TFLS withdrawal from my SIPP

[John123ab]

Hi,

I'm a bit confused about the mechanics of taking my TFLS from interactive investor SIPP. Questions as follows;

1)Say I have £500k in my SIPP and want to take my 25% tax free lump sum. Then I have to move the £500k to flexi draw down. I then take my £125k tax free. My question is would I then notice any differences when I contribute to my SIPP afterwards (pension recycling rules observed) or is the split into two pots a background thing?

2) Second, if I wanted only part of the tax free amount, say half of 25% then I transfer £250k to flexi access drawdown to take out £62.5k then leaving the remaining benefit of the 50% of the 25% in the 'main' pot to transfer to flexi access at a later date?

3) Does the mix of whether the cash is in 'main' pot or 'flexi access' make any difference to returns? I could just transfer the entire 100% to flexi access drawdown to save two lots of admin if I'm going to front end the taking of the entire 25% anyway over time and the interface for investing with Interactive investor remains the same after this.

Sorry for the ramble, hopefully one of you understands.

John

[ursaminortaur]

Hi,

I'm a bit confused about the mechanics of taking my TFLS from interactive investor SIPP. Questions as follows;

1)Say I have £500k in my SIPP and want to take my 25% tax free lump sum. Then I have to move the £500k to flexi draw down. I then take my £125k tax free. My question is would I then notice any differences when I contribute to my SIPP afterwards (pension recycling rules observed) or is the split into two pots a background thing?

2) Second, if I wanted only part of the tax free amount, say half of 25% then I transfer £250k to flexi access drawdown to take out £62.5k then leaving the remaining benefit of the 50% of the 25% in the 'main' pot to transfer to flexi access at a later date?

3) Does the mix of whether the cash is in 'main' pot or 'flexi access' make any difference to returns? I could just transfer the entire 100% to flexi access drawdown to save two lots of admin if I'm going to front end the taking of the entire 25% anyway over time and the interface for investing with Interactive investor remains the same after this.

Sorry for the ramble, hopefully one of you understands.

John

Interactive investor say they handle the split between crystallised funds (where you have moved some of the pension pot into flexi-access drawdown and taken the TFLS corresponding to that part) and the uncrystallised funds (part of the pot which hasn't been moved into drawdown and into which new contributions go) behind the scenes so that you just see one pot.

https://www.ii.co.uk/ii-accounts/sipp/income-drawdown/notional-split

I don't have an ii SIPP but based upon my SIPP with A J BELL which uses a similar strategy the answers to your questions are

1) The split is a background thing and you won't see any difference - you can sell and buy any shares/funds etc without worrying whether they are in one part or another. (If you are drawing down though eventually you could use up all of the part which had been put into flexi-access drawdown and would then need to crystallise more - I'd expect ii to inform you if you were ever to get close to that happening.)

2) Yes you should be able to do this.

3) No it doesn't make any difference to returns.

[John123ab]

Thank you, that is very clear. Thanks for pointing me to the II examples as well which I didn't find either.

[John123ab]

Ignoring the income and inheritance tax side of things. Is there any benefit in moving less to flex access drawdown now rather than the entire pot e.g. doing it in stages? This is very complicated for something so simple i.e. I just want to access the 25% TFLS maybe in stages and leave the rest to grow until I retire.

[swill453]

Ignoring the income and inheritance tax side of things. Is there any benefit in moving less to flex access drawdown now rather than the entire pot e.g. doing it in stages? This is very complicated for something so simple i.e. I just want to access the 25% TFLS maybe in stages and leave the rest to grow until I retire.

You don't really need to do anything other than the last sentence above.

Take the 25% either all at once or in chunks over time. You don't need to do anything else. What you haven't taken will remain invested.

Scott.

[TedSwippet]

Ignoring the income and inheritance tax side of things. Is there any benefit in moving less to flex access drawdown now rather than the entire pot e.g. doing it in stages?

As written, this question is hard to answer. The entire point of a pension is for its income tax advantages, and (less so) its inheritance tax advantages. If you ignore both of those -- that is, if you're happy to pay more in tax than otherwise -- then clearly a pension has no function for you.

Most people prefer to pay less tax, not more. For best results, you should only take out as much of the 25% tax free as you have a use/need for. While inside the pension, whatever proportion of it is left untaken can continue to grow tax-free. In a sense, you can look at this part of your pension as equivalent to an ISA. It is not sensible to expose investment income to tax when you don't have to.

[JohnB]

As I understand it, when you move a fraction of a SIPP into drawdown, you have to withdraw the 25% lump sum at that point, if you withdraw money from the drawdown pot at a later time you do not get a proportion tax free.

[ursaminortaur]

As I understand it, when you move a fraction of a SIPP into drawdown, you have to withdraw the 25% lump sum at that point, if you withdraw money from the drawdown pot at a later time you do not get a proportion tax free.

Strictly speaking when you crystallise part of your pension pot you can take up to 25% as a tax free lump sum. So you could theoretically just take a 10% tax free lump sum or no tax free lump sum. However for a DC pension it doesn't really make sense not to take the full 25% tax free lump sum in drawdown.
(With DB pensions it may well make sense to not take a tax free lump sum since to get the lump sum you may have to convert annual pension, ie lower the annual pension you will get, and the conversion factor used (usually referred to as a commutation factor) is often pretty poor value.)

You are correct that after entering flexi-access and taking your tax free lump sum subsequent withdrawals from the crystallised part of the pot will then be taxed.

There is though another way of accessing your pension. With UFPLS you leave the pot uncrystallised and then drawdown money from the pot - 25% of each amount you drawdown will be untaxed and the other 75% will be taxed at your marginal tax rate. In effect for each small amount you drawdown using UFPLS you are crystallising that amount and taking the corresponding 25% tax free lump sum and then immediately taking the rest of the crystallised amount out as taxed income.

[JohnB]

The situation is muddled with the abolition of the Life Time Allowance. The UFPLS you mention could be affected by the reintroduction of an LTA by an incoming Labour Party. There is an argument that pension providers have no obligation to record LTA usage this year, so you could take advantage of a hole in HMRC records, if you need to avoid it.

[John123ab]

Ignoring the income and inheritance tax side of things. Is there any benefit in moving less to flex access drawdown now rather than the entire pot e.g. doing it in stages?

Most people prefer to pay less tax, not more. For best results, you should only take out as much of the 25% tax free as you have a use/need for. While inside the pension, whatever proportion of it is left untaken can continue to grow tax-free. In a sense, you can look at this part of your pension as equivalent to an ISA. It is not sensible to expose investment income to tax when you don't have to.

This topic is very educational. So if you leave more inside then the 25% element of that untouched piece and future contributions continue to grow and you can take out another 25% tax free until you bust through the new limit of 25%x£1073k. Of course though better out because Rachel Reeves will probably changed the rules......

[ursaminortaur]

Most people prefer to pay less tax, not more. For best results, you should only take out as much of the 25% tax free as you have a use/need for. While inside the pension, whatever proportion of it is left untaken can continue to grow tax-free. In a sense, you can look at this part of your pension as equivalent to an ISA. It is not sensible to expose investment income to tax when you don't have to.

This topic is very educational. So if you leave more inside then the 25% element of that untouched piece and future contributions continue to grow and you can take out another 25% tax free until you bust through the new limit of 25%x£1073k. Of course though better out because Rachel Reeves will probably changed the rules......

Yes, though of course you either need to eventually take it or die before age 75 ( if you die without taking it then the tax free lump sum dies with you, though if you are under 75 when you die your beneficiaries pay no tax on the inherited pension pot).

[TedSwippet]

This topic is very educational. So if you leave more inside then the 25% element of that untouched piece and future contributions continue to grow and you can take out another 25% tax free until you bust through the new limit of 25%x£1073k.

An example might clarify.

Suppose you have £400k in your pension. You need £50k now for some home improvements. You take the full 25% PCLS on all £400k, spend £50k on improvements, and invest the other £50k. Two years later, your £50k outside the pension has returned 10% (for simplicity, all capital gain), so has risen to £55k, but inflation is also 10%, so that you now need £55k for a second round of improvements. Taking out your £55k lands you with a 10% or 20% CGT liability on £5k, leaving you with a £500 or £1000 shortfall to cover. (Tax loss is even worse if you have had to pay higher rates of this as annual tax on dividends or interest over the period.)

Alternatively, when you need the first £50k you crystallise just £200k of your pension (that is, four times the amount you need). This leaves you with a pension that is part-crystallised. To you, it will look like a single £350k pot (£150k crystallised, £200k uncrystallised), but Interactive Investor tracks the percentage of it that is crystallised (you'll be able to view that online in your account). Again, after two years, investment gain and inflation are both 10%. Your £200k uncrystallised element is now £220k. You can take 25% of that tax-free now, release the full £55k, cover your improvement costs, and lose nothing to tax.

In both cases you end up with a fully crystallised pension, so no more tax-free amounts available after this. However, in the second case you are £500, £1000, or more better off for having avoided paying entirely unnecessary tax.

Of course though better out because Rachel Reeves will probably changed the rules......

Well, possibly, but also possibly not. A major problem with pensions is that you, as an individual saver, have to commit to saving over a large proportion of your lifetime, whereas politicians of all stripes now treat pensions as a political football, things they can fiddle with for their own short term personal political advantage or ambitions, and with scant or zero attention to the effects on actual pension savers of their (usually, damaging) short-notice changes.

Labour may well worsen things, but remember that when they left office in 2010 the lifetime allowance stood at £1.8M, and it was a succession of Conservative chancellors that cut, and cut, and cut until it bottomed out at £1M, a more than 50% cut in real terms, before they eventually realised it was damaging and scrapped it (though only after much damage was done). Likewise, it was a Conservative chancellor that also cut the annual allowance to £40k, before a successor raised it, but again only after seeing that the low limit was becoming an employment disincentive in some sectors.

There is, of course, no situation so bad that a politician cannot worsen it. The key point here though is that over time Conservative chancellors have wreaked as much damage to pensions, if not more in many areas, than Labour ones. Neither party is to be trusted. At all.

[JohnB]

If you were likely to hit the lifetime allowance, and it was inflation-linked, as designed, and you had a £1m pot, then the argument might be different, as your second withdrawl would be using a smaller fraction of a £1.1m LTA, and you'd have more leeway to avoid a 55% tax charge on your excess at 75.

But it isn't and is half-abolished, and might return, and...

[TedSwippet]

If you were likely to hit the lifetime allowance, and it was inflation-linked, as designed, and you had a £1m pot, then the argument might be different, as your second withdrawl would be using a smaller fraction of a £1.1m LTA, and you'd have more leeway to avoid a 55% tax charge on your excess at 75.

Right. In practice, in the past a fair few people have taken the larger or full PCLS much earlier than needed to sidestep punitive 55% tax charges later in life. This is one of the LTA damages I was referring to above, and one that has (perhaps, mostly, we hope) now gone away.

But it isn't and is half-abolished, and might return, and...

Anything could happen. Again, politicians care only about their own re-election chances, and really don't give two hoots for pension savers. Not least because they have their own pension scheme that is, by and large, better than what most of the rest of us have, and more importantly, is often unaffected by the whipsaw pension rule changes they foist on the rest of us.

However, I don't see even Labour reinstating the LTA exactly as it was before the last budget scrapped it. And it's at least relatively likely that anything they come up with to replace it will have some protections against retroactive effects, similar to when the LTA was cut (and cut, and cut).

Of course, they could well come up with something even worse than the old LTA. Nobody knows; which is in itself a large part of the problem. If you were hunting for a single adjective to describe UK pension policy, "unstable" would be a good fit. Or, "inconsistent". Or "arbitrary". Or "erratic". Or more pithily, "deranged".

[danlondonuk]

I found this post interesting especially with the Proposed reintroduction of the LTA by an expected Labour Government, if Labour were to gain power and then re-introduced the LTA & 25% TFLS CAP would it be wise in preparation to combine all pensions into a single SIPP and then if the SIPP is the LTA draw the maximum TFLS, so as not to possibly loose this generous benefit. I was thinking about doing this as a defensive move if as expected Labour win the upcoming election.

Is one able to move the SIPP into drawdown , then ring fence the maximum TFLS allowed and then leave the pot to grow once in drawdown then i'm assuming as one has already crystallised in a drawdown pot but still left to grow or take some of the TFLS if desired they would then not be caught out by any re-introduction or lowering of the TFLS or LTA under a new government ?

Thoughts on this please

[swill453]

Is one able to move the SIPP into drawdown , then ring fence the maximum TFLS allowed and then leave the pot to grow once in drawdown then i'm assuming as one has already crystallised in a drawdown pot but still left to grow or take some of the TFLS if desired they would then not be caught out by any re-introduction or lowering of the TFLS or LTA under a new government ?

I'm afraid not. Taking the maximum TFLS means just that, removing it from the tax-protected wrapper. You'd have to find a home for it elsewhere.

Scott.

[SebsCat]

I found this post interesting especially with the Proposed reintroduction of the LTA by an expected Labour Government, if Labour were to gain power and then re-introduced the LTA & 25% TFLS CAP would it be wise in preparation to combine all pensions into a single SIPP and then if the SIPP is the LTA draw the maximum TFLS, so as not to possibly loose this generous benefit. I was thinking about doing this as a defensive move if as expected Labour win the upcoming election.

The abolition of the LTA doesn't increase the amount of the TFLS that can be taken. From April, the maximum tax-free amount you can take is equal to the new Lump Sum Allowance (LSA) which is set at £268,275, ie 25% of the existing LTA. Therefore a straight reintroduction of the LTA at the existing level wouldn't reduce the available TFLS.

That's not to say that a future government won't reduce the amount of TFLS that can be taken whether by introducing a new, lower LTA (very unlikely IMHO) or reducing the LSA. Indeed, removing the link between the TFLS and the LTA arguably makes it easier. The LSA is now just a figure that can be altered at whim. There's not going to be an outcry if it never gets increased in line with inflation again (it is already worth some 20% less in real terms than when the LTA was last increased in 2020/1). Probably not if it is "simplified" to a nice round number like £250k or even £200k.

Is one able to move the SIPP into drawdown , then ring fence the maximum TFLS allowed and then leave the pot to grow once in drawdown then i'm assuming as one has already crystallised in a drawdown pot but still left to grow or take some of the TFLS if desired they would then not be caught out by any re-introduction or lowering of the TFLS or LTA under a new government ?

Apologies if I'm misreading this, but it sounds like you're suggesting crystallising now with the intention of withdrawing the TFLS at a later date. That's not possible - you either take the TFLS cash when you crystallise or that amount is added to the drawdown pot and you will pay income tax on it when withdrawing it, just like any other withdrawal.

[MickR]

Ignoring the income and inheritance tax side of things. Is there any benefit in moving less to flex access drawdown now rather than the entire pot e.g. doing it in stages? This is very complicated for something so simple i.e. I just want to access the 25% TFLS maybe in stages and leave the rest to grow until I retire.

You don't really need to do anything other than the last sentence above.

Take the 25% either all at once or in chunks over time. You don't need to do anything else. What you haven't taken will remain invested.

Scott.

Hi

I'm just about to go through this process and have been reading this thread( thanks - great resource ). The link to the examples on the ii website were really useful, but they didn't cover the question raised about leaving some of your available TFLS in the drawdown pot. The original thread goes off topic a little so just wanted go back to this point

I'm in a similar position, with an II SIPP. I want to access a portion of my TFLS now, then the remainder over the next couple of years as I feed it into my ISA's. I only want to withdraw the TFLS element, with the remainder just held in the SIPP in the drawdown pot.

Reading the information, the split between your non drawdown and drawdown pots is a notional split and ii keep a tab of this by allocating a percentage of your overall pot as either crystallised or uncrystallised. Investments go up and down but the percentage remains the same.

My question is, if I crystalise 100K of a 400K pot, but only initially withdraw 10K as a TFLS, does the remaining 15K TFLS in my drawdown pot go up and down with my investments (as a percentage of the pot), or is it fixed at the £15K?

I don't think it too much of an issue either way, just trying to minimise administration. If the remaining TFLS remains as a percentage, I may as well just crystallise the whole pot now. If its fixed, I'll just go in a couple of times a year whenever I need the cash

thanks

Mick

[mc2fool]

My question is, if I crystalise 100K of a 400K pot, but only initially withdraw 10K as a TFLS, does the remaining 15K TFLS in my drawdown pot go up and down with my investments (as a percentage of the pot), or is it fixed at the £15K?

I don't think it too much of an issue either way, just trying to minimise administration. If the remaining TFLS remains as a percentage, I may as well just crystallise the whole pot now. If its fixed, I'll just go in a couple of times a year whenever I need the cash

thanks

Mick

From what I understand the TFLS is take all of it (crystallised) or lose it. viewtopic.php?p=646330#p646330

If you only want £10K then you should only crystallise £40K worth, you can't crystallise £100K and leave £15K behind to draw later, AIUI.

[kempiejon]

From what I understand the TFLS is take all of it (crystallised) or lose it. viewtopic.php?p=646330#p646330

If you only want £10K then you should only crystallise £40K worth, you can't crystallise £100K and leave £15K behind to draw later, AIUI.

Yup this is my thought too. I had been mulling the same dilemma of taking part of the pension but have worked out I'd rather crystallise and take the full 25% leaving the balance for now. I can reinvest the 25% and use some cash and other investment income. Taking money out of the SIPP and ISAing and other investments removes the capital from potential pension changes. Also, although I'm not sure about permanent employment, I think that'd allow me to come back to maxing a SIPP as I'd not triggered the Money Purchase Annual Allowance