Extracting Cash from Pension

[MyNameIsUrl]

I'd like to extract cash from a Youinvest SIPP and it seems there are two options: drawdown and UFPLS. I've read though Youinvest's website and it seems as if there is little to choose between the two options.

If I want to extract cash to empty the pot over the next two or three years, keeping my total income below the higher-rate band, it seems to me whichever of the two methods I use I will get 25% tax-free and 75% taxed at basic rate. With drawdown I can get the 25% a bit sooner, but overall the total amount of post-tax cash will be the same either way.

Have I understood correctly? Does it make any difference (I'm wondering why there are two methods if so)?

[swill453]

Have I understood correctly?

Yes pretty much.

Does it make any difference (I'm wondering why there are two methods if so)?

Taking money out by UFPLS leaves the remaining pot entirely uncrystallised. This used to have quite significant tax implications if you were to die, but I think the (relatively) recent rule changes have lessened this effect.

What it does allow you to do is leave the bulk of your pension pot in its tax-sheltered wrapper and not have to worry about what to do with suddenly having 25% of it dumped in your lap. Of course for some that would be a positive advantage, for me I didn't have a need for it.

(You used to be able to get the same effect by doing "phased drawdown". UFPLS just simplifies this. The bigger change was the abolition of "capped drawdown", which increased the amount you could drawdown, by any method.)

Scott.

[ursaminortaur]

Flexi-access drawdown ie taking the 25% tax free lump sum in one go and crystallising the pot has advantages over UFPLS if your pot is anywhere close to the LTA limit.

If you use UFPLS drawdown LTA tests are carried out everytime you take money out and all growth in the pot is added onto the amount of LTA you have used up until you empty the pot or reach 75 when there is a compulsory LTA test on uncrystallised funds.

In contrast if you take the full 25% out tax free and crystallize the pot then no further LTA test is carried out until you are 75. The test carried out at 75 is then simply on the amount in the pot at that age minus the amount in the pot when crystallised (after the 25% had been taken). This can be minimised or even reduced to zero by taking out enough in drawdown before you reach 75.

Assuming 4% growth then you start hitting LTA problems at 75 with UFPLS if you have a pot of around £600,000 at 55 (for this calculation I'm assuming the LTA remains at £1million until you are 75 - and therefore ignoring the proposed indexation of the LTA from 2018 onwards or any possibility that the Government reduces the LTA even further)

£600,000 pot. 4% growth being taken out ie taking out £24000 per year. After 20 years you have used up £480,000 of your LTA but still have £600,000 in your pension pot ie you will be charged for an excess of £80,000.

Of course if you have 4% growth and take out less than £24000 per year then your pot will grow and the problem will compound.

If growth is higher than 4% you will have problems with the LTA test at 75 with smaller pots.



Dave

[ursaminortaur]

Capped drawdown only continues for those who already have it and only as long as they restrict the amount they drawdown to the capped limit they were given. If they exceed that level then they will automatically be switched to flexi-access drawdown which will have a small number of impacts such as restricting any further DC pension contributions by reducing their allowance to £10,000. No one who started drawdown after 5th April 2015 would have been able to opt for capped drawdown.

Dave