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How flexible is flexible drawdown?

MyNameIsUrl
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How flexible is flexible drawdown?

#242038

Postby MyNameIsUrl » August 6th, 2019, 9:47 am

Suppose a SIPP has 100k in it. Potentially, from that total, 25k can be taken as a tax-free lump sum, and 75k as taxable income.

Can the amounts be withdrawn totally flexibly? For example, this year withdraw 6k tax-free and 12k taxable, next year 3k tax-free and 10k taxable? Clearly, the remaining amount would be partly crystallised and partly uncrystallised, depending on previous withdrawals.

For example, with Youinvest SIPP, can one simply log on and request a withdrawal, ticking a box to indicate whether it's tax-free or taxable?

swill453
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Re: How flexible is flexible drawdown?

#242046

Postby swill453 » August 6th, 2019, 10:18 am

Re the last (Youinvest) question the answer is no. From your crystallised pot you can adjust the amount online.

But for crystallisation itself, and for UFPLS withdrawals, you have to fill in and post a full application form.

Scott.

ursaminortaur
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Re: How flexible is flexible drawdown?

#242055

Postby ursaminortaur » August 6th, 2019, 10:49 am

MyNameIsUrl wrote:Suppose a SIPP has 100k in it. Potentially, from that total, 25k can be taken as a tax-free lump sum, and 75k as taxable income.

Can the amounts be withdrawn totally flexibly? For example, this year withdraw 6k tax-free and 12k taxable, next year 3k tax-free and 10k taxable? Clearly, the remaining amount would be partly crystallised and partly uncrystallised, depending on previous withdrawals.

For example, with Youinvest SIPP, can one simply log on and request a withdrawal, ticking a box to indicate whether it's tax-free or taxable?



There are two forms of drawdown.

The first is flexi-access drawdown where the pension pot is crystallised and the 25% tax free lump sum is taken immediately. Subsequently you can take as much of the remaining taxable pension as you wish whenever you wish which is then taxed at your marginal rate.

Secondly there is UFPLS where the pot is left uncrystallised and you drawdown whatever you wish but in this case 25% of whatever you drawdown is tax free and the other 75% is taxed at your marginal rate.

You can achieve something closer to the total flexibility you want by using flexi-access but only crystallising part of your pot.
So in the first year you would crystallise £24k of your £100k pot and take 25% of that tax free ie £6k and then take £12k out which would be taxed at your marginal rate. (Note this leaves £6k crystallised but not drawn down).
Next year you could crystallise £12k and take out £3k tax free you would then be able to take out £9k from this newly crystallised part and £1k from the left over £6k in the previously crystallised part to give a total withdrawal of £10k taxed at your marginal rate.
Note. This obviously wouldn't work if in the first year you wanted to withdraw £3k tax free and £10k which was taxed as you would be forced to crystallise at least £13k which would force you to take £3.25k tax free. Hence the flexibility although closer to what you want is still limited
This process of partially crystallising a pension pot is known as phased drawdown. Unfortunately not all drawdown providers support it so you would need to find one who does.

http://www.jjfsltd.com/wp-content/uploads/Phased-Drawdown.pdf

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Re: How flexible is flexible drawdown?

#242056

Postby vrdiver » August 6th, 2019, 10:52 am

Just be aware that when you crystalise any of your pot, the 25% tax-free element needs to be taken within 12 months, or you lose the right to it.

I presume this is to stop people crystalising their entire pot before it exceeds the LTA, then enjoying the growth in the crystalised (and therefore protected part of the) pension pot.

VRD

ursaminortaur
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Re: How flexible is flexible drawdown?

#242059

Postby ursaminortaur » August 6th, 2019, 10:59 am

vrdiver wrote:Just be aware that when you crystalise any of your pot, the 25% tax-free element needs to be taken within 12 months, or you lose the right to it.

I presume this is to stop people crystalising their entire pot before it exceeds the LTA, then enjoying the growth in the crystalised (and therefore protected part of the) pension pot.

VRD


In practise I think most flexi-access drawdown providers would insist that you take the 25% tax free element immediately at crystallisation.

MyNameIsUrl
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Re: How flexible is flexible drawdown?

#242066

Postby MyNameIsUrl » August 6th, 2019, 11:16 am

ursaminortaur wrote:You can achieve something closer to the total flexibility you want by using flexi-access but only crystallising part of your pot.
So in the first year you would crystallise £24k of your £100k pot and take 25% of that tax free ie £6k and then take £12k out which would be taxed at your marginal rate. (Note this leaves £6k crystallised but not drawn down).
Next year you could crystallise £12k and take out £3k tax free you would then be able to take out £9k from this newly crystallised part and £1k from the left over £6k in the previously crystallised part to give a total withdrawal of £10k taxed at your marginal rate.
Note. This obviously wouldn't work if in the first year you wanted to withdraw £3k tax free and £10k which was taxed as you would be forced to crystallise at least £13k which would force you to take £3.25k tax free. Hence the flexibility although closer to what you want is still limited


Many thanks for the detailed explanation. It's clear now that although there isn't total flexibility, I can achieve what's required by sometimes taking more tax-free than I actually need, to allow me to take the required amount of taxed income. The objective, fairly obviously, is to manage the taxed income each year to optimise the use of tax allowances; the withdrawal of extra tax-free cash would be inconsequential from this point of view.


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