not be confused about the rules, I think some of the ways that the article has been phrased could confuse other readers. For example he refers to ‘traditional, capped drawdown’ – an option which does not exist anymore. There is no proper explanation about how UFPLS and FAD are taxed – sure, it is a brief article more about the musings of the author’s personal situation than an attempt at a comprehensive explanation, but some links to eg Pensionwise describing the basic tax treatment and MPAA/recycling rules would be useful to ensure readers don’t come to erroneous conclusions. Several comments have pointed out that phased drawdown, taking only the tax free component and no income, is the obvious way to avoid triggering MPAA.
    But I agree with that there seems no obvious reason to draw income from pensions in preference to ISAs, or indeed taxable accounts.
    But it really goes to show that the author’s conclusions are spot on – the pensions freedoms have thrown up so many choices and options that the complexity is bewildering.

  • 39 The Greybeard October 14, 2018, 10:51 am

    @naeclue: You are unsure as to “why the author wants to go into drawdown at all, and why he doesn’t just draw income from ISAs”. The reason is that ISA income alone would be insufficient. And as I have already said, LTA is not an issue. Re: the unduly harsh treatment of pensions after death, you compare the existing rules with what went before. I am comparing with them what might exist in their place, had the government approached pensions freedoms more intelligently. Is it really so difficult to come up with something less complicated than navigating the existing rules, especially at a time of bereavement? Surely not.

  • 40 The Greybeard October 14, 2018, 11:12 am

    @Vanguardfan: You raise a good point about the now-obsolete capped drawdown. A few years ago, there was a lot of adverse press coverage about retirees suffering a constricted income due to gilt-linked GAD limits, which I think has served to put some people off the whole notion of drawdown a little, even though the situation no longer applies. The reference was intended to highlight something good about conventional drawdown. But the word ‘traditional’ probably isn’t a perfect synonym for ‘obsolete’. I’ll get it changed, and also make explicit that contemporary drawdown doesn’t trigger MPAA limits as long as an income isn’t taken.

  • 41 Drawdown-errrr October 14, 2018, 11:32 am

    @Naeclue – I agree 100% with your analysis. I still feel the subtleties between UFPLS and FAD – especially with regard to the MPAA limit as that’s the focus here – has not been made clear in this article (again – apologies Greybeard, I do not wish to offend – merely to unearth the facts).

    If the author wants to access his pension, but in some way that mitigates ‘the effects of the £4,000 MPAA limit,’ then his conclusion that UFPLS is the way to go is simply false.

    Instead, he should take his pension via the FAD route and drip-feed as much (or as little) of his 25% PCLS as he wants until it runs out, as this won’t trigger the MPAA. This would give him the freedom to contribute more than £4,000 pa to his pension (assuming it’s not pre-planned), as and when his freelance work picks up.

    However, under the UFPLS rules, he could never contribute more than £4,000 pa to his pension from the moment he triggers taking income in this way (source: https://www.aegon.co.uk/support/faq/pension-technical/MPAA.html ).

    I would only see taking UFPLS as making sense if the 25% PCLS from the author’s combined pensions were deemed too little to live on – then he would have to trigger the MPAA rules anyway (whether he takes income via FAD or UFPLS).

    Again, this is a complicated area and as the illuminating discussions here show, it bears doing the work and being 100% informed before triggering anything irrevocable.

  • 42 Naeclue October 14, 2018, 12:17 pm

    @Greybeard , pension transfers on death are about as simple as they can be and much simpler than say ISAs where probate is required. Your SIPP assets sit outside your estate, and will be passed to beneficiaries by the pension trustees according to your wishes, with no inheritance or other tax to pay or even consider. Your beneficiaries pay tax under PAYE when they drawdown, just as they would with their own pensions. Or no tax at all on drawdown if you die before age 75. This is a far less onerous tax/bureaucratic regime than for your non-pension assets.

    Regarding insufficient income from your ISAs, are we talking about natural yield income here, as opposed to drawn income? If so and you do not wish to take income from capital, a way round it is to sell assets in your ISA and buy the same in your SIPP, then draw the cash from your ISA. I do the opposite as I have an LTA problem, but this would mean your capital and asset allocation would remain the same, less a small dealing cost. It would also boost your SIPP assets, which as mentioned sit outside your estate.

  • 43 The Greybeard October 14, 2018, 12:24 pm

    @Drawdown — er: I think we can agree that the subtleties of UFPLS vs. flexible drawdown have *not* been adequately brought out, simply by the fact that we are continuing to have this on-line conversation. That said, exploring this was not a primary purpose of the article, although it is clear that there is some demand for this! A future article may be the place to address the topic.

    Re: your third paragraph, if I understand it correctly, you are recommending that I potentially exhaust my 25% lump sum, and live off that while I await a freelance upturn (which may or may not come), with the goal of minimising any MPAA hit. To put it another way, (again if I understand it correctly), you’re advising me to potentially exhaust my 25% lump-sum (and thereby potentially crystallise my entire pot) in exchange for the freedom to shelter from tax a sum of income that I may not actually have. No thanks.

    I think that it is always going to be difficult to prescribe solutions to other people’s problems without knowing the full circumstances. Naeclue seemed to think that my ISA income alone would provide a decent living. Vanguardfan generously allowed an income from taxable accounts as well. For you and these other people, that may be perfectly adequate. It won’t be for me. And why should it be? I have saved and invested into my pension for all these years, and now I am considering how best to take a pension income.

    One final point: the substantive point of the article is indeed brought out by these comments. Deciding on an optimum course of action is bloody difficult. And I don’t think that it should be.

    PS: I’m probably offline now until late Monday.

  • 44 Naeclue October 14, 2018, 12:59 pm

    @Vanguardfan, are the choices offered by pension freedoms really bewildering? I see them as a great step forward compared to before with GAD limits and the 55% death tax. There is a choice to buy an annuity, drawdown or a combination. With drawdown, you either put the whole lot into drawdown, as I did, or gradually introduce more as time goes on. UFPLS is really a simplified and likely more cost efficient way for many of doing partial drawdowns. If you take income (including UFPLS) rather than tax free PCLS cash, your annual allowance is restricted by MPAA.Why is any of this bewildering?

    The one overly complicated area I find is with the LTA and wish they would scrap it for money purchase pensions in favour of restricting lifetime pension contributions.

  • 45 Naeclue October 14, 2018, 1:19 pm

    @Greybeard “if I understand it correctly, you are recommendingthat I potentially exhaust my 25% lump sum, and live off that while I await a freelance upturn”.

    This is precisely what he and I are recommending. Why would you not want to do that if you want to keep open the option of future contributions above MPAA limits?

    Actually I have just thought of one reason not to do that. If you have no taxable income over a year, then the partial drawdown/UFPLS route may be more tax efficient as the “income” component would be tax free if it sat within the personal allowance.

    I am not saying your ISA income may be sufficient by the way. In the scenario i suggested, you would take (up to) the natural income of both ISA AND SIPP.

  • 46 Vanguardfan October 14, 2018, 3:58 pm

    @greybeard, I think all anyone is trying to do is make alternative suggestions to that could achieve your stated aim of drawing from your investments whilst preserving the ability to contribute more than £4K to pensions in the future. I’m not sure why you are affronted by these suggestions!
    I personally was not assuming that if you took ISA or taxable income instead of SIPP income that this would only be the natural yield of your investments. I had in mind what Naeclue suggests re selling ISA investments, and potentially repurchasing in SIPP.
    What we’re essentially mulling over is the correct sequencing of decumulation from taxable, ISA and SIPP assets. This will vary between individuals depending on objectives, particularly the legacy objective, and the LTA situation.
    Also, you don’t need to crystallise all your pension into FAD. You can do it a bit at a time. Obviously there is a downside, but as you know, the downside of UFPLS is the MPAA. You have a choice!

    @naeclue. I think as this thread shows, it’s not straightforward to work through the pros and cons of each option. I do understand them pretty well, but there is undoubtedly more complexity with more choice. I myself have quite a few different options to mull over, which bring in the relative timing of drawing SIPP vs DB pension income as well…

  • 47 MrOptimistic October 14, 2018, 4:05 pm

    I intend to take the PCLS and lob some of the cash ISA’s I have into my stocks/shares ISA. I am wary of future governments changing rules or adding an ‘ unearned income’ type of discriminating tax on pensions so not too swayed by the idea of UFPLS, and of course the MPAA hit is a factor ( as well as the risk of the investments declining in value).
    I presume, incidentally, that a reduction in MPAA only applies one tax year at a time and us not an eternal thing. Never seen that discussed/ explained anywhere.
    I suspect one attraction of the lifetime cap is it is a way of clawing back some civil service pension contributions, though maybe that is too cynical.
    Useful discussion anyhow and very timely as I’ll be filling in a couple of forms today to start some GMP funds into payment.

  • 48 Vanguardfan October 14, 2018, 5:04 pm

    @mroptimistic (I see why you have that name!) – the MPAA is indeed forever, once it is triggered. That’s why it’s a big deal, and one of the biggest traps for the unwary. So many people want to get their hands on their pension at 55, not realising they could be tying their hands in relation to future contributions for the next 20 years!

  • 49 MrOptimistic October 14, 2018, 5:20 pm

    Wow really? Thanks. That’s what I originally thought but decided I had never seen it confirmed. It’s one thing being sure you know something, another when you have to sign a form and commit to it .

  • 50 Naeclue October 14, 2018, 6:55 pm

    @Vanguardfan, I think drawdown options and restrictions are straightforward. What complicates the picture is the introduction of ISAs, income, capital gains and inheritance taxes. As you say, it is trying to navigate the optimal way of decumulation from the various taxed and untaxed accounts (and other income such as employment, air bnb, etc) that is difficult. Then throw into the mix the regular legislative changes and life events just to keep us on our toes.

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