SIPP Drawdown

[yieldhog]

I've been drawing a fixed amount from my SIPP for at least ten years. Recently, my SIPP provider changed due to a takover event.

The new provider has asked me which "Pot" I would like to continue drawing the fixed amount from my SIPP. In a reply to a question I sent the provider, I got the following answer:

"Typically, but not always, when you do a transfer in from another
provider, if you have crystallised funds within that transfer then this will
create a 2nd pot in addition to the pot that you already hold with .............

I suspect this is the reason why this has happened and why we have asked
for your preference in terms of the pot you would now like your drawdown to
come from."

At this point I have no idea how much is crystallised and how much not but my new provider has promised to identify the two pots so that I can choose which one I draw from. What difference does it make where the drawdown comes from? I would prefer to eliminate this differentiation if possible to simplify my SIPP for my heirs. If one pot is much smaller than the other then maybe I could drawdown that first so that it all gets used up and just leaves the larger pot?

As far as I remember, I took the maximum 25% taxfree lump sum when I first retired and invested the rest to create perpetual income. The fixed drawdown has continued while the fund has grown to currently stand at the highest level it has ever been.

Could anyone explain what the consequences might be for choosing one pot over the other?

Grateful for any clarification on this subject.

Thanks
Y

[ursaminortaur]

I've been drawing a fixed amount from my SIPP for at least ten years. Recently, my SIPP provider changed due to a takover event.

The new provider has asked me which "Pot" I would like to continue drawing the fixed amount from my SIPP. In a reply to a question I sent the provider, I got the following answer:

"Typically, but not always, when you do a transfer in from another
provider, if you have crystallised funds within that transfer then this will
create a 2nd pot in addition to the pot that you already hold with .............

I suspect this is the reason why this has happened and why we have asked
for your preference in terms of the pot you would now like your drawdown to
come from."

At this point I have no idea how much is crystallised and how much not but my new provider has promised to identify the two pots so that I can choose which one I draw from. What difference does it make where the drawdown comes from? I would prefer to eliminate this differentiation if possible to simplify my SIPP for my heirs. If one pot is much smaller than the other then maybe I could drawdown that first so that it all gets used up and just leaves the larger pot?

As far as I remember, I took the maximum 25% taxfree lump sum when I first retired and invested the rest to create perpetual income. The fixed drawdown has continued while the fund has grown to currently stand at the highest level it has ever been.

Could anyone explain what the consequences might be for choosing one pot over the other?

Grateful for any clarification on this subject.

Thanks
Y

If you crystallised the whole pot and didn't then contribute anymore then I'd have expected that you would still have just the one crystallised pot.

The

"Typically, but not always, when you do a transfer in from another
provider, if you have crystallised funds within that transfer then this will
create a 2nd pot in addition to the pot that you already hold with ..."

statement makes it sound as though they think your account was transferred to them and that you already had an existing pension pot with them or maybe that you transferred a pension pot from elsewhere at the same time to consolidate your pots rather than it being a takeover.

If for some reason, like your having made more contributions since you crystallised your original pot, you have ended up with a mixture of crystallised and uncrystallised pots then accessing the crystallised pots would be using flexi-access whilst accessing the uncrystallised pot would use UFPLS (unless you told them to crystallise that pot as well and took 25% as a tax free lump sum). If you drawdown using UFPLS then 25% of what you drawdown would be tax free with the remainder taxed at your marginal rate whereas if you drawdown from the crystallised pot using flexi-access then you have already taken the tax free lump sum and hence all the money drawndown would be taxed at your marginal rate.

(If you hadn't taken anything so far apart from the 25% tax free lump sum when you crystallised the pot then future contributions would be just limited by your relevant earnings and the normal annual allowance limit of £40,000 per year. However if you had drawn down more than the tax free lump sum from the crystallised pot or in the future used UFPLS drawdown any future contributions would be limited by your relevant earnings and the MPAA limit (which is currently £4000 per year). This almost certainly doen't apply to you as you say you have been drawing down a fixed amount for 10 years but I included it for completeness.)

If you are anywhere close to the lifetime limit (LTA limit) then you are better off crystallising the pot than using UFPLS since you can remove growth from the crystallised pot without further LTA testing whereas each UFPLS drawdown causes a further LTA test. As I mentioned above if you do have an uncrystallised pot then you could just crystallise it and take 25% as another tax fee lump sum hopefully then the new provider will just merge the new crystallised pot with the existing crystallised pot.

When you do have a crystallised pot and uncrystallised pot some providers such as A J Bell with their Youinvest SIPP make it look as though you just have one pot and handle things behind the scenes. Others though show two separate pots with different investments in different pots and some may even go as far as charging you extra for dealing with two pots rather than one.

Hope this is of some help.

[yieldhog]

ursaminortaur,

Thank you for taking the time to provide that explanation. It's very much appreciated.

I will post a follow-up when I get to know more about the two pots.

I should have mentioned that I will be 75 in about ten months time and understand there could be consequences at that time from any decisions I make now.

If it does turn out that I still have uncrystallised funds, would I be entitled to take up to 25% tax-free or would that depend on how much I originally took as a lump sum? It would be nice to get some tax-free money out but I suspect the latter.

Y

[seagles]

ursaminortaur,

Thank you for taking the time to provide that explanation. It's very much appreciated.

I will post a follow-up when I get to know more about the two pots.

I should have mentioned that I will be 75 in about ten months time and understand there could be consequences at that time from any decisions I make now.

If it does turn out that I still have uncrystallised funds, would I be entitled to take up to 25% tax-free or would that depend on how much I originally took as a lump sum? It would be nice to get some tax-free money out but I suspect the latter.

Y

you can get 25% tax free from any uncrystallized funds. HL keeps the 2 pots seperately as well, every year I re-open the standard SIPP account pay in £2880 (current max), they then get the 20% from HMRC, when I see that arrive, I instruct them to convert it to the crystallized account, sending me the 25% tax free at the same time. You can do that until you are 75. Everytime you do that though, I believe the LTA changes, not a problem for me as will not ever get to the MAX........

[ursaminortaur]

ursaminortaur,

Thank you for taking the time to provide that explanation. It's very much appreciated.

I will post a follow-up when I get to know more about the two pots.

I should have mentioned that I will be 75 in about ten months time and understand there could be consequences at that time from any decisions I make now.

If it does turn out that I still have uncrystallised funds, would I be entitled to take up to 25% tax-free or would that depend on how much I originally took as a lump sum? It would be nice to get some tax-free money out but I suspect the latter.

Y

At 75 there will potentially be two final LTA tests.

1) A final LTA test on any already crystallised pot. This just looks at the growth in the crystallised pot since it was crystallised which still remains in the pot.

(Value of crystallised pot at age 75) - ( (value of pot when crystallised) - (tax free lump sum taken) )

Since drawing money out of an already crystallised pot does not cause any LTA test this test can be rendered toothless if you are close to the LTA limit by withdrawing enough of that growth (these withdrawals will be subject to tax at your marginal rate but that is less than you would pay if there was an LTA excess charge).

2) A final LTA test which captures anything left uncrystallised.

After age 75 you cannot contribute anything more to an authorised pension. The other change is that your beneficiaries will pay no tax on withdrawals from an inherited pension if you die before age 75 but will have to pay tax at their marginal rate on withdrawals on an inherited pension after age 75.

[MrFoolish]

Is it just me or has the government made this crystalisation thing unnecessarily complicated? I consider myself to be reasonably financially savvy but this isn't something I'm instinctively grasping.

[ursaminortaur]

Is it just me or has the government made this crystalisation thing unnecessarily complicated? I consider myself to be reasonably financially savvy but this isn't something I'm instinctively grasping.

The system has become more complicated because the government has introduced

1) beneficial changes like Osborne's pensions freedoms, and simplifications like UFPLS (which could already be achieved in a more clunky but flexible manner via partial crystallisations) which opened up potential loopholes for gain thus leading to things like the MPAA.

2) Changes which reduced the amount of tax relief the government gave out or allowed the government to claim back via a charge (drastically reducing annual allowance and Lifetime allowance, introducing a taper) - which then led to further complications with the various fixed and individual protections introduced as the LTA limit was lowered.

3) But didn't change other features such as the age 75 cutoff. Originally you had to take an annuity by age 75 but rather than abolishing this arbitrary date when things were changed to allow drawdown past that age it was maintained but different rules then applied before and after because there were no LTA tests after age 75. In retrospect it would probably have been simpler to have had no age 75 tests but just to allow LTA tests to continue whenever a BCE occurred right upto death.

Governments like to fiddle with pensions whether for our benefit (indirectly for the government's benefit since hopefully it gets the credit at the next election) or directly for the government's benefit (it reduces the amount it pays into our pensions as tax relief etc) so pension complications are likely to continue to increase until some future government is willing to expend a lot of energy to produce a simplified system (which will then once again become more complicated over time).

[yieldhog]

seagles,
It's not just you but fortunately we have posters on this board like ursaminortaur and seagles who are prepared to give up some of their time to explain things.

Y

[yieldhog]

If I understand things correctly, and I discover that I have uncrystallised funds in my SIPP, I could withdraw 25% of the uncrystallised funds tax free and then instruct my SIPP provider to crystallise the remainder, thus leaving me with just one pot of crystallised funds. Depending on how much might be in the uncrystallised pot, I could also instruct my SIPP provider to stop my taxable drawdowns thus saving me a bit of income tax. The only downside to this is that my other sources of income are paid before tax is deducted and hence I would end up owing some tax every year, albeit less than I would have paid under the PAYE system (on my monthly SIPP drawdowns).

Y