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Capped or Flexible Drawdown ? Take full TFC now ?
Posted: 23 December 2012 10:52:25(UTC)

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I am a female and have just turned 60 and am now in receipt of 17k pa final salary pension. I did not take any TFC from this pension. I will start receiving my state pension of approx 5k in April 2015.
I have a 600k HL SIPP that I am trying to decide what to do with. I do realise I am in a fortunate position with this level of pension.

My basic aim is to take as much pension out as possible in the early years but to stay within the basic rate (BR) tax band, say 42k. I have no pressing need for the TFC.

My initial plan was to buy a small annuity to give me 3k income, so I would have the 20k to allow me to do flexible drawdown. I could wait until my state pension started, rather than buy an annuity, but I reasoned I wanted to use up my BR bands for the next couple of years and reduce my pension pot.

I would then just crystallise enough of my pot every year to give me taxable income to take me up to the BR limit. I would take out the corresponding 25% TFC each time I crystallised. The benefits of this approach would appear to be that my pension fund would remain uncrystallised and therefore IHT free (until I am 75) and also that the funds representing my 25% TFC entitlement would still grow within the SIPP tax wrapper.

My concerns now are that the government may abolish or severely restrict TFC in future years, so I am thinking of crystallising the whole 600k. If I do this I could probably get enough income in capped drawdown, particularly with the reinstated 20% uplift in Gad rates. The disadvantages would be that I would lose the IHT protection on the fund and that the 150k would then have to be invested outside the SIPP tax wrapper.

I suppose the real question is should I take the full 25% TFC now in case I cannot in the future. Would the chancellor be able to make retrospective changes to this entitlement ? Also if I do crystallise the whole fund would it be preferable to opt for flexible drawdown.

Any comments welcome
Clifford Pope
Posted: 04 January 2013 14:33:20(UTC)

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I hope someone responds to this question. I am pondering similar points myself - 63, in a position to retire whenever I want, perhaps progressively reducing working week, juggling in my mind the factors you mention.

Basically whether to take as much money out as possible, or try and do cannier things but with unknowable risks?
Posted: 04 January 2013 15:41:55(UTC)

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The chap you need to attract an answer from is 'Roydo'. Did you see this discussion which may deal with some of your points?


I appreciate that you do not want to wait until 2015 to generate the required level of income but, if you can get to that point, qualifying for Flexible Drawdown seems very attractive to me (capped drawdown puts you at the mercy of the Govt who keep changing the ground-rules). I'm in that happy position myself (Flexible Drawdown) and plan to take a 5% income from my fund which I have easily achieved via a mixture of Corporate Bonds and high-yielding shares so that I expect to be able to maintain that income as a minimum while maintaining the value of the capital in real terms.

Hope you attract a more knowledgable answer regarding TFC's.
neXus 6
Posted: 04 January 2013 15:45:31(UTC)

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"The disadvantages would be that I would lose the IHT protection on the fund and that the 150k would then have to be invested outside the SIPP tax wrapper."

It may be that you are trying to ride 2 competing objectives:
1) Enjoying your life by spending your hard earned money.
2) Worrying about tax.

If we consider the IHT position: what are your real hopes and what is the most likely scenario? Unless you plan to die before age 75 (seems a tad radical to save on IHT) then any unused pension faces a 55% death charge which is worse than the rate of IHT i.e. from an IHT perspective, you may be better spending the pension before other assets which are charged at up to 40%.

As you know, pension funds are not tax free (due to Gordon Brown's raid disallowing the recovery of dividend withholding tax). You may be able to manage an investment portfolio of £150k at least as tax efficiently by using your annual CGT allowance: £10,600 on £150k is approx 7% gross which is a better return than most fund managers over the last decade!!!!!!
Posted: 05 January 2013 08:43:35(UTC)

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Thank you very much for your replies. I must admit I am veering to taking the TFC cash now.
Myself and my husband are both in very good health so the chances are that one or both of us will still be around when I am 75, so I should not worry unduly about giving up the IHT protection. As you stated, if I make age 75, the IHT on the uncrystallised pension fund suddenly goes from 0% to 55%. A weird bit of regulation.

Investing the TFC outside a 'tax free' wrapper seemed counter intuitive to me as I have been brainwashed into thinking investing in ISA's and pension funds was so tax efficient.. I can see that I could manage it outside.

I will get some new quotes on a small annuity to top up my existing pension to 20k, then start a flexible drawdown after April 5. Let us hope the TFC % are not tampered with in the March budget......
Bryan Collings
Posted: 06 January 2013 11:31:33(UTC)

Joined: 06/01/2013(UTC)
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I am older at 70 but have a similar situation to yourself. After much deliberation I have decided to take the 25% TFC and then invest it in my wife's name as she still has basic rate tax capacity. I have invested in shares offering capital growth rather than high income shares to use the CGT capacity which my wife also has. As the years pass we will shelter the funds in ISA accounts. Like yourself we do not actually need more income from our SIPPS but have a great aversion to giving more to the government of our hard earned wealth than we can possibly avoid. How we take funds in the years ahead will depend on how legislation and tax rates develop. It is always a fluid situation! I hope this gives you some sense of security on the actions you have taken.
Bryan Collings
Posted: 06 January 2013 16:21:07(UTC)

Joined: 06/01/2013(UTC)
Posts: 2

As an addendum to the previous posting you can shelter some of your drawings from income tax up to 30% by investing in a VCT. These are of course riskier investments but by choosing carefully you can minimise the risk and expect a good return. I have held some right through the recent problems since 2008/9 and although the value decreased for a while the income continued to flow and the capital value has now come back. Overall my return has been at the rate of just over 7% p.a. which I consider very reasonable when one looks at the period in question. You also avoid CGT if you keep them for more than 5 years. I'm probably teaching you to suck eggs and if so just ignore my rambling.
Posted: 06 January 2013 17:47:02(UTC)

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Thank you Bryan. It does make me feel better knowing there are others that have taken the same decision, in similar circumstances. Like you, I will put the investments in my husband's name as he has more BR band to use up.
I did briefly look at VCT when I was employed and in the higher rate tax bands. I may revisit them.
kind regards

neXus 6
Posted: 07 January 2013 09:55:56(UTC)

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Just a quick observation on VCTs. Take a little care that you aren't letting the tax tail wag the dog. VCTs are at the higher end of the risk spectrum and having worked to accumulate your current wealth, putting any of it at unnecessary risk for a tax break should be done with careful consideration. A 30% tax break would not look clever if there was a 40% investment loss!

Also, this is a bit off the wall but some more weird regulation may mean VCTs are only going to be available to "high net worth" individuals: the definition of which is typically ambiguous but may be £100k pa income or £250k of investments........ but pensions don't count as investments!
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