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Understanding the 25% SIPP tax free process
Tyrion Lannister
Posted: 07 September 2017 17:41:15(UTC)

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Steve U, I agree with Old Timer, you need to ask your SIPP provider. The basis of your question seems to be, can you hold crystallised and non crystallised funds in the same SIPP.

A question for Old Timer - I understood it was possible to hold crystallised and non-crystallised funds in the same SIPP. Is this not true?

The reason I think this is? I was told that if you take out a 12.5% lump sum, i.e. 50% of your allowance, with the intention of withdrawing the remaining 12.5% at a later date, then this is facilitated by only half of your funds being crystallised.

Redundant (Old Timer?)
Posted: 07 September 2017 21:58:42(UTC)

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TL - the answer to your question is yes, but I am not an IFA.

In the circumstances you mention, a BCE occurs when the SIPP is first put into drawdown. Say you crystallise half then, my understanding is that the whole SIPP continues to grow (or decline) and when you take the remaining part of the 25% (i.e. 12.5%) it is calculated on the total value of fund then with a lump amount of 25% less the 12.5% already taken. The important point is that all the contributions are in the SIPP before the first BCE and no further contributions are made to it. I believe if you want to continue making contributions you need a new SIPP.

Steve's circumstances are slightly different as he proposes to put the SIPP into payment and then transfer the DB pension in. This is why he needs to talk to the SIPP provider. Whilst I am not totally certain, I think the pension rules are that you can not add to a SIPP already in drawdown either by contributions or by transfer in of another pension not in payment. There is talk of a possible change to this rule to allow other pensions to be transferred in, but it is unlikely this tax year.
Tyrion Lannister
Posted: 08 September 2017 00:08:48(UTC)

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OT,

At one point I thought I'd got to grips with this subject only to find shortly after that I'd hardly scratched the surface.

I say shame on the government, all they're doing with these unnecessarily complex rules is lining the pockets of the finance industry who already fleece us for far more than they're worth.

Back to the main point, you are allowed to contribute (probably!) £4000 pa to your pension after the first BCE. I had assumed this meant you could contribute further to a crystallised pension but you seem to be saying that this contribution is only allowed into a separate uncrystallised pension, is that correct?

No need for the caveat that you're not an IFA, you know more about this than I do!
Redundant (Old Timer?)
Posted: 08 September 2017 06:09:23(UTC)

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TL - my understanding is that once BCE of say Pension A has occurred no further contributions are permitted into that pension. However you can still make pension contributions of up to £4000pa (assuming you have employment income, know as net relevant earnings) but this is has to be in a different Pension say B.

The rules were designed originally for DB schemes and have been up dated some what to reflect the advent of DC schemes and SIPPs. However the main premise IMHO was always that once a pension had been crystallised that was it for that particular fund as regards further contributions. In a some ways that makes sense as the 25% pre-commencement lump sum is still based on the value of the fund at BCE for DB schemes and a lot of employer DC schemes, Recent changes to allow partial crystallisation don't apply to DB schemes (often not in the scheme rules) and possibly a lot of DC schemes will not allow it as it too is not in their scheme rules! Changes are needed to reflect the growth in the number of SIPPs and allow more flexibility, but I am not holding my breath!

Mikesmusing
Posted: 09 September 2017 22:36:31(UTC)

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Steve U

The DB pension is only assessed for LTA purposes when you crystallise the DB pension i.e. take benefits from that pension. The usual value for LTA purposes is the amount of any tax free lump sum plus 20x the amount of the initial annual pension. Note that this is very 'generous' treatment when compared with the SIPP DC LTA valuation. (Your 34x, for example.)

If you transfer the DB cash equivalent to your SIPP it is an uncrystallised part of the SIPP until you choose to crystallise it. The normal SIPP crystallisation rules then apply.

Someone asked about the LTA test at age 75. The fund value at age 75 minus the amount(s) put into pension drawdown at previous crystallisations, if greater than zero, is compared with any remaining available LTA (nil in most of the examples discussed in this thread). Any excess is subject to the 25% excess LTA charge and the balance is available for drawdown subject to income tax.

Wayne
I think the answers to your questions are No, you don't have to wait to begin drawdown and Yes, your understanding appears correct.

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Jon Snow on 09/09/2017(UTC), Steve U on 10/09/2017(UTC)
Redundant (Old Timer?)
Posted: 10 September 2017 08:53:08(UTC)

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Mikesmusing - "The usual value for LTA purposes is the amount of any tax free lump sum plus 20x the amount of the initial annual pension. Note that this is very 'generous' treatment when compared with the SIPP DC LTA valuation. (Your 34x, for example.)"

I know about the 20x DB Valuation, but the "very 'generous' treatment when compared with the SIPP DC LTA valuation" is new to me. I had understood that the SIPP DC LTA was based on actual value at first BCE. Where have I gone wrong?
Steve U
Posted: 10 September 2017 09:22:19(UTC)

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Redundant (Old Timer?);50960 wrote:
Mikesmusing - "The usual value for LTA purposes is the amount of any tax free lump sum plus 20x the amount of the initial annual pension. Note that this is very 'generous' treatment when compared with the SIPP DC LTA valuation. (Your 34x, for example.)"

I know about the 20x DB Valuation, but the "very 'generous' treatment when compared with the SIPP DC LTA valuation" is new to me. I had understood that the SIPP DC LTA was based on actual value at first BCE. Where have I gone wrong?



I think what is meant is that as the DB pension is valued at times 20 if retained as as a DB pension but is valued at times 34 if it's taken out as a CETV.

In my case if I left it as a DB pension it would fall under the LTA
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Redundant (Old Timer?) on 10/09/2017(UTC)
Redundant (Old Timer?)
Posted: 10 September 2017 09:48:01(UTC)

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SU - Thank you, it is a point I had missed. Like you I have left my DB pension alone.
Jerry J
Posted: 10 September 2017 10:04:50(UTC)

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Firstly a 'Thank you' to all the contributors to this topic; lots of interesting points made by so many individuals who are far more intelligent than I am.

However I am now even more confused! I'm 84, my wife is 21 years younger at 63. We both have ISAs of course (about 60k & 120k respectively); I have a FS pension but the 'Widow's' element will be substantially reduced when I die (because of the age difference). My wife has a small SIPP which we add to every year but it is only at around 250k.

My greatest fear is about how my wife will be able to best manage (when I go!) the minefield that this topic discusses.

We use HL as our provider so my advice to my wife is that she contacts them as quickly as possible after my death and uses their advice service. OK, we know that will mean paying them a fee but that seems to be a better course than trying to muddle through the apparently very complicated issues.

I share the regret that Governments (of all colours) have made things so complicated for those of us that have made so much effort to save what we can. We deserve better!
Steve U
Posted: 10 September 2017 21:49:14(UTC)

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Redundant (Old Timer?);50964 wrote:
SU - Thank you, it is a point I had missed. Like you I have left my DB pension alone.


I am taking mine at the x34 level

If you add in the TFLS which the DB scheme convert at about 20 times - I.e you lose £1 of annual income for £20 of TFLS - then the x34 becomes x38.6 - I've done the numbers and it's too good an offer to refuse
Mikesmusing
Posted: 10 September 2017 22:18:16(UTC)

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Some reasons why giving up the DB pension for a DC pot might not be the best choice include
- much higher use of LTA under the DC option
- you cannot replace the DB pension 'guarantees' with the amount of transfer value offered and the structure of the DB pension suits your personal circumstances (spouse / dependants pensions; guaranteed pension increases)
- risk diversification: bad luck on investment choices; high longevity; inflation may each make the DC outcome unattractive

Of course there may be several good reasons to take the DB to DC transfer, but be wary of being seduced by apparently large transfer values. DB transfer values are apparently large for a reason - they generally represent fairly poor value for the risks being transferred to the individual, although there are exceptions to this.

This is slightly off topic but relevant to the wider discussion.

2 users thanked Mikesmusing for this post.
Sara G on 11/09/2017(UTC), Tim D on 11/09/2017(UTC)
Mikesmusing
Posted: 11 September 2017 15:13:42(UTC)

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Jerry J;50967 wrote:
Firstly a 'Thank you' to all the contributors to this topic; lots of interesting points made by so many individuals who are far more intelligent than I am.

However I am now even more confused! I'm 84, my wife is 21 years younger at 63. We both have ISAs of course (about 60k & 120k respectively); I have a FS pension but the 'Widow's' element will be substantially reduced when I die (because of the age difference). My wife has a small SIPP which we add to every year but it is only at around 250k.

My greatest fear is about how my wife will be able to best manage (when I go!) the minefield that this topic discusses.

We use HL as our provider so my advice to my wife is that she contacts them as quickly as possible after my death and uses their advice service. OK, we know that will mean paying them a fee but that seems to be a better course than trying to muddle through the apparently very complicated issues.

I share the regret that Governments (of all colours) have made things so complicated for those of us that have made so much effort to save what we can. We deserve better!



The FS provider will be able to tell you the reduction that will apply to the widow's pension, or at least provide a current estimate. I'd suggest that advice, if needed, is taken now rather than waiting. This will explain what actions if any can be taken now to improve the position and should provide some peace of mind. Not much to lose and potentially something to gain rather than just worrying about possible complexity. No doubt HL would provide the advice, for a fee.
Michael Grimes
Posted: 16 October 2017 15:00:00(UTC)

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After the weekend conjectures about the budget I am wondering whether to sell all my SIPP holdings and keep it in cash until the position is clarified by Hammond's budget.

If the 25% tax free allowance is at risk of being reduced I could then immediately take the total 25% from the temporary cash pot leaving the 75% as a cash balance and reinvest in a balanced portfolio.

Can anyone see any problems with that approach?

dd
Posted: 16 October 2017 15:34:39(UTC)

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Less extreme would be to put just 25% in cash, rather than 100% - not that I can project the direction of the market, of course.
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Michael Grimes on 16/10/2017(UTC)
Redundant (Old Timer?)
Posted: 16 October 2017 18:06:21(UTC)

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This is the first Budget in a new Parliament and history shows that all Governments use it, and occasionally the following one, for more radical tax changes. Any later and voters remember!

Pensions are a clear target this time, but my money is on reducing the tax relief down to a single rate, probably 25% to encourage saving.

Hitting the 25% Pre Commencement Lump Sum (to give it its proper name) is more challenging politically. The term Pre Commencement Lump Sum describes what it is and more importantly its intended purpose - to give starting retirees the chance to clear their debts and prepare for retirement. If abolished, the tories would face such a backlash that we could see a Liberal revival! I think it is much more likely that a cap could be introduced, so the Pre Commencement Lump Sum could not exceed a certain figure, e.g. still 25% but £100,000 maximum.

Just my thoughts, but as the pension industry would need time to make any changes I don't think any changes will be before 1 January, more likely 6 April 2018. Like you, MG, I have a SIPP, but I will stay invested through this Budget.
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Tim D on 17/10/2017(UTC)
dd
Posted: 16 October 2017 19:16:52(UTC)

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Redundant (Old Timer?) plans to stay invested, as will I and many others, especially those who do not have sufficient time to manage their investments actively on a daily or even hourly basis. The problem with selling ALL in my view, is that you need to be pretty nimble if you want to obtain good prices when the market is on the up, because it all happens so fast, as a result of events and announcements (and even the weather, occasionally).
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Keith Cobby on 18/10/2017(UTC)
Catch The Pigeon
Posted: 17 October 2017 08:04:38(UTC)

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Redundant (Old Timer?);52040 wrote:
This is the first Budget in a new Parliament and history shows that all Governments use it, and occasionally the following one, for more radical tax changes. Any later and voters remember!

Pensions are a clear target this time, but my money is on reducing the tax relief down to a single rate, probably 25% to encourage saving.

Hitting the 25% Pre Commencement Lump Sum (to give it its proper name) is more challenging politically. The term Pre Commencement Lump Sum describes what it is and more importantly its intended purpose - to give starting retirees the chance to clear their debts and prepare for retirement. If abolished, the tories would face such a backlash that we could see a Liberal revival! I think it is much more likely that a cap could be introduced, so the Pre Commencement Lump Sum could not exceed a certain figure, e.g. still 25% but £100,000 maximum.

Just my thoughts, but as the pension industry would need time to make any changes I don't think any changes will be before 1 January, more likely 6 April 2018. Like you, MG, I have a SIPP, but I will stay invested through this Budget.


PCLS = Pension commencement lump sum, not Pre...
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Tim D on 17/10/2017(UTC), Peter Sm on 17/10/2017(UTC)
Peter Sm
Posted: 17 October 2017 19:26:44(UTC)

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Hi catch the pigeon, please e mail. Ref IFA, see my previous posts.
petersmith640@hotmail.com.
Catch The Pigeon
Posted: 18 October 2017 08:22:59(UTC)

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Peter Sm;52079 wrote:
Hi catch the pigeon, please e mail. Ref IFA, see my previous posts.
petersmith640@hotmail.com.


Done.
Soon to be retired
Posted: 02 November 2017 18:46:50(UTC)

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Folks,

I am a newbie to the thread and as a start would light to add my thanks to everyone who asks question and has contributed to this thread (particularly Jon Snow, Money Spider, DJLW, Mikemusing and Redundant (old Timer?)) for taking time to answer the queries from us less informed). Having tried to understand the various pensions options and related legislation and ongoing changes and charges over the last 10 years in planning for retirement, I believe that the sharing of knowledge (such as this thread) is fundamental to ensuring we are able to make informed choice and ask knowledgeable questions.

Firstly some observations:

1. I despair for the future of our children and their tax and pensions situation. Very little exists to help with their financial planning unless they seek it out and take the time to become informed

2. The industry is lacking simple guides to explain the technical aspects of pensions products (i.e. Crystallisation, flexible drawdown and the savings/income pots) and how in practice they work

3. Advisors will continue to struggle with complex changes and what they mean for today, tomorrow and long term investment planning

4. We will continue to develop our own excel tools and applications to model what we think might happen (I am considering starting an excel training/consultancy firm to top up my pension 😅😂🤣)

Secondly to my question

For someone age 55 who has a pensions pot in a SIPP at LTA (£1m) and based upon today's known knowns (SIPP enables drawdown with savings and income pots, LTA @ £1m with CPI growth from 2018, tax free cash @ 25% of LTA, personal tax allowance of £11,500 and basic rate tax of 20% on income up to £34,500) which scenario would be best to pay off lump sum debt (say £100k mortgage) provide income of say £24k whilst minimising LTA excess liability, income tax, inheritance tax and possible future changes to tax efficient vehicles (ISA's, pension contributions and tax free cash from pension)

Crystallise full SIPP - all funds move from savings pot to income pot, resulting a BCE event which uses up full LTA. 25% (£250k) is taken tax free and 75% (£750k) is left invested to be drawn upon

Pros - access to lump sum up front so no risk of lump sum rule changes; residual lump sum (after paying off debt) can be used each year combined drawdown to give you £24k income with minimal income tax
Cons - Inheritance tax on lump sum outside of pension; income/capital gains tax on growth of tax free cash outside of pension; if growth rate in invested pensions pot exceeds the rate you draw funds out then you could exceed LTA at age 75 resulting in tax bill - although nice problem to have as growth exceed drawdown so money might last forever!!

Crystallise SIPP in chunks (e.g. £100k each year - £100k moved from savings pot into income pot using 10% of LTA - £25k is tax free and £75k remains in income pot to be drawn down on, £900k remains in savings pot - with both pots getting interest growth. You draw down on income pot till it runs out then do another chunk transfer

Pros - you get LTA Limit growth each year so you may not have any LTA penalty
Cons - lump sum and other pension rules may change so you could lose out in future; you'll not be able to pay off debts until year 4 so you may need more income as you'll have to make payments and interest will be charged on those debts; you'll have to withdraw about £27k to achieve income of £24k after tax for 1st 4 years (so roughly £3k pa income tax) then from year

Crystallise SIPP in chunks front loaded to pay of debts - £400k moved from savings pot into income pot using 40% of LTA - £100k is tax free and £300k remains in income pot to be drawn down on, £600k remains in savings pot - with both pots getting interest growth. You draw down on income pot till it runs out then do another chunk transfer

Pros - you get LTA Limit growth each year so you may not have any LTA penalty
Cons - lump sum and other pension rules may change so you could lose out in future; you'll have to withdraw about £27k to achieve income of £24k after tax for 1st 4 years (so roughly £3k pa income tax) then from year

Something else ... - I know there are loads of permutations and what ifs, but are there any obvious other approaches
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