The Lemon Fool

Ok, so far my understanding is that once you transfer funds into drawdown the LTA test is done..
All well and good.

Now consider then that the drawdown investments grow and generate dividends etc and some of this is taken as PAYE taxed each year.

What happens to the capital gains and dividends in the drawdown pot? Are they left to grow tax-free and only taxed on withdrawal?

Thats what it looks like to me. But it sounds like a good deal, tax-free gains and only taxable withdrawals?

In which case it would seem to me that the entire pot should be moved into drawdown for maximum flexibility (no point staying in the pension wrapper as it provides no additional benefit there. (gains and dividends tax-free anyway in flexi drawdown)

Then you just decide year to year or month to month what you need etc. (Based on safe withdrawal rate etc)

Did I get that right? Or is there something Im missing?

This seems like a good summary. https://www.drewberryinsurance.co.uk/kn ... n-drawdown

Tax-free investment growth
"All funds that remain invested in a pension or a drawdown fund retain tax-free investment return"

Cool. So as Im close to the LTA already I should move as much as possible ASAP into Drawdown as it will be tax free once there. Any remainder I should keep as an emergency fund in the SIPP to avoid the LTA charges and hope that once day they will remove the LTA.

Worse case I suck it up and pay the tax either as income or lump sum.

That will be my "current" plan. If anyone sees anything insane or that Ive missed please let me know

I guess the "drawback" is that by putting it into drawdown you find yourself with a tax free lump sum of up to a quarter of a million in your hands, that you have to stick somewhere. Avoiding being taxed on any income this generates may be difficult.

Scott.

runnygum wrote:
Cool. So as Im close to the LTA already I should move as much as possible ASAP into Drawdown as it will be tax free once there. Any remainder I should keep as an emergency fund in the SIPP to avoid the LTA charges and hope that once day they will remove the LTA.

Worse case I suck it up and pay the tax either as income or lump sum.

That will be my "current" plan. If anyone sees anything insane or that Ive missed please let me know

I think there are a few issues that need further clarification. You are correct that growth and income generated within an invested drawdown account are not taxed - the tax treatment is the same as for an ‘uncrystallised’ pension. You are also correct that income tax is only applied when money is withdrawn from the drawdown account. When you place funds into flexi access drawdown you ‘crystallise’ that part of the pension, and withdraw 25% tax free. You can then choose how much and when to withdraw the rest, and it is subject to income tax at your marginal rate.

As far as the LTA goes, whenever you crystallise pension funds (ie place them in drawdown), you are tested against the LTA, and will have used up a percentage of the LTA. If you crystallise the ‘maximum’, ie 100% of the LTA, you will have a tax free lump sum of a little more than £250,000 and an invested drawdown pot of a little more than £750,000. If you have excess remaining in your SIPP, you won’t get any of that as a tax free lump sum, as you can’t get more than 25% of the LTA tax free (unless you have special protections). You will next be tested on the LTA if you crystallise any of that portion, or when you reach 75, or when you die if that come before 75. So, if you anticipate that part will grow, it makes sense to crystallise everything and pay the LTA excess charge sooner rather than later. (You can’t avoid it, and I think you are optimistic to think that the LTA may be abolished).
At 75, your drawdown pot is also tested against the LTA and if it has increased in value, there will be LTA charge to pay (so you should ensure that you at least drawdown any growth in the drawdown account).

Hope that helps. The Pensionwise.gov.uk also explains the basics of the various withdrawal methods allowed under the pension freedoms, in a slightly less biased way than the link you posted (which I read as an advert for drawdown)

Also it’s not clear if you have stopped adding to your SIPP, but you should be aware that once you take taxable money from your SIPP (ie more than the 25% tax free lump sum) you are subject to something called the Money Purchase Annual Allowance (MPAA) which limits tax relief on future contributions to a maximum of £4000 gross total contributions per annum, forever.

Yep understood thanks.

I have fixed protection. Ill see what the lye of the land is at the time. Maybe 50% now and 50% later might be better. But probably as you say best just to to it all at once into drawdown and pay the 25% on the excess.

Just a practical note from an older retiree-73-retired at 57
My SIPP was well under the LTA -about £650000
Initially on retirement I took the tax free lump sum and lived on it for some years leaving the Pension-now crystallised to grow
I had an ISA also. My wife had a small SIPP and ISA too
I have used my wife’s tax free lump sum from her SIPP also
When all that tax free money ran out I took from ISAS for a few years-tax free
I now have started taking from my SIPP again which is now back to its previous retirement total!
I take only up to the 20% tax rate
Reclaiming excess tax on SIPP withdrawals (if required) via R55 form is simple,done online and refunds come within a month
Going forward will take from ISAs and my SIPP alternately or some from both
xxd09