Author Topic: Pension lump sum  (Read 394 times)

Flavius

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Pension lump sum
« on: October 11, 2017, 08:20:56 AM »
I've been investing most of my money into a SIPP with a view to retiring in the next few years. What are peoples thoughts on the advantage of taking a 25% lump sump tax free on retirement compared to using an 'Uncrystallised Funds Pension Lump Sumí (UFPLS) arrangement? This is where you don't take the lump sump but drawdown an income and are only taxed on 75 % of it.

I've been making various calculations on the back of a fag packet and it looks like the Uncrystallised fund may be better depending on how long you live.

RobFIRE

  • Bristles
  • ***
  • Posts: 267
  • Age: 33
  • Location: UK
  • Projected FIRE May 2020
Re: Pension lump sum
« Reply #1 on: October 11, 2017, 11:38:56 AM »
Well, it really depends on what factors you are considering. Would you have a particular use for the lump sum that you could not achieve using a drawdown arrangement e.g. pay off mortgage and save on the interest? Do you anticipate UK income tax going up in the future such that you think accessing money earlier will reduce total/future tax liability, or a related legislative change? Would you do something with the lump sum to invest/use it such that returns would be higher than leaving it in the SIPP investment for longer? Is your objective to maximize total money available over your retired life, or to favour more money when younger (and perhaps more active so spending more or needing more until state pension kicks in), or to favour more money when older (to cover possible care/health costs etc.)?

Flavius

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Pension lump sum
« Reply #2 on: October 12, 2017, 02:26:18 AM »
Thanks for your reply.

We have no current plans for any big spending after retirements as our mortgage is paid off and I am hoping to pay for a new kitchen and possible Lamborghini/Motorhome/Yacht before I retire. More fantasy than reality. I have no real concerns about tax going up but changes in retirement rules are a concern. My plan if I took the lump sum would be to invest it back into the same funds where it is now. (Mainly index trackers) and I'd probably then draw it down it to bridge the gap between when I retire and 67 (about 10 years). Looking at the sums involved I think that this will probably be exempt from tax as the capital gains will be less than the annual exempt amount (for 2 people). (I need to double check this)

We very much aiming for having the money available when I am younger and anything left over when we die would be a bonus for the children.

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 1876
Re: Pension lump sum
« Reply #3 on: October 13, 2017, 03:24:17 AM »
Uncrystallised is the winner for me, keep the growth and income wrapped up so that it can benefit from the 25% as well.

But I reserve the right to change my mind if it looks like the politicians might try to remove the 25% tax free element.

Looking at the sums involved I think that this will probably be exempt from tax as the capital gains will be less than the annual exempt amount (for 2 people). (I need to double check this)
Remember that they'd be income tax on the dividends from unwrapped funds - not just capital gains. If the allowance does drop to £2k that isn't a lot - and you can't harvest it like you can with capital gains.

dreams_and_discoveries

  • Pencil Stache
  • ****
  • Posts: 666
  • Location: London, UK
Re: Pension lump sum
« Reply #4 on: October 13, 2017, 06:57:40 AM »
Thanks for this - I hadn't realised this existed, definitely something I'd think about nearer the time...

I think PwF has the right approach there, maximising growth pre-tax.  And agree who know how politicians will meddle in the next 20 years....

TartanTallulah

  • Bristles
  • ***
  • Posts: 270
  • Location: The Middle of Scenic Nowhere
Re: Pension lump sum
« Reply #5 on: October 13, 2017, 07:47:36 AM »
Uncrystallised would be my preference if I was confident that the option to take 25% of the pension fund without tax wasn't going to be removed in the foreseeable future. To some extent it's academic for me since my main retirement income will be from a DB pension and the TFLS has to be taken at the outset, but I will have to make a decision about my SIPP. No hurry, though, I can't touch it for another 17 months.



skip207

  • Stubble
  • **
  • Posts: 167
  • Location: UK
Re: Pension lump sum
« Reply #6 on: October 17, 2017, 04:01:13 AM »
I would agree, although I am far from an expert.

I am expecting the rules to change before I get to SIPP age though!

Flavius

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Pension lump sum
« Reply #7 on: October 19, 2017, 10:35:44 AM »
Thanks for all your replies. Unchrystallised is looking like my favoured option as well depending on the tax situation when I retire.