TFLS and The Pension Service

[Pheidippides]

A really good discussion with the PAS, here in all its glory:

PS Advisor: Hello. You're through to PS Advisor. How can I help?
Pheidippides: Hello - I am 54 and 55 in January next.
‎Pheidippides: I am very close to the LTA
I intend to take the full 25% TFLS near my 55th birthday.
How is my LTA affected as the remainder of my fund will (hopefully) continue to grow
PS Advisor: What do you mean by just taking the 25% tax free lump sum? What you will be able to do depends on the options your provider offers. Whatever you take out from your pension crystalises a percentage of your LTA until you have used up 100%
Pheidippides: About 30% of my LTA is in a DB pension scheme that I am not going to touch. The remainder is in a SIPP. If the numbers were:
DB = 155,000
SIPP = 900,000
TFLS = 225,000
therefore LTA becomes 830,000? and I calc as remaining SIPP value plus 20x annual DB current pension
PS Advisor: If you want to take 25% of your SIPP as the tfls, you can only do that by crystalising the whole £900k in your SIPP. That will crystalise just under 90% of your LTA.
Crystallising means no more contributing?
PS Advisor: No. It means taking out from the pension. You only get 25% of what you crystalise tax free. You cant just crystalise the tfls.
PS Advisor: It sounds like you should really be paying a financial advisor to go through your best outcome with.
OK - Thanks for the assist
PS Advisor: It is a complicated area and not one we can go into any detail on via this webchat.
Pheidippides: understood
PS Advisor: No problem. Bye.
Pheidippides: bye

This seems to be completely at odds with the process described very simply in AJ Bell's platform. I don't intend to take anything as income until TY 20/21 and that will be intending to maximize the tax-free and lower-rate tax bands to their fullest.

Some residual questions:


How is the LTA reassessed?

Having taken all the TFLS in one lump does future investment growth matter, or not 'til I'm 75?

If you are close to the LTA does maximizing your drawdown to the limit of the Higher Rate Tax make sense as you can then put any excess into an ISA to protect against ANY future tax?

Regards

Pheid

[TedSwippet]

A really good discussion with the PAS, here in all its glory ...

I'm not sure I can see anything wrong with the PAS responses here. Are you conflating crystallising a pension with taking actual taxable drawdown? If so, they aren't one and the same. Crystallising means allocating a chunk of money from your pot, with 25% taken tax-free and the other 75% placed into a segregated drawdown element. You can take taxable income from that drawdown element if and when needed, but you don't have to start that immediately. You can defer drawdown for as long as you like (but see below for why deferring for too long is not a good idea).

As for contributing into pensions after crystallising, you can. As long as you haven't taken any taxable benefit, you have the usual annual allowance, otherwise you're limited to the £4k MPAA in DC. There are some fiddly recycling rules, but no outright ban.

How is the LTA reassessed?

It's not "reassessed" exactly. What happens is that you use it up in percentage-sized chunks. If you were to crystallise a £900k SIPP you would take £225k in PCLS, place £675k in (deferred?) drawdown, and use up 900/1055 your LTA (the current LTA is £1055k, and I assume no LTA protection), so 85.3% LTA used. That leaves you 14.7% of whatever is the LTA in effect at the time of any future pension crystallisation or DB pension commencement.

Most folk with both types of pension seem to suggest that it is better to take the LTA hit, if any, on the DC pension rather than the DB one. I only have DC though, so I'm not conversant with the ins-and-outs here.

Having taken all the TFLS in one lump does future investment growth matter, or not 'til I'm 75?

There's another spiteful LTA test at age 75. That will take 25% of anything you have in your drawdown element above what went into it through crystallisation. That means you are highly motivated to draw down at least all of the nominal growth before reaching age 75. Even paying tax on it at 40% will beat the 55% you might end up with if you get caught by the age 75 test. You might back-load withdrawals a bit, but eventually you want to take enough of them before running up against this age 75 test.

If you are close to the LTA does maximizing your drawdown to the limit of the Higher Rate Tax make sense as you can then put any excess into an ISA to protect against ANY future tax?

Always best to put things in an ISA to the fullest extent possible, but whether to do so by invoking taxable drawdown if you don't need to depends on your tax circumstances. The age 75 test will dominate in some cases, though; there you may well choose to drawdown even into higher rate tax, if that means you avoid 55% punitive LTA tax later on.