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How to get more Tax Free Lump sums with UFPLS

taken2often
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How to get more Tax Free Lump sums with UFPLS

#123385

Postby taken2often » March 9th, 2018, 9:43 am

I keep asking Hargreaves Lansdown to be more specific about the benefits of UFPLS as this is new and many do not know about it. I keep asking them to but a note at the bottom of their Drawdown information pages that UFPLS can be an alternative drawdown method worth considering. The best I have achieved so far is that on their pension page UFPLS is in black and all the other options are in blue. I fought the Pensions Office for a number of years for this method. I now think that H-L and no doubt others do not understand the benefits other than those the quote. So I have pointed them out last week. Thought I would point out what I think is obvious here.

UFPLS is for those who may still work, but need some extra cash. Or have a work pension and other income. Who do not need the full tax free lump sum to pay off debt, mortgage or some other essential requirement. For those who wish to preserve capital and obtain more tax free lump sum UFPLS should give you total flexibility. So I give a very simple example of the benefits not mentioned in the spec sheets.

The benefit that I fought for was to allow me to take the Natural Yield from my fund. The plan being to take 80% leave 20% for indexing. If you invest for income instead of growth this should work by creating your own annuity. Seven years ago when I was 65 I asked Sippdeal my then provider to start this. Not allowed I was told, that kicked it off.

Everyone has a 250k Tax Free Lump Sum Allowance at present, 25% of a 1 million Life Time Allowance.

What is very strongly recommended is take the 25% as a must and if you have a DB Pension this is true, but this advice bleeds over into all pensions and can be misleading. If you say have a 100k fund take the 25% then you have little chance of gaining more Lump Sum.

The same 100k could produce 5k per year in yield, take 4k and leave 1k for indexing. 1k per year Tax free lump sum. After 10 years say. I have 40k in income 10k tax free and allowing for ups and down of the market say I still have 109k.

Result I have taken 10k and still have another 27,250k available this equals 37,250k and this can go on and on. You have the funds to take more if you need it, hopefully the income from the yield will increase to index what you are taking and you have funds to pass on.

Hope this is helpfull

Bob

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Re: How to get more Tax Free Lump sums with UFPLS

#123394

Postby swill453 » March 9th, 2018, 9:58 am

I agree that using UFPLS makes things convenient, I use it myself and have been for nearly 3 years.

However it doesn't actually make you any money, tax free or otherwise. Your hypothetical example could take the full 25% initial lump sum and (crucially) reinvest it outside the pension in the same investments it had been liquidised from. As long as this could be done tax-efficiently (by using ISAs, or by ensuring any gains or income came within annual allowances), then the sums will work out exactly the same.

UFPLS just means you don't have to make such an effort.

Scott.

taken2often
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Re: How to get more Tax Free Lump sums with UFPLS

#123679

Postby taken2often » March 9th, 2018, 10:45 pm

Hi Scott

What you say is true, but there may be many like me who have enough problems with IHT without making it worse. I am also fully fund my ISA
from my taxable portfolio. I transfer a PIB every year and save 20% tax on the interest so funding the ISA is out, but it is a good idea

Bob

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Re: How to get more Tax Free Lump sums with UFPLS

#123768

Postby ursaminortaur » March 10th, 2018, 2:39 pm

taken2often wrote:What is very strongly recommended is take the 25% as a must and if you have a DB Pension this is true, but this advice bleeds over into all pensions and can be misleading. If you say have a 100k fund take the 25% then you have little chance of gaining more Lump Sum.


Taking the full 25% tax free lump sum is recommended for DC pensions. For DB pensions it is often the wrong thing to do since to take the full 25% you often have to convert some of your annual pension into that lump sum - conversion rates for this are usually pretty poor. Hence for a DB pension it is often better not to take the 25% tax free lump sum.

For anybody anywhere close to the LTA limit (and with the current LTA that means with a pot of about £600,000 or more if you start drawdown at 55 and achieve 4% growth per year * ) then UFPLS risks losing out to an LTA excess charge. This is because every UFPLS withdrawal causes a LTA test and a percentage of your LTA to be used up. Hence any growth in the fund between your starting such withdrawals and age 75 when any still uncrystallised funds are subject to an LTA test will be being charged against your LTA. In contrast if you crystallise the pension pot using flexi-access drawdown then subsequent withdrawals are not tested against the LTA and hence that growth can be drawndown at your marginal tax rate without it being counted against your LTA. (Any growth that you left in your crystallised pot and didn't drawdown would be accessed at the age 75 test so if using flexi-access you should drawdown enough before age 75 to avoid any LTA excess charge)

4% growth from a £600,000 pot produces £24,000 per annum
Withdrawing that from 55 to age 75 ie for 20 years means that you use up 20 x 24000 = £480,000 from your LTA but still have £600,000 in the pot
Hence at age 75 you will be accessed as being over the £1 million LTA by £80,000
If on the otherhand you don't withdraw the full growth then this will build up in the pot and increase the size of the pot even more because of compounding until the test at age 75.

* From April 2018 the LTA is supposed to increase by CPI which the above calculation doesn't take into account so you might be able to get away with a slightly bigger starting pot assuming that this occurs and is maintained.

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Re: How to get more Tax Free Lump sums with UFPLS

#123775

Postby taken2often » March 10th, 2018, 3:12 pm

Hi Ursminortaur
The financial industry seems to strongly recommend taking the 25%. What you suggest is sensible if you expect to have a long life and a legal partner to continue usually at 50% pensions, which may not be that great due to inflation but still a lot better than nothing.

I have quite high hopes that they will do away with LTA as it is a very bad rule. Controlling input of tax allowance is sensible, punishing success
is foolish. It appears that hundreds if not thousands of doctors are retiring early due to LTA. And that is just one crucial profession.

The projects for LTA is very difficult due to market swings. Do you think if you pay tax at 75 they give it back if the market drops the following year. No chance. At least there is only one test at 75. The fund can then take off after that, and you can keep drawing until I could have the 375k lump sum

I am locked in at 1.5m and heading towards it, so I have the incentive to pop off at 74.75 years. If I were terminal I would do it.

The strange world of pension management.

Bob

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Re: How to get more Tax Free Lump sums with UFPLS

#123799

Postby ursaminortaur » March 10th, 2018, 5:42 pm

taken2often wrote:Hi Ursminortaur
The financial industry seems to strongly recommend taking the 25%. What you suggest is sensible if you expect to have a long life and a legal partner to continue usually at 50% pensions, which may not be that great due to inflation but still a lot better than nothing.


As always it depends on your circumstances but in many instances the commutation rates for converting annual pension from a DB pension to money for the lump sum are atrocious.

https://www.aegon.co.uk/news/should_you_take_your25tax-freepensionlumpsum.html

How it works is that you are allowed to take anything up to 25 per cent tax-free. But the bigger the lump sum you withdraw, the more future pension you sacrifice – and some schemes force you to forfeit more than others.
What you give up is down to the 'commutation factor'. For example, you might be offered £12 in the form of a lump sum for every one pound of future pension you give up. This is a commutation factor of 12:1. But some schemes will offer you £20 of lump sum for every pound of pension income you sacrifice. That would be a far more favourable commutation factor of 20:1.
Tully says: 'This is where people really need advice. If it's a poor commutation factor you might be better taking more as income and less as tax-free cash.
'But if you want to pay off debt, it might be better to take the lump sum even if it's a poor commutation factor. Or another option would be to take tax-free cash from a defined contribution pot, and none from a defined benefit pot. It's difficult to say one course of action is always favourable. It depends on your circumstances.'
When it comes to judging whether your commutation factor is any good, Tully says: 'Anything below 15:1 is poor in today's environment. Anything above 20:1 is good, 15:1 to 20:1 is OK - I would think not great but acceptable,'


Personally I think that they are understating how bad commutation rates are in the above article and I'd only rate 20:1 as OK with
25:1 or higher as good. Unfortunately there are quite a lot of DB pensions - including public sector DB pensions - where it is 12:1 or something fairly close to that.


taken2often wrote:I have quite high hopes that they will do away with LTA as it is a very bad rule. Controlling input of tax allowance is sensible, punishing success
is foolish. It appears that hundreds if not thousands of doctors are retiring early due to LTA. And that is just one crucial profession.

The projects for LTA is very difficult due to market swings. Do you think if you pay tax at 75 they give it back if the market drops the following year. No chance. At least there is only one test at 75. The fund can then take off after that, and you can keep drawing until I could have the 375k lump sum

I am locked in at 1.5m and heading towards it, so I have the incentive to pop off at 74.75 years. If I were terminal I would do it.

The strange world of pension management.

Bob


I agree that the LTA is bad. It made sense to have such a limit to stop people building up really gigantic pots and then being able to take 25% tax free when the annual allowance was £215,000 or more. But dropping it to £1 million when the annual allowance ids now £40,000 serves little purpose. It just complicates the system with the various protections and now catches lots of people whose pension will be relatively modest.

I know you fought for UFPLS (or at least for something similar to be put in place) but I think as long as the LTA limit is still in place you would have been better off to have crystallised your pot and used flexi-access withdrawing enough of the growth to avoid the LTA excess charge and if necessary looking at other ways such as gifting excess income to distribute the withdrawn funds to your potential beneficiaries. As to popping off at 74.75 years, as I understand it, that won't really help your heirs anyway since there is an LTA test on death before 75 so any LTA excess charge will be taken out before the funds are passed to your nominated beneficiaries.


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