The Lemon Fool

Hi

I've been trying get my head around how the PCLS works post crystallisation.

More specifically how are additional contributions handled in an existing pension in drawdown and how is additional growth apportioned.

I have approached my pension provider and this is the reply I got. Which I don't really understand.

The new contributions into your SIPP would go into a separate tranche.

There is not an option to ring fence your dividends, the dividends will go straight into the cash account and the SIPP as a whole will be proportionally split into crystallised and uncrystallised funds.

If the SIPP was to increase or decrease the uncrystallised and crystallised sections of the SIPP would do the same at the proportional split.


I'll use a worked example of what I think this means and expose my ignorance, the numbers used are illustrative, if contrived and unrealistic. Hopefully someone here will be able to explain how this works.

Lets introduce Steve.

Steve retires at 57, He has a DC pot worth £480K. He takes his maximum of 25% for UPLS (120K) and 360K goes into drawdown. This leave 148K of the UPLS allowance unused. He takes 12K per year from his pension (so he is subject to the 4K rule), he has no other qualifying income anyway. He however does deposit the £2880 amount into the pension which the Government grosses up to 3.6K. This according to the above goes into a separate tranche.

His investment performance is stellar he makes 112K per year, so his pot grows by 100K annually after the 12K is removed.

This carries on for 10 years, at 67 Steve is ready crystallise that new tranche.

Steve is now in an enviable position, he has a pension pot with the following breakdown 1 million (growth) + 36K (uncrystallised tranche) + 360K crystallised tranche in drawdown. For a total fund of £1,396,000.

How much PCLS is he allowed to have? The most obvious limit is 268K, so given he has already taken 120K the most he can get 148K. However he can only get various percentages, the most important part being how much of that 1 million growth is apportioned to his second tranche.

Option 1

36K is 10% of 360K, thus is he allowed to access 10% of the 1 million profit (100K) + 25% of 36K. 25% of 100K is 25K+9K makes 34K new UPLS

Option 2

36K is just over 9% of 396K (36K + 360K), thus he is allowed to access 90K of the 1 million + 25% of the 36K. 25% of 90K +9K makes 31.5K new UPLS

Both these options assume that the growth from the two tranches would be the same, which is not true the second tranche would initially be small, but given stock market volatility I'm not sure how it could be calculated on an ongoing basis.

There is however a further nuance.

Steve has been taking 12K a year in income (120K in total), this has reduced the profits, where does this fit into the equation? I think it must be reducing the crystallised tranche. So 360K has been reduced to 240K. Using the reduced figure for both options changes things.

Option 3

36K is 15% of 240K thus he is allowed to access 15% (150K) of the 1 million profit + 25% of 36K. 25% of 150K is 37.5K + 9k makes a new PCLS of 46.5K

Options 4

36K is 13% of 276K thus he is allowed to have 130K + 25% of the 36K. 25% of is 32.5K + 9K makes a new PCLS of 41.5K

As an aside the LTA is abolished from April, so there is no tax implication from the pot growing, at least until money is taken out.

Maybe a scenario I've missed?

The numbers are large to ensure there is a reasonable range, however if Steve had not been subject to the MPAA limit then contributions could be much higher and the numbers would start to become a lot more credible. Moreover taking more than 12K would also potentially reduce the crystallised pot.

Not all providers do the crystallised/uncrystallised split the same way. It might be worth saying who your provider is, there may be someone with direct experience.

Scott.

Perhaps this is all far above my head, but you start

"He has a DC pot worth £480K. He takes his maximum of 25% for UPLS (120K) and 360K goes into drawdown. This leave 148K of the UPLS allowance unused."

If he's taken the maximum 25%, then surely he has no allowance left?

Provider is Halifax SIPP, which is AJ Bell really.

If he's taken the maximum 25%, then surely he has no allowance left?

The allowance is now fixed at 268K + change. It is possible as illustrated to use some of the 268K then expose more.

ayshfm1 wrote:Provider is Halifax SIPP, which is AJ Bell really.

If he's taken the maximum 25%, then surely he has no allowance left?

The allowance is now fixed at 268K + change. It is possible as illustrated to use some of the 268K then expose more.

At the time he deposits the £2880/£3600 p.a., it makes up a tiny proportion of his pot. It follows that the uncrystallised proportion of his pot is tiny. So his entitlement to tax free cash won't go up by very much. I haven't done the exact sums.

Scott.

swill453 wrote:

ayshfm1 wrote:Provider is Halifax SIPP, which is AJ Bell really.

If he's taken the maximum 25%, then surely he has no allowance left?

The allowance is now fixed at 268K + change. It is possible as illustrated to use some of the 268K then expose more.

At the time he deposits the £2880/£3600 p.a., it makes up a tiny proportion of his pot. It follows that the uncrystallised proportion of his pot is tiny. So his entitlement to tax free cash won't go up by very much. I haven't done the exact sums.

Scott.

I think I had started to understand that now, and I have done some sums - eg
Month 1: 360,000 from crystallised, 300 from new contribution = 0.08326% of total.
Total grows 1% in a month (this is a bit more realistic than the flat 112k growth every year for 10 years)
Month 2: total is 363,903; 300 new contribution; uncrystallised is 300+0.08326% of 363,903 = 603.25 which is 0.1656%
and so on.
With the steady 1% growth per month, after 10 years it end up at
£1,245,087 total of which 5.72% is uncrystallised, ie £72,005.

So that would be about £18,000 as the second tax free lump sum.

ayshfm1 wrote:I have approached my pension provider and this is the reply I got. Which I don't really understand.

It's certainly a confusing area. Although Interactive Investor is not your provider, they do operate the same system; that is, a proportional split into crystallised and uncrystallised funds. And they publish a usable page that explains, with examples, how everything works for contributions, withdrawals, and investment gains (or losses).

Perhaps this might help: Notional split - interactive investor

EthicsGradient wrote:So that would be about £18,000 as the second tax free lump sum.

That seems to me to be about the right magnitude.

Each deposit of money "earns" 25% PCLS. So £3600 deposit earns £900 PCLS at the moment it's deposited. (This is slightly complicated as the £2880 net deposit and £720 tax relief are credited a couple of months apart, but ignore this for now.)

Then that £900 per annum is compounded at the overall growth rate of the pot. (Using fixed £112,000 growth per year makes this sum very difficult, so I won't do it )

So after 10 years you've got a potential £9000 PCLS, plus the compound growth over the 10 years, making £18,000 seem reasonable.

Scott.