Flexible pension drawdown confusion

[Degsy67]

I’m a bit confused around the flexible drawdown, PCLS and UFPLS rules. It would help me a lot if I lay out a scenario with a few made up numbers and invite comments.

£500k in a YouInvest SIPP, age 55. Pensioner decides to withdraw the maximum they can from the pot for the first 10 years without paying any tax.

Annual personal allowance is £12.5k (let’s assume this remains unchanged). The pensioner decides to take an uncrystallised funds pension lump sum (UFPLS) of £16.5k each year from the pension. The £16.5k is composed of 25% tax free (PCLS) and 75% which counts as taxable income. That equates to £4.1k tax free plus £12.4k taxable. As the taxable portion is below the £12.5k annual personal allowance, no tax is due. (For the purposes of keeping things simple, let’s ignore the SIPP provider taxing this money on a Month 1 basis and needing to claim tax back from HMRC - this all gets squared away over the course of a month or so).

So, over the course of 10 years, continuing to do this year after year (ignoring inflation, changes to tax rules, changes to personal allowance, any investment returns), the pensioner has crystallised 10 x £16.5k = £165k. The remaining £335k is uncrystallised.

In year 11 he decides to pay off his outstanding mortgage balance of £70k and he again wants to avoid paying any tax on the withdrawal from his pension fund. If you get hung up on this being a mortgage payment and you want to tell me that he should have paid off his mortgage right at the start of his retirement then forget about this being for a mortgage repayment. Let’s imagine he wants to buy an expensive car as a one off luxury event instead.

With £335k of uncrystallised funds available, he can take up to 25% of this (~£84k) tax free. So in year 11, instead of taking his usual £16.5k UFPLS, he requests YouInvest to pay him a tax free PCLS of £70k. To do this, YouInvest crystallise £280k of the pension pot leaving £335k - £280k = £55k as uncrystallised funds and £280k - £55k - £70k = £155k crystallised funds.

To make the maths easier, let’s assume that for the first time ever a miracle occurs and his remaining investments achieve some growth. The total remaining pot of £155k + £55k = £210k increases in value to £221k. That’s £155k crystallised and £66k uncrystallised.

In year 12 he continues with his previous approach of drawing down a £16.5k UFPLS per year. He does the same in years 13, 14 and 15 (4 years). 4 x £16.5k = £66k. At this point the uncrystallised portion of his pension pot is completely depleted however his £155k of crystallised funds remains.

In year 16 he drops the income from his pension to £12.5k per year which matches the personal allowance and withdraws this on an annual basis going forwards.

So here are a few questions:

1. What have I misunderstood and what did I get wrong?

2. Do YouInvest support this type of flexibility - ie, swapping from UFPLS withdrawals to PCLS only and back to UFPLS?

3. I realise that in reality the value of the fund will not remain static but will change over time. Under these circumstances, how do I calculate the crystallised vs uncrystallised split? Do I simply take the total amount crystallised over time away from the total value of the fund? What happens if this calculation results in a negative result one year and a positive result a number of years later?

4. When there are crystallised and uncrystallised funds in the pension, does the retiree need to tell YouInvest where to take any withdrawals from? If not then what rules would YouInvest apply to determine this?

Any comments much appreciated.

Degsy

[swill453]

A quick reply without much thought:
- AJ Bell track crystallised vs. uncrystallised behind the scenes in terms of a proportion or percentage. Every time you add or subtract money they adjust the proportion. So any growth (or otherwise) in your holdings affects each part proportionately. They'll tell you the current proportions on request.
- UFPLS withdrawals can only come from the uncrystallised bit, standard drawdown can only come from the crystallised bit. What you do is under your control, simply by filling in the appropriate boxes on the form.

Scott.

[Chrysalis]

This is a helpful illustration, and response, for anyone trying to work out a withdrawal strategy.
In your illustration, the only thing ‘wrong’ that I can see is that in the year when the portfolio grows, both uncrystallised and crystallised parts will grow at the same rate. The crystallised portion isn’t literally ‘crystallised’ ie unchanging in value. Also worth noting is that AIUI, the growth of the crystallised portion will be tested again against the LTA at 75.

The other thing to note, although possibly not of relevance to you, is that I think providers vary as to how they handle partially crystallised pensions. My understanding is that some will separate out uncrystallised and crystallised funds into different accounts. I assume that these accounts could in theory hold different investments, and therefore might grow at different rates. I would be grateful if any other posters who are in drawdown with other providers could confirm this.

[seagles]

Hargreaves Lansdown keep the 2 seperate. You have a SIPP account for uncrystalized then when you want to crystallize you transfer to the other account.

[ffacoffipawb64]

Hargreaves Lansdown keep the 2 seperate. You have a SIPP account for uncrystalized then when you want to crystallize you transfer to the other account.

This is a much better way of doing things. However it does end up in higher fees (if you have more than £250k in funds or approx £50k in shares) as each account is treated as a separate entity.

However, fees aren't everything. Prompt payment of benefits like PCLS and drawdown income is more important and some of the other providers can't even manage that.

[swill453]

Hargreaves Lansdown keep the 2 seperate. You have a SIPP account for uncrystalized then when you want to crystallize you transfer to the other account.

This is a much better way of doing things.

Each to their own, but I prefer the Youinvest way. You don't have to invest and consider 2 different pots, which won't be easy if you've (naturally) got a single SIPP investment strategy.

(How does it work anyway? At, say, the point of crystallising 50% of your pension, do you have to divvy your investments into two?)

Youinvest would be ideal if you could see your "percentage crystallised" on the website though...

Scott.

[ursaminortaur]

This is a helpful illustration, and response, for anyone trying to work out a withdrawal strategy.
In your illustration, the only thing ‘wrong’ that I can see is that in the year when the portfolio grows, both uncrystallised and crystallised parts will grow at the same rate. The crystallised portion isn’t literally ‘crystallised’ ie unchanging in value. Also worth noting is that AIUI, the growth of the crystallised portion will be tested again against the LTA at 75.

An LTA test will also be performed every time you make a UFPLS withdrawal using up more of your LTA. Unlike with the UFPLS withdrawals from the uncrystallised pot though the growth after crystallisation in the crystallised pot can be mitigated before the the age 75 test by withdrawals from that crystallised pot which are not subject to any LTA testing. Whether this would be a concern on a £500k pot would depend on your growth rate and how long before age 75 you start drawdown but with a £500k pot it probably won't be a concern especially since the LTA limit is now increasing with CPI.

[Degsy67]

I appreciate all of the replies so far and the corrections in my understanding. Looks like I’ll nedd to take a look at the way in which YouInvest calculate the crystallised/uncrystallised split. Also interesting to see that Hargreaves Lansdown manage this a different way. The comments on the UPFLS LTA test is also an interesting point of detail which I wasn’t aware of.

I’d appreciate an answer from those in the know to the following specific:

2. Do YouInvest support this type of flexibility - ie, swapping from UFPLS withdrawals to PCLS only and back to UFPLS?

Sounds like they do but would be good to have this confirmed from a YouInvest SIPP holder who has direct experience someone who is familiar with the way they apply rules in this area.

Degsy

[Chrysalis]

Whether this would be a concern on a £500k pot would depend on your growth rate and how long before age 75 you start drawdown but with a £500k pot it probably won't be a concern especially since the LTA limit is now increasing with CPI.

The individual might have a DB pension taking up some LTA, or indeed another pension pot with some other provider.

[swill453]

2. Do YouInvest support this type of flexibility - ie, swapping from UFPLS withdrawals to PCLS only and back to UFPLS?

So I don't have direct experience of it, but I can't imagine how the answer could be "no".

If any of your pot is uncrystallised then you can apply to either make a UFPLS withdrawal, or to crystallise it by taking a PCLS. How could they refuse?

Scott.

[genou]

I’d appreciate an answer from those in the know to the following specific:

2. Do YouInvest support this type of flexibility - ie, swapping from UFPLS withdrawals to PCLS only and back to UFPLS?


Degsy

I went from UFPLS to nothing, then PCLS and flexible drawdown. The flexible drawdown can be altered at will once started (and therefore can be stopped ).

I suspect in order to start UFPLS up again they would require another wet signature ( hence paper forms ) because you are accessing a different tranche of the pot than FD , but I don't see why they would not let you do it.

Do check out the arithmetic if LTA is an issue for you, the interaction with UFPLS is horrendous.

[Degsy67]

OK, starting to get my head around it now.

UPFLS - a withdrawal from the uncrystallised part of the pension which results in crystallising a proportion and then instantaneously/simultaneously paying this out of the pot along with the associated tax free element (PCLS).

PCLS withdrawal - a withdrawal from the uncrystallised part of the pension which results in crystallising a proportion of the pot but only paying out the tax free element.

Flexible Drawdown - a withdrawal from the crystallised part of the pension with all of the withdrawal treated as income and subject to income tax (subject to personal tax allowance).

The first two of these are Benefit Crystallisation Events so the test against LTA occurs as a consequence of either of these actions. There is also an LTA test at age 75 if there are remaining uncrystallised funds.

Now, coming to AJBell’s approach to managing what proportion of funds are crystallised and what remains uncrystallised... help! I can’t find anything in their documentation which helps to explain how this is managed in practice. Can anyone help with a pointer or alternatively a worked example? I’m guessing that the proportion is calculated at the point of each event based on the valuation of the fund at the time and that this approach continues up until the point that the pensioner has effectively crystallised 100% of the growing (shrinking) over time pot. At this point I’m assuming it remains 100% crystallised forever irrespective of the value of the pot.

Quite complicated in terms of the BCE LTA tests. Based on the fact that pension fund sizes have been constrained by the reduced annual allowance from 2012 and the fact that the annual allowance is now increasing in line with CPI on an annual basis, I’m hoping that a future government will simplify this again at some point in the future... but I won’t hold my breath.

Degsy

[ursaminortaur]

OK, starting to get my head around it now.

UPFLS - a withdrawal from the uncrystallised part of the pension which results in crystallising a proportion and then instantaneously/simultaneously paying this out of the pot along with the associated tax free element (PCLS).

PCLS withdrawal - a withdrawal from the uncrystallised part of the pension which results in crystallising a proportion of the pot but only paying out the tax free element.

Flexible Drawdown - a withdrawal from the crystallised part of the pension with all of the withdrawal treated as income and subject to income tax (subject to personal tax allowance).

The first two of these are Benefit Crystallisation Events so the test against LTA occurs as a consequence of either of these actions. There is also an LTA test at age 75 if there are remaining uncrystallised funds.

Now, coming to AJBell’s approach to managing what proportion of funds are crystallised and what remains uncrystallised... help! I can’t find anything in their documentation which helps to explain how this is managed in practice. Can anyone help with a pointer or alternatively a worked example? I’m guessing that the proportion is calculated at the point of each event based on the valuation of the fund at the time and that this approach continues up until the point that the pensioner has effectively crystallised 100% of the growing (shrinking) over time pot. At this point I’m assuming it remains 100% crystallised forever irrespective of the value of the pot.

Quite complicated in terms of the BCE LTA tests. Based on the fact that pension fund sizes have been constrained by the reduced annual allowance from 2012 and the fact that the annual allowance is now increasing in line with CPI on an annual basis, I’m hoping that a future government will simplify this again at some point in the future... but I won’t hold my breath.

Degsy

One small correction it is the LTA limit which is now increasing with inflation - CPI. The annual allowance has been stuck at £40,000 since April 2014 unless it is further reduced because you are a very high earner (tapered allowance) or because you have already withdrawn taxable income from a pension pot (MPAA).

[DrBunsenHoneydew]

There is also an LTA test at age 75 if there are remaining uncrystallised funds.

Another clarification: There is a test at age 75 even if you have previously crystallised the whole pot.
The pot could grow to exceed the available LTA whether or not crystallised. If you have crystallised but not taken enough from the "drawdown part", it could grow "too much" and HMRC will rub its hands.

[Degsy67]

Thanks for the further corrections and clarifications.

Anyone able to clarify or confirm the way that AJBell calculate the crystallised/uncrystallised proportion across multiple drawdown actions?

Degsy

[genou]

Thanks for the further corrections and clarifications.

Anyone able to clarify or confirm the way that AJBell calculate the crystallised/uncrystallised proportion across multiple drawdown actions?

Degsy

They don't share it with you, although I believe you can ask, as stated above. What they do give you is the percentage of LTA used to date ( if you go periodic UPFLS you get one on each payment ) , which is what I am mostly focused on. Beyond that I have a known minimum amount of crystallised funds which I am drawing down as FD.* I have a projection ( created by me ) as to when I will do a further BCE to create more crystallised funds to enable FD to continue. All I see at the moment is that FD payments are coming from tranche 1 of 1, with no detail of how that tranche relates to uncrystallised funds.

I assume at some point they will tell me that tranche 1 is getting small, or I will ask them in advance of creating a further BCE.

*

The crystallised portion isn’t literally ‘crystallised’ ie unchanging in value

I have never seen a BCE calculation that allows the value to fall - i.e. a BCE generates a fixed minimum amount; I haven't thought about whether the value extractable from the SIPP can rise, but the imbalance makes me unsure of this comment - it would be interesting to know how the HL "two pot" system works if the value in the crystallised pot falls below the "BCE amount remaining after withdrawals" if that makes sense.

[EssDeeAitch]

This thread gave me pause to thought so I contacted my SIPP platform (Interactive Investor) and asked what the situation was regarding draw-down.

I withdrew my 25% tax free element just over two years ago and I will not need to draw down any more for at least 10 years (probably 15 years). In the meantime I will be paying in the £2880 a year made up to £3600 by HMRC.

I have been told that any growth in the SIPP as well as the new contributions will be subject to the 25% tax free draw-down which is good, I was not sure on that. The relevant values will be made available on request. Existing and new contributions are held in the one account, (Fidelity have two accounts for this) which for me makes record keeping easier.

Good thread, it has helped a lot.

[swill453]

I have been told that any growth in the SIPP as well as the new contributions will be subject to the 25% tax free draw-down which is good, I was not sure on that. The relevant values will be made available on request. Existing and new contributions are held in the one account, (Fidelity have two accounts for this) which for me makes record keeping easier.

Wow I'm stunned, that (the bold bit) is categorically wrong.

Either you misunderstood, or the person who told you needs retraining.

Do you have it in writing by any chance?

Scott.

[EssDeeAitch]

I have been told that any growth in the SIPP as well as the new contributions will be subject to the 25% tax free draw-down which is good, I was not sure on that. The relevant values will be made available on request. Existing and new contributions are held in the one account, (Fidelity have two accounts for this) which for me makes record keeping easier.

Wow I'm stunned, that (the bold bit) is categorically wrong.

Either you misunderstood, or the person who told you needs retraining.

Do you have it in writing by any chance?

Scott.

In light of your comments, I will get it checked out immediately and come back to you. I will ask in writing this time

[Alaric]

I have been told that any growth in the SIPP as well as the new contributions will be subject to the 25% tax free draw-down which is good,

If you had a totally separate SIPP for the £ 2880 contributions, presumably you could take 25% as a tax free cash sum at a time of your choosing. How it works if that SIPP has been consolidated with a earlier one where you have already taken the 25% isn't clear.