Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Flexi-Access vs UFPLS and a bit on LTA

vrdiver
Lemon Quarter
Posts: 2574
Joined: November 5th, 2016, 2:22 am
Has thanked: 552 times
Been thanked: 1212 times

Flexi-Access vs UFPLS and a bit on LTA

#170864

Postby vrdiver » October 2nd, 2018, 3:49 pm

I have a SIPP which I will be able to access next year (at 55). I have the choice of taking payments as UFPLS or Flexi-Access.

For the below examples, assume my personal allowance has been consumed elsewhere, but that I am a basic rate taxpayer. For ease, ignore inflation.

If I go the UFPLS route, I would take an annual payment, let's call it £10,000, of which £2,500 is tax-free and £7,500 would count as taxable income. The pot would remain uncrystallised.

The £7,500 is taxed at 20%, losing £1,500 to HMRC).

If I go the Flexi-access route, I would still take the £10,000 payment, but there would now be £30,00 worth of the pot that has been crystallised (£40k less the £10k withdrawn). The £10k would not count as taxable income.

In the Flexi-access case, I could divert the money that is not going to HMRC into an ISA and invest it.

Using my real numbers, it takes about 16 years to fully crystallise the pot, after which HMRC would like tax on the full £10,000, i.e. £2,000

However, in the above scenario, I'd have avoided (not evaded!) tax for 16 years, or died trying. If I've succeeded, then I have an ISA pot of 16x£1.5k=£24k, which, assuming HYP-like investment in the ISA, has generated dividends over the 16 years which have also been reinvested: lets call it another £8k in total, so the ISA has £32k, generating a yield of 4%, or £1,280. The £1,280 is offset against the tax bill, leaving £720 tax remaining, which is roughly half the tax that would have been paid each year under the UFPLS route.

In summary, Flexi-Access avoids paying any tax for (in my case) about 16 years, after which it halves the tax bill whilst leaving me with a small capital sum in an ISA.

UFPLS sees me reach 75 with a fully uncrystallised SIPP. Flexi-access sees the SIPP fully crystallised before age 75. Should I care?

Ignoring risks like investing in another Carilion or the government changing the rules (which I rank higher than the Carilion scenario) what have I missed / not considered / misunderstood, or is this really a no-brainer?

Finally, and perhaps it needs to be a separate thread, how does the LTA figure into this if I'm withdrawing dividends only, starting at age 55?

If you read this far - thank you!
VRD

swill453
Lemon Half
Posts: 7962
Joined: November 4th, 2016, 6:11 pm
Has thanked: 984 times
Been thanked: 3643 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170884

Postby swill453 » October 2nd, 2018, 5:41 pm

vrdiver wrote:If I go the Flexi-access route, I would still take the £10,000 payment, but there would now be £30,00 worth of the pot that has been crystallised (£40k less the £10k withdrawn). The £10k would not count as taxable income.

In the Flexi-access case, I could divert the money that is not going to HMRC into an ISA and invest it.

Using my real numbers, it takes about 16 years to fully crystallise the pot, after which HMRC would like tax on the full £10,000, i.e. £2,000

However, in the above scenario, I'd have avoided (not evaded!) tax for 16 years, or died trying. If I've succeeded, then I have an ISA pot of 16x£1.5k=£24k, which, assuming HYP-like investment in the ISA, has generated dividends over the 16 years which have also been reinvested: lets call it another £8k in total, so the ISA has £32k, generating a yield of 4%, or £1,280. The £1,280 is offset against the tax bill, leaving £720 tax remaining, which is roughly half the tax that would have been paid each year under the UFPLS route.

I don't see why you're taking more tax free cash out than you need and putting it in the ISA. If you only need £8.5K to live on, then why not just take that out?

The rest can earn the same HYP-like dividends in your SIPP, so you're not losing anything. Doing the above calculations on separate ISA dividends is over-complicating it and clouding the decision-making process.

If your projection is that you'll pay basic rate tax on all the taxable drawdown anyway, I think it makes sense to delay this as much as possible. So spend tax free cash while you can (IMHO)

Scott.

ursaminortaur
Lemon Half
Posts: 6944
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1718 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170932

Postby ursaminortaur » October 2nd, 2018, 10:09 pm

vrdiver wrote:I have a SIPP which I will be able to access next year (at 55). I have the choice of taking payments as UFPLS or Flexi-Access.

For the below examples, assume my personal allowance has been consumed elsewhere, but that I am a basic rate taxpayer. For ease, ignore inflation.

If I go the UFPLS route, I would take an annual payment, let's call it £10,000, of which £2,500 is tax-free and £7,500 would count as taxable income. The pot would remain uncrystallised.

The £7,500 is taxed at 20%, losing £1,500 to HMRC).

If I go the Flexi-access route, I would still take the £10,000 payment, but there would now be £30,00 worth of the pot that has been crystallised (£40k less the £10k withdrawn). The £10k would not count as taxable income.

In the Flexi-access case, I could divert the money that is not going to HMRC into an ISA and invest it.

Using my real numbers, it takes about 16 years to fully crystallise the pot, after which HMRC would like tax on the full £10,000, i.e. £2,000

However, in the above scenario, I'd have avoided (not evaded!) tax for 16 years, or died trying. If I've succeeded, then I have an ISA pot of 16x£1.5k=£24k, which, assuming HYP-like investment in the ISA, has generated dividends over the 16 years which have also been reinvested: lets call it another £8k in total, so the ISA has £32k, generating a yield of 4%, or £1,280. The £1,280 is offset against the tax bill, leaving £720 tax remaining, which is roughly half the tax that would have been paid each year under the UFPLS route.

In summary, Flexi-Access avoids paying any tax for (in my case) about 16 years, after which it halves the tax bill whilst leaving me with a small capital sum in an ISA.

UFPLS sees me reach 75 with a fully uncrystallised SIPP. Flexi-access sees the SIPP fully crystallised before age 75. Should I care?

Ignoring risks like investing in another Carilion or the government changing the rules (which I rank higher than the Carilion scenario) what have I missed / not considered / misunderstood, or is this really a no-brainer?

Finally, and perhaps it needs to be a separate thread, how does the LTA figure into this if I'm withdrawing dividends only, starting at age 55?

If you read this far - thank you!
VRD


With UFPLS every withdrawal is a BCE and uses up a bit more of your LTA. This means that growth occuring in the pension pot will be counted against your LTA as it is withdrawn using UFPLS or on death or reaching age 75 when a final test on uncrystallised funds occurs.
With flexi-access an LTA test occurs when the pot is crystallised and another LTA test takes place on death or at age 75. However this test is only on growth remaining in the crystallised pension pot at that time. This is calculated as the difference between the value of the crystallised pot and the value at the time of crystallisation minus the tax free lump sum taken. Withdrawing money from the crystallised pot is NOT tested against the LTA hence to avoid growth in the fund after crystallisation being tested against the LTA you just have to remove that growth before the final LTA test (at death or age 75). This will obviously be taxed at your marginal rate but that will be less than the charge for exceeeding the LTA.
Therefore if you are getting anywhere close to the LTA (which might be as low as £600,000 if retiring at 55 with a reasonable level of growth until 75) it would be best to use flexi-access drawdown rather than UFPLS so as to avoid the LTA excess charge by drawing down the growth.

vrdiver
Lemon Quarter
Posts: 2574
Joined: November 5th, 2016, 2:22 am
Has thanked: 552 times
Been thanked: 1212 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170959

Postby vrdiver » October 3rd, 2018, 1:42 am

Thanks to both of you for your responses.

swill453 wrote:

I agree the removal of small sums into an ISA is overcomplicating things if it was stand-alone. I was considering it purely so as to consume all the dividends and have the reinvestment (with other sources) occur in one place. As Ursaminortaur pointed out, removing the growth element post crystallisation should help avoid exceeding the LTA come age 75.

ursaminortaur wrote:
Can I check if I understand the LTA calculation correctly?

Example: LTA = £1m (for ease of use)
SIPP value in year 1: £500k Withdraw £25k of dividends, LTA of 25,000/1,000,000 = 2.5%. Crystallised element = £100k. No tax due as £25k was all PCLS.

SIPP value in year 2: £500k (grew from the £475k that was left after the previous withdrawal) withdraw £25k. LTA consumed = 2.5%.

If this pattern repeated, after 5 years 100% of the fund would have been crystallised, using 12.5% of the LTA?

From my understanding of the LTA calculation (which is from t'internet, so likely as not either wrong or over-simplified), the £25k growth in my example is all uncrystallised. I don't have to apportion it according to the ratios of the crystallised to uncrystallised funds at the last BCE?

Once fully crystallised I then need to ensure drawdown each year makes use of the lower tax bands, rather than deferring any withdrawals and being faced with higher marginal tax rates on larger withdrawals, or an LTA violation and 55% charge.

Hoping I've understood this!
VRD

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170960

Postby Alaric » October 3rd, 2018, 1:53 am

vrdiver wrote:SIPP value in year 1: £500k Withdraw £25k of dividends


I don't think it matters as to the financing source of the withdrawals. You could sell assets with exactly the same tax effect.

vrdiver
Lemon Quarter
Posts: 2574
Joined: November 5th, 2016, 2:22 am
Has thanked: 552 times
Been thanked: 1212 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170961

Postby vrdiver » October 3rd, 2018, 2:08 am

Alaric wrote:
vrdiver wrote:SIPP value in year 1: £500k Withdraw £25k of dividends


I don't think it matters as to the financing source of the withdrawals. You could sell assets with exactly the same tax effect.

Agreed. Just showing my habitual thinking as a HYP investor who takes dividends rather than the more sophisticated methods others might apply (not wishing to get into a TR debate, please ignore the dividend comment - it's just "growth" of the SIPP pot...)

Cheers
VRD

TUK020
Lemon Quarter
Posts: 2039
Joined: November 5th, 2016, 7:41 am
Has thanked: 762 times
Been thanked: 1175 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#170976

Postby TUK020 » October 3rd, 2018, 7:20 am

vrdiver wrote:Can I check if I understand the LTA calculation correctly?

Example: LTA = £1m (for ease of use)
SIPP value in year 1: £500k Withdraw £25k of dividends, LTA of 25,000/1,000,000 = 2.5%. Crystallised element = £100k. No tax due as £25k was all PCLS.

SIPP value in year 2: £500k (grew from the £475k that was left after the previous withdrawal) withdraw £25k. LTA consumed = 2.5%.

If this pattern repeated, after 5 years 100% of the fund would have been crystallised, using 12.5% of the LTA?

VRD


correction I think:
after 5 years 100% of the fund would have been crystallised, using 50% of the LTA
(well a smidge less as LTA = 1.03m now)

ursaminortaur
Lemon Half
Posts: 6944
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1718 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#171015

Postby ursaminortaur » October 3rd, 2018, 10:12 am

TUK020 wrote:
vrdiver wrote:Can I check if I understand the LTA calculation correctly?

Example: LTA = £1m (for ease of use)
SIPP value in year 1: £500k Withdraw £25k of dividends, LTA of 25,000/1,000,000 = 2.5%. Crystallised element = £100k. No tax due as £25k was all PCLS.

SIPP value in year 2: £500k (grew from the £475k that was left after the previous withdrawal) withdraw £25k. LTA consumed = 2.5%.

If this pattern repeated, after 5 years 100% of the fund would have been crystallised, using 12.5% of the LTA?

VRD


correction I think:
after 5 years 100% of the fund would have been crystallised, using 50% of the LTA
(well a smidge less as LTA = 1.03m now)



The pattern you are describing is known as phased drawdown where you crystallise portions of your pot - in this case in £100K portions - over a number of years. The more usual case with flexi-access drawdown is to crystallise the whole pot at once ie all £500K by taking the 25% PCLS of £125K. If you didn't need this £125K PCLS for something then you could invest it outside the pension some possibly in ISAs - timed right a couple would be able to put £80K of it into ISAs (2 x 20K in one year and 2x 20K a few days later in the next year). Anything else you then withdrew would be taxable at your marginal rate.

Note. Not all providers offer the option of phased drawdown. How this is handled by the provider varies - some may actually hold the investments in multiple pension segments (crystallised and uncrystallised) others may leave them in one pot but apply some modelling to assign growth to different virtualised segments. This will have a small effect on the LTA calculations as the growth you get over those 5 years will be in both the crystallised and uncrystallised portions. The growth in the uncrystallised portions when they are then crystallised will increase both the amount of LTA used and also the amount of PCLS you are entitled to. If you were much much closer to breaching the LTA, ie within a few percent, then this growth effect could result in such a phased drawdown exceeding the LTA.

As TUK020 points out with the described phased drawdown you would use up about 50% of your LTA after 5 years. Each crystallisation event would crystallise about £100K and use up about 10% of your LTA.

vrdiver
Lemon Quarter
Posts: 2574
Joined: November 5th, 2016, 2:22 am
Has thanked: 552 times
Been thanked: 1212 times

Re: Flexi-Access vs UFPLS and a bit on LTA

#171031

Postby vrdiver » October 3rd, 2018, 11:16 am

TUK020 wrote:
vrdiver wrote:Can I check if I understand the LTA calculation correctly?

Example: LTA = £1m (for ease of use)
SIPP value in year 1: £500k Withdraw £25k of dividends, LTA of 25,000/1,000,000 = 2.5%. Crystallised element = £100k. No tax due as £25k was all PCLS.

SIPP value in year 2: £500k (grew from the £475k that was left after the previous withdrawal) withdraw £25k. LTA consumed = 2.5%.

If this pattern repeated, after 5 years 100% of the fund would have been crystallised, using 12.5% of the LTA?

VRD


correction I think:
after 5 years 100% of the fund would have been crystallised, using 50% of the LTA
(well a smidge less as LTA = 1.03m now)

Doh!!!!! Should have been 100,000/1,1000,000 = 10%, not just the £25k (2.5%) tax free element :oops:
Thanks for the heads up...

VRD


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 5 guests