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Query About the 25% TFLS

NegevSouth
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Query About the 25% TFLS

#219089

Postby NegevSouth » May 2nd, 2019, 10:01 pm

Hoping someone can clarify a point regarding withdrawal of the 25% tax-free element of a pension fund.

Previously untouched pot of £40k. When it comes to accessing funds for the first time, say I don't want the £10k TFLS in one go, but just need to take £2,500. That leaves a pot of £37.5k, including the option to take at a later stage TFLS of £7,500.

However, suppose it's then left for a few years without taking anything from it and that £37.5k grows to £56k. Would I be entitled to take 25% of £56k, less £2,500 already taken, in other words a total tax-free withdrawal of £11.5k?
Or would I still only be entitled to a TFLS of £7,500?

Thanking you good folk.

mearnsfool
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Re: Query About the 25% TFLS

#219097

Postby mearnsfool » May 2nd, 2019, 10:27 pm

Some schemes want you to take the 25% tax free lump sum in one go.

Have you read the rules of your scheme or talked to the pension provider as to what what the rules of the scheme advise.

mearnsfool
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Re: Query About the 25% TFLS

#219098

Postby mearnsfool » May 2nd, 2019, 10:30 pm

Double post, mods please remove.
Last edited by mearnsfool on May 2nd, 2019, 10:31 pm, edited 1 time in total.

swill453
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Re: Query About the 25% TFLS

#219100

Postby swill453 » May 2nd, 2019, 10:30 pm

NegevSouth wrote:Hoping someone can clarify a point regarding withdrawal of the 25% tax-free element of a pension fund.

Previously untouched pot of £40k. When it comes to accessing funds for the first time, say I don't want the £10k TFLS in one go, but just need to take £2,500. That leaves a pot of £37.5k, including the option to take at a later stage TFLS of £7,500.

However, suppose it's then left for a few years without taking anything from it and that £37.5k grows to £56k. Would I be entitled to take 25% of £56k, less £2,500 already taken, in other words a total tax-free withdrawal of £11.5k?
Or would I still only be entitled to a TFLS of £7,500?

Neither.

You've crystallised £10,000 of your pot by taking £2500 tax free. The £7500 left can grow but you can't get more out of it tax free.

The other £30,000 is uncrystallised, and whatever it grows to you'll be able to take 25% of it tax free.

Your pension provider will keep track of what's crystallised and what's not.

EDIT: assuming it's allowed, as per other reply.

Scott.

NegevSouth
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Re: Query About the 25% TFLS

#219236

Postby NegevSouth » May 3rd, 2019, 12:10 pm

swill453 wrote:
NegevSouth wrote:Neither.

You've crystallised £10,000 of your pot by taking £2500 tax free. The £7500 left can grow but you can't get more out of it tax free.

The other £30,000 is uncrystallised, and whatever it grows to you'll be able to take 25% of it tax free.

Your pension provider will keep track of what's crystallised and what's not.

EDIT: assuming it's allowed, as per other reply.

Scott.


Thanks Scott, I get what you said. But on that basis, let's say I did take all the TFLS in the first place, leaving £30k. If that grows, can I take a further 25% tax free of that new future growth element?

StepOne
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Re: Query About the 25% TFLS

#219242

Postby StepOne » May 3rd, 2019, 12:25 pm

NegevSouth wrote:Thanks Scott, I get what you said. But on that basis, let's say I did take all the TFLS in the first place, leaving £30k. If that grows, can I take a further 25% tax free of that new future growth element?


No, because you crystallised the whole pot when you took the 10k.

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Re: Query About the 25% TFLS

#219245

Postby Alaric » May 3rd, 2019, 12:28 pm

NegevSouth wrote: But on that basis, let's say I did take all the TFLS in the first place, leaving £30k. If that grows, can I take a further 25% tax free of that new future growth element?


That's not how the rules are worded. The rules are written as though you used 75% to buy an annuity. The remaining 75% is going to be taxed as earned income when you take it out, regardless of investment performance.

fisher
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Re: Query About the 25% TFLS

#219248

Postby fisher » May 3rd, 2019, 12:41 pm

Think of it as two pots. One is Uncrystallized, the other is Crystallized. At the moment you have 100% - 40K uncrystallized.

Originally you were talking about wanting a TFLS of £2,500. That requires a Crystallization of £10,000 of your uncrystallized. So you crystallize £10K and take your 2.5K lump sum. You then have 7.5K crystallized that you can use for drawdown and this will be classed as earned income and is taxable.

You still have 30K uncrystallized. In the next few years it grows to 35K. You then crystallize all 35K and you can take 25% = £8,750 as a tax free lump sum and the rest goes into your crystallized pot awaiting taxable drawdown.

Alternatively, starting from the beginning again with your 40K pot, you decide to crystallize all of it. You can then take 10K tax free lump sum, leaving 30K Crystallized and available for Drawdown. If you don't draw any of that 30K and over the next few years it becomes worth 35K then there is no extra available as a TFLS as you took the maximum right at the start. The 35K is available for taxable drawdown.

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Re: Query About the 25% TFLS

#219332

Postby TUK020 » May 3rd, 2019, 4:33 pm

One other aspect to consider if you are talking about larger amounts

When you have a crystallization event, you are also using up a % of your LTA based on the value at that time.

Pot = £40k
Take TFLS = £10k
Remaining pot = £30k, And you have used approx 3% of your LTA (30/1003)
Even if the remainingg pot grows to £35K, you still have only used 3% of LTA

ursaminortaur
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Re: Query About the 25% TFLS

#219460

Postby ursaminortaur » May 4th, 2019, 9:51 am

fisher wrote:Think of it as two pots. One is Uncrystallized, the other is Crystallized. At the moment you have 100% - 40K uncrystallized.

Originally you were talking about wanting a TFLS of £2,500. That requires a Crystallization of £10,000 of your uncrystallized. So you crystallize £10K and take your 2.5K lump sum. You then have 7.5K crystallized that you can use for drawdown and this will be classed as earned income and is taxable.

You still have 30K uncrystallized. In the next few years it grows to 35K. You then crystallize all 35K and you can take 25% = £8,750 as a tax free lump sum and the rest goes into your crystallized pot awaiting taxable drawdown.


This partial crystallisation of your pot is known as phased drawdown

https://www.reevesifa.com/phased-drawdown/


The problem though is that not all pension providers allow it so you will need to check whether you can use it or whether you are restricted to either just crystallising the whole pot in one go or using UFPLS drawdown.

(UFPLS is a sort of replacement for phased drawdown but is much more restrictive as with UFPLS you crystallise only the amount you withdraw from your pot each time you use UFPLS drawdown but 25% of what you take out is tax free with the other 75% being taxed at your marginal rate.The rest of the pension pot remaining uncrystallised.)


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