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Savings and Investments thread
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PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.5 -
golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
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Rob7Lee said:0
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Rob7Lee said: the day I get to 57 i'm taking 25% although as thats 9 years away
I say this as a 50 year old who is nearer 27 (mentally) and 67(physically)8 -
I see Tullow Oil up very strongly today, @Rob7Lee you still holding shares in these as you tipped them early part of this year?SP though is still well down on this years high as are most Oil companies,I have a few UJO shares that ain’t doing much at all.0
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Daarrzzetbum said:I see Tullow Oil up very strongly today, @Rob7Lee you still holding shares in these as you tipped them early part of this year?SP though is still well down on this years high as are most Oil companies,I have a few UJO shares that ain’t doing much at all.
Personally I feel that the UK is still a good place to be & at some point will recover most of its March - May losses...............although the mantra still stands that you should have a well balanced portfolio, covering all asset classes, all sectors & countries and to diversify, diversify & diversify.
1 -
question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?0 -
Novacyt just hit £10 - the rise continues.0
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Daarrzzetbum said:I see Tullow Oil up very strongly today, @Rob7Lee you still holding shares in these as you tipped them early part of this year?SP though is still well down on this years high as are most Oil companies,I have a few UJO shares that ain’t doing much at all.0
- Sponsored links:
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LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?0 -
LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?1 -
LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?1 -
Rob7Lee said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?0 -
LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
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golfaddick said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?1 -
stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
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golfaddick said:Daarrzzetbum said:I see Tullow Oil up very strongly today, @Rob7Lee you still holding shares in these as you tipped them early part of this year?SP though is still well down on this years high as are most Oil companies,I have a few UJO shares that ain’t doing much at all.
Personally I feel that the UK is still a good place to be & at some point will recover most of its March - May losses...............although the mantra still stands that you should have a well balanced portfolio, covering all asset classes, all sectors & countries and to diversify, diversify & diversify.
FTSE just seems dead with barely a pulse these days.0 -
Rob7Lee said:golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
superclive98 said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?1 - Sponsored links:
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balham red said:golfaddick said:Daarrzzetbum said:I see Tullow Oil up very strongly today, @Rob7Lee you still holding shares in these as you tipped them early part of this year?SP though is still well down on this years high as are most Oil companies,I have a few UJO shares that ain’t doing much at all.
Personally I feel that the UK is still a good place to be & at some point will recover most of its March - May losses...............although the mantra still stands that you should have a well balanced portfolio, covering all asset classes, all sectors & countries and to diversify, diversify & diversify.
FTSE just seems dead with barely a pulse these days.
A slide I saw earlier shower the UK stockmarket being the worst performing market for the past 10 years when compared to the World Index. P/E wise we are 40% below where we were 10 years ago.2 -
golfaddick said:stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
The whole thing seems ridiculously complicated - almost designed to discourage reluctant young people from saving!
Should everybody who is still working take that tax free element at 55 and recycle it back into another pension so they can claim even more tax relief?
I'm too old to worry about this anyway!
1 -
stevexreeve said:golfaddick said:stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
The whole thing seems ridiculously complicated - almost designed to discourage reluctant young people from saving!
Should everybody who is still working take that tax free element at 55 and recycle it back into another pension so they can claim even more tax relief?
I'm too old to worry about this anyway!1 -
LargeAddick said:Rob7Lee said:golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
Ashers said:LargeAddick said:Rob7Lee said:golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
stevexreeve said:golfaddick said:stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
The whole thing seems ridiculously complicated - almost designed to discourage reluctant young people from saving!
Should everybody who is still working take that tax free element at 55 and recycle it back into another pension so they can claim even more tax relief?
I'm too old to worry about this anyway!
For example, I have a SIPP which is now on the Hargreaves Lansdowne platform. In my naivety I supposed that I can just directly withdraw amounts up to the limit directly. Oh no. For a reason which is not explained, I have to apply to make it a drawdown pension. H-L claims that there are no extra charges. I am not sure I believe that, but either way, why do we have this bureaucracy?0 -
Ashers said:LargeAddick said:Rob7Lee said:golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
PragueAddick said:stevexreeve said:golfaddick said:stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
The whole thing seems ridiculously complicated - almost designed to discourage reluctant young people from saving!
Should everybody who is still working take that tax free element at 55 and recycle it back into another pension so they can claim even more tax relief?
I'm too old to worry about this anyway!
For example, I have a SIPP which is now on the Hargreaves Lansdowne platform. In my naivety I supposed that I can just directly withdraw amounts up to the limit directly. Oh no. For a reason which is not explained, I have to apply to make it a drawdown pension. H-L claims that there are no extra charges. I am not sure I believe that, but either way, why do we have this bureaucracy?1 -
LargeAddick said:Rob7Lee said:golfaddick said:PragueAddick said:Speaking of SIPPs, I've been meaning to ask for a while how drawdown works. I have, of course, read H-L's blurb on it, and guess what, I'm not clear as a result about a fairly fundamental question
I understand that I can take out max 25%. I don't understand whether I can take it all out in one chunk or not. If not, how much can I take out at any one time? Presumably you have to make a decision on a certain day that you are opting for drawdown, as otherwise how can it be defined, the size of the withdrawal amount that constitutes 25%?
Let's assume you have £400k in your Pension plan. Taking any money out is known as a "Crystallization Benefit Event" and there are a number of different ones depending on how you want to structure payments, but I'll go through the 2 main ones here.
You do not have to take out all the 25% tax-free element in one go & can withdraw as much or as little of the 25% as you like until the full 25% has been used.
Example 1.
You want to take all 25% out on day 1 when you turn 60. Before you take any money the funds are known as being "uncrystalised". Once you take the 25% (in this case £100k) the remaining £300k is "crystallised" and therefore no further tax free amounts can be taken. Your £300k can stay invested (which it should) and will fluctuate as before. So say 5 years later at age 65 you want to start drawing out an income, then you start taking taxable amounts from the "crystallised" pot, hoping that it might now be worth in excess of the £300k.
Example 2
You only want to take out £50k from your £400k pension pot at age 60. (This is where it become technical & tricky to explain).
£200k of your pension pot is "crystallised", so that the maximum tax free amount you can take is (25%x£200k) £50k. The remaining £200k is left "uncrystalised" so that you can take a further 25% from it at a later date.
5 years later you want to take your pension (as in example 1). You now have 2 pension pots, 1 crystallised & 1 not. Assuming both have grown by 5% pa (therefore by 25% over the 5 years) you could have:
1) a crystallised pot of £187,500
2) an uncrystalised pot of £250,000
Pot 1 you can only take taxable benefits from but pot 2 you can still take a 25% tax free amount......in this case £62,500 and then the rest is taxable.
There are many other examples but I wont go into them now. Suffice to say that anyone who has a personal pension nowdays should be making sure that it can facilitate being a "Flexi-acces Drawdown" plan. Many can't & thus why advisers 😉 are always trying to get clients in old pp's or Stakeholder plans to switch into a new plan.
Another benefit (apart from the flexibility of staged payments) is that upon death (before age 75) then the remaining fund can be inherited TAX FREE by a spouse or dependants. After age 75 tax will be charged at the beneficiaries own tax rate. You can see why an annuity might not be quite the right product anymore when retiring.
One final thing. We talk about the 25% being "tax-free" and it has been known as this since forever. But HMRC changed the wording a few years back and now any initial lump sum taken from a pension is called a "Pension Commencement Lump Sum" or PCLS for short. I wonder why they dropped the words "tax-free.....? You have been warned.
HTH.
It still surprises me that many people still take the annuity route.0 -
golfaddick said:PragueAddick said:stevexreeve said:golfaddick said:stevexreeve said:LargeAddick said:question for an IFA if there is one on here .... and these are hypothetical figures.
If someone is about to reach 55 and has £300k in their pension pot they are entitled to take £75k (25%) as a tax free lump sum. However, they only want to take £25k leaving the rest in to hopefully increase in value, so they do this reducing their pot to £275k.
In five years time their pot is now worth £400k and they want to take the rest of their 25% tax free sum. Is it then calculated as 25% of £400k so £100k less the £25k previously taken so meaning they can take a further £75k?
You can potentially lose a lot of future tax relief by dipping in for a quick 25K.
The £4k limit only applies once you start taking payments AFTER you have taken the tax-free element.
The whole thing seems ridiculously complicated - almost designed to discourage reluctant young people from saving!
Should everybody who is still working take that tax free element at 55 and recycle it back into another pension so they can claim even more tax relief?
I'm too old to worry about this anyway!
For example, I have a SIPP which is now on the Hargreaves Lansdowne platform. In my naivety I supposed that I can just directly withdraw amounts up to the limit directly. Oh no. For a reason which is not explained, I have to apply to make it a drawdown pension. H-L claims that there are no extra charges. I am not sure I believe that, but either way, why do we have this bureaucracy?0