starting SIPP drawdown with James Hay

[bluedonkey]

My SIPP is a "James Hay Modular iSIPP". In the new tax year starting 6 April 2023, I intend to start withdrawals. The intention is to withdraw 12 equal monthly amounts. The amounts will be taken as Uncrystallised Funds Pension Lump Sum, so 25% of each withdrawal will be tax-free and the remaining 75% will be taxed as income. I'm 66. No intention to make further pension contributions.

I realise that it is my responsibility to ensure that there is sufficient cash in the SIPP to be available at the time of each withdrawal.

The above is about the limit of my understanding. Some issues that are unclear to me:

1. Let's say the SIPP is £500k. If I take £20k each year, is £20k counted against my LTA? Is the LTA calculation done each month, or do I ask the SIPP provider to "frank" £20k in April 2023 as UFPLS and I then make the monthly withdrawals.

2. My understanding is that allocating part of the SIPP as UFPLS has no effect on the actual investments, other than the need to ensure cash is available for the withdrawals. It's just a LTA calculation.

3. I'm unclear how to choose between UFPLS and Flexi-Access Drawdown.

Any thoughts or comments welcome.

[genou]

1. Let's say the SIPP is £500k. If I take £20k each year, is £20k counted against my LTA? Is the LTA calculation done each month, or do I ask the SIPP provider to "frank" £20k in April 2023 as UFPLS and I then make the monthly withdrawals.

Each UFPLS triggers a BCE calculation and uses a percentage of your LTA. I had trivial UFPLS which used <1% of my LTA.

2. My understanding is that allocating part of the SIPP as UFPLS has no effect on the actual investments, other than the need to ensure cash is available for the withdrawals. It's just a LTA calculation.

That's true. Some providers maintain an internal calculation of crystallised/ uncrystallised funds, some create separate "pools", but that's irrelevant if all withdrawals are UFPLS

3. I'm unclear how to choose between UFPLS and Flexi-Access Drawdown.

Constant use of UFPLS is a very inefficient way of using your LTA, but that's only relevant if you reckon you need to be careful about LTA.

[bluedonkey]

Constant use of UFPLS is a very inefficient way of using your LTA, but that's only relevant if you reckon you need to be careful about LTA.

I may need to be careful about the LTA, though I suspect I won't know either way until I'm 70/early 70s (currently 66). Why is it inefficient?

Any suggestion for a way to take annual withdrawals over many years using my basic rate band? UFPLS just seemed a neat solution though I may well be missing something!

Thanks.

[swill453]

Any suggestion for a way to take annual withdrawals over many years using my basic rate band? UFPLS just seemed a neat solution though I may well be missing something!

I crystallised my whole SIPP, and invested the tax free cash outside (in ISAs and general dealing accounts). So now I take a lump sum drawdown from the SIPP of £12,570 each year in April for my spending.

My wife does something similar, so this covers most of our day to day spending, while paying no income tax at all.

Scott.

[ursaminortaur]

Constant use of UFPLS is a very inefficient way of using your LTA, but that's only relevant if you reckon you need to be careful about LTA.

I may need to be careful about the LTA, though I suspect I won't know either way until I'm 70/early 70s (currently 66). Why is it inefficient?

Any suggestion for a way to take annual withdrawals over many years using my basic rate band? UFPLS just seemed a neat solution though I may well be missing something!

Thanks.

As stated each use of UFPLS uses up a percentage of your LTA limit ( and the automatic test at 75 captures anything still uncrystallised). This means that any growth between now and age 75 is fully captured by LTA tests.

In contrast if you crystallise your whole pot then there is just an LTA test when you crystallise the pot and a further test at age 75 - but crucially the age 75 test only captures any growth that is actually left in the crystallised pot at age 75 and NO LTA tests are performed when drawing down from a crystallised pot. This means that you can minimise the amount of LTA you use up ( and hence avoid exceeding the LTA limit ) by just making sure you drawdown all the growth before age 75.

[bluedonkey]

Thanks Ursa.

Can you point to any sources or your earlier posts comparing UFPLS with alternative withdrawal methods such as flexi-drawdown? I'm sure it must have been covered on the Fool in the past.

If I crystallise the whole pot, do I then have to withdraw 25% straight away? This is something I would like to avoid as I would then have a large amount of unsheltered money. My preference is to make annual withdrawals of approximately the running yield or perhaps a bit more. A lot of the capital in the SIPP will probably be left in order to take advantage of the IHT benefits.

[xxd09]

Monevator.com has some information on these procedures
Worth a look
xxd09

[swill453]

If I crystallise the whole pot, do I then have to withdraw 25% straight away?

Yes, that's part of the definition of crystallisation.

This is something I would like to avoid as I would then have a large amount of unsheltered money. My preference is to make annual withdrawals of approximately the running yield or perhaps a bit more. A lot of the capital in the SIPP will probably be left in order to take advantage of the IHT benefits.

You can do that by UFPLS, as you know.

Your provider may also allow partial crystallisation, so you end up with a drawdown pot alongside an uncrystallised part.

Scott.

[bluedonkey]

If I crystallise the whole pot, do I then have to withdraw 25% straight away?

Yes, that's part of the definition of crystallisation.

This is something I would like to avoid as I would then have a large amount of unsheltered money. My preference is to make annual withdrawals of approximately the running yield or perhaps a bit more. A lot of the capital in the SIPP will probably be left in order to take advantage of the IHT benefits.

You can do that by UFPLS, as you know.

Your provider may also allow partial crystallisation, so you end up with a drawdown pot alongside an uncrystallised part.

Scott.

Part of my confusion is not understanding the differing implications of:
a) taking out £20k as UFPLS where 25% is tax-free
b) taking out £20k as drawdown where 25% is also tax-free

[Darka]

Part of my confusion is not understanding the differing implications of:
a) taking out £20k as UFPLS where 25% is tax-free
b) taking out £20k as drawdown where 25% is also tax-free

Pete of Meaningful Money has some great videos' which cover this:

Retirement - Drawdown vs UFPLS vs Annuity
https://www.youtube.com/watch?v=NOIivz8_QuA

Drawdown, UFPLS or Annuity - EXAMPLES!
https://www.youtube.com/watch?v=0xF9B-h0-Fo

[kempiejon]

Part of my confusion is not understanding the differing implications of:
a) taking out £20k as UFPLS where 25% is tax-free
b) taking out £20k as drawdown where 25% is also tax-free

Let me see if I understand this, there are 2 ways of access your pot.
a) Your pot is uncrystallised and any amount extracted has a 25% tax free element, the rest taxed at your marginal rate. Each subsequent withdrawal is treated the same way 25% free, 75% taxed.
b) The pot is crystallised, when this happens 25% of the pot is cashed in, usually withdrawn immediately and is tax free. The balance 75% stays invested and all (100%) of any withdrawals are taxed at your marginal rate

[martinc]

UFPLS is just a special case of drawdown where everything is cash.

A £20k UFPLS gives £5k tax-free cash and £15k taxable cash.

A drawdown of £20k gives £5k tax-free cash and £15k in drawdown (in a separate account with some providers). You can then withdraw £15k taxable cash (selling holdings if necessary) and you are in exactly the same place as you were with the UFPLS. If you leave the £15k in drawdown it will continue to grow, earn dividends etc. but when you do withdraw anything it's 100% taxable.

UFPLS only exists because some smaller providers don't want the overhead of administering drawdown accounts (apparently).

[bluedonkey]

Part of my confusion is not understanding the differing implications of:
a) taking out £20k as UFPLS where 25% is tax-free
b) taking out £20k as drawdown where 25% is also tax-free

Pete of Meaningful Money has some great videos' which cover this:

Retirement - Drawdown vs UFPLS vs Annuity
https://www.youtube.com/watch?v=NOIivz8_QuA

Drawdown, UFPLS or Annuity - EXAMPLES!
https://www.youtube.com/watch?v=0xF9B-h0-Fo

Thanks for this. The videos that financial adviser has were very helpful. It helped me understand the difference between UFPLS and flexi-drawdown. He explains it by saying that compared to flexi-drawdown, UFPLS cuts out the interim stage of having part of the fund allocated/crystallised awaiting withdrawal. It's made it clear to me that UFPLS suits my circumstances.