Tax planning with drawdown

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Scottish Widows logo (hooded woman) - with the caption' Masterclass, Tax planning with drawdown'.

In this recorded MasterClass from 10 April 2018 we share our technical guidance focusing on the following elements:

  • tax efficient withdrawals using drip feed drawdown
  • the Lifetime Allowance test/second Lifetime Allowance test
  • pension death benefits.
  • Operator: Good day and welcome to the Scottish Widows MasterClass. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr Simon Harris. Please go ahead, sir. 

    Simon Harris: Thank you very much and good morning everybody and welcome to the latest Scottish Widows TechTalk MasterClass. In today’s presentation, Chris Jones and Tom Coughlan from the Scottish Widows Financial Planning Team will be looking at the area of tax planning using drawdown.

    We’ve all witnessed the impact of the pension freedoms on the choices clients make at retirement and we see now drawdown has become the new default selection. Based on the latest data from the FCA, they’ve stated that since the pension reforms, there has been an increase in the number of pension pots entering into drawdown. 30% of pots accessed since October 2015 have gone into drawdown whilst 12% have been taken as an annuity.

    The FCA have expressed concern about the use of drawdown especially where this is setup directly by the consumer without taking advice. This concern is relevant when about a third of consumers, again according to the FCA, access drawdown without the use of advice. And indeed, as part of the latest bulletin, the Financial Lives Survey highlights a lack of understanding and confusion about retirement income options. 25% of the people who have accessed their defined contribution pension in the last year report that they get an income or have taken a cash lump sum but are not sure how this works.

    The research also established that less than half of consumers who made a retirement income decision in the last two years failed to think about areas such as health or life expectancy. So, what this highlights is the flexibility the drawdown can offer is more popular than ever. It’s evident that to truly understand and make the most of the flexibility, it will require support up front and ongoing in areas such as making the right income choices, sound investment decisions and understanding the impact to areas such as the lifetime allowance. So, the value of advice should not be underestimated and a good understanding of the options can and will benefit your clients. 

    In this morning’s presentation, Chris and Tom will focus in on the efficient use of drawdown particularly in relation to taxation and structuring income to benefit the clients and discuss other areas relevant to planning such as death benefit consideration and the impact to the lifetime allowance. When structuring income, increasingly this can and will include regular use of the pension commencement lump sum to support clients through drip-feed drawdown also known as phased drawdown.

    As with other pension areas, the Scottish Widows Financial Planning Team offers a great deal of support in this and other areas. And following the presentation today, I’ll be letting you know where you can find more information. 

    So, this morning’s presentation is scheduled to last for about 30 minutes following which there’ll be time for any questions you may have. You can post your questions online using the ask-a-question window on your screen. The recording of today’s presentation will also be available on the Scottish Widows Adviser Extranet should you wish to review the content again and also CPD certificates will be issued.

    I will now hand the call over to Chris to start today’s presentation.

    Chris Jones:  Thank you, Simon. Good morning, everyone. So, drawdown can be an effective tax planning tool allowing clients to benefit from the full range of tax advantages that pensions can offer. The removal of maximum withdrawal limit along with the other tax changes from pension freedoms greatly enhance this.

    Today, we’ll start by looking at the basics of tax planning making sure clients don’t pay too much income tax on their pension income. We’ll then have a look at how flexi-access drawdown compares with UFPLS. Then we’ll look at a little bit complex planning, using drip-feed drawdown and combining tax-free cash with income to maximise the tax position. Then the lifetime allowance. Lifetime allowance  is increasingly important with larger funds and lower lifetime allowance limits. And those moving into drawdown will also face the second lifetime allowance test. So, we’ll take a look at that. And finally, we’ll have a look at estate planning with drawdown and then we’ll have time to take some of your questions.

    Here are the very basics. Whenever you want to take tax-free cash using drawdown, at least three times that amount must be designated into drawdown. So, an example there, the client needs £25,000 tax-free cash, they have to move £75,000 into drawdown and a total of £100,000 is crystallised. All new arrangements must be flexi-access drawdowns but you can still designate into existing capped drawdown arrangements if they’re pre April 15.

    The tax-free cash is always linked to the designation and it cannot be deferred. You use it or lose it. Increasingly important, there are the protected pension ages and greater than 25% tax-free cash. These require all benefits to be crystallised at the same time limiting the amount of tax planning they can do when using drawdown.

    More and more clients will have these as a result of increased DB transfers into PPs. Many of these would have had protected retirement ages of less than 55. If they were to use flexi-access drawdown, they have to take all of their tax-free cash and crystallise the rest into drawdown at the same time. And that is all benefits, not within in the same arrangement but all within the same scheme. For example, you have two PPs under the same scheme or a GPP and a PPP. You’d have to take all the benefits at the same time.

    So, withdrawing all the funds at once is now a possibility but rarely the best thing to do particularly from a large − particularly when you have a large fund. So, an example here of a £200,000 fund, and have no other income, you get your £50,000 tax-free cash but the rest is all taxable income. If you did that, you lose your personal allowance, you pay a massive £53,100 tax and receive less than 96,000 − less than 100,000, sorry, £96,900, an extremely high effective rate of tax of 35.4%. The client as you see in the graph there is paying higher rate tax on nearly all of that money. 

    Alternatively, you could just spread that over five years. You can see there on the graph, none of the funds now fall into the high rate band. And you look at the numbers to see how much difference that really makes. On the left there, we have that £150,000 payment with the 35% effective rate tax. Spreading it over five years,  now, with £30,000 a year, nearly 40% of that withdrawal is covered by the personal allowance and the rest falls into the basic rate band reducing that tax down from £53,000 to £18,000 and effective rate of tax of just 12.1%. And of course, the more years the income can be spread over, the lower the tax paid. If your clients could extend this to ten years by taking £15,000 a year, it would mean just £6,300 of tax or 4.2%.

    Modest funds which are likely to result from modest earnings potentially only having been subject to basic rate tax and therefore only receiving basic rate relief on any contribution. Normally, the tax rate is less in retirement than during working life. If you’re paying a disproportionately higher rate of tax in retirement, that will undermine the effectiveness of pension planning.

    Two key advantages of pension planning − the first, the tax-free cash; the second is the tax relief received on contribution is often higher than the tax paid on withdrawals. This is now even more likely with the significant increase in the personal allowance in recent years, meaning a large portion of many clients’ income in retirement can be paid free of tax. The flexibility and control of drawdown allows clients to maximise the tax benefits of pensions. 

    Let’s have a look now at how flexi-access drawdown can compare with the UFPLS. The flexi-access drawdown, you can take the maximum tax-free cash without taking any income whereas with UFPLS tax-free cash is always 25% of the payment. The flexi-access drawdown has a greater ability to control the tax amount whilst the UFPLS provides a simpler option.

    With flexi-access drawdown, if you just take the tax-free cash and no income, that doesn’t trigger the MPAA. The UFPLS always triggers the money purchase annual allowance. With flexi-access drawdown, scheme-specific tax-free cash is available and tax-free cash greater than 25% but it is not available for the UFPLS. And with flexi-access drawdown, you can take an amount above the lifetime allowance where you have to have a lifetime allowance available to take the UFPLS.

    Tax planning with drawdown transcript continued

    And, of course, don’t forget, the other alternative is small pots. Small pots do not trigger the money purchase annual allowance and so should be considered for either flexi-access drawdown or a UFPLS where a client is ever likely to want to continue funding. It allows up to three pots of £10,000 or less to be fully crystallised and the payment, 75% of that is subject to income tax and 25% tax-free.

    So, that’s the basics. Now, I’ll pass to Tom who’s going to have a look at drip-feed drawdown.

    Tom Coughlan:  Thank you, Chris. Good morning, everyone. As mentioned, drip-feed drawdown as a product feature launches soon. So, in advance of that, we’ve put together some examples just to show how it works from a tax perspective. We won’t look at the product features but just for those who aren’t aware of this product feature, we’ll just briefly explain what it is.

    It’s an automated regular crystallisation feature that allows a client to take a withdrawal, a regular withdrawal and to specify how much of that is made up of tax-free cash and how much is made up of drawdown income. So, for example, a client might select a withdrawal of £100 a month and request that that is made up of 40% tax-free cash and 60% drawdown income. And then there’s the flexibility within that to change the proportions as circumstances change.

    Okay. So, the scenario that we’ll look at all involve clients taking a £1,000 withdrawal and them using varying combinations of tax-free cash and income to optimise their tax position. The first scenario that we’ll look at is where the client takes a £1,000 withdrawal every month and 25% of that will be tax-free cash and 75% will be drawdown income. Now, the second example is the other extreme. The client takes £1,000 but all of that is made up of tax-free cash and there’s no drawdown income that goes with that. And then the third scenario, somewhere between the two. The client takes again £1,000 withdrawal and half of that is made up of tax-free cash and half of it is made up of drawdown income.

    So, it just enables the client to select the right mix of those two things to ensure that their tax bands and their personal allowance perhaps are utilised fully. The tax efficiency all comes from the tax-free cash. You are using the tax-free cash to essentially lower the effective rate of tax on pension withdrawals, and that might be suitable where a higher proportion of taxable income can be deferred until after retirement, say when income tax rates are lower.

    And with drip-feed drawdown, there’s always a trade-off between avoiding tax now and then exhausting tax-free cash in the future. So, you’re using tax-free cash to minimise the tax on withdrawals now but that tax-free cash would then not be available later. So, it’s often finding the balance between those two things.

    Okay. So, just looking at a bit more detail at option one. So, £1,000 is received every month and that means under this option, 75%:25%, £1,000 has to be crystallised. So, the amount withdrawn is the same as the amount actually paid out. And as I said, that is made up of £250 tax-free cash each time and £750 flexi-access drawdown income. So, the £250 comes directly from the un-crystallised part of the fund and is paid out as tax-free cash. And then three times that amount, £750, has to be designated across to drawdown. And then the same amount is paid out direct to the client and that’s all built into the system.

    The advantage here is that it requires the lowest crystallisation amount. So, it helps keep a larger portion of the fund un-crystallised that maintains some tax-free cash for the future. It also generates additional growth on the tax-free cash as well. And this might be appropriate for a client whose taxable income is perhaps just below a certain tax threshold, perhaps the 40% threshold and they just want to control how much taxable income they receive to ensure that they don’t pay tax at the higher rate. With this option, drawdown is actually paid out. So, if it hasn’t already been triggered, then it will trigger the money purchase annual allowance. 

    Okay. So, a client this year earning £37,350. That is £9,000 below the high rate threshold. So, they have scope to receive £9000 taxable income within the 20% band. So, out of that £12000 paid over the year, three quarters of it will be taxed, but then a quarter will be tax-free. So, that ensures that they stay within the higher rate threshold for the year. Sorry, that says quarterly payments, it should say monthly payments there. So, it’s £250 each month, tax-free cash. £750 drawdown income and over the year that equals £9,000 taxable, £3,000 tax-free cash. If you stay within that band, and the graphic there shows the same income each year, but that is likely to change. And if that does change, you could then change those percentages. So, in year two, for example, it might be appropriate to receive say 28% tax-free cash, 72% drawdown income, but it can be changed as circumstances change. 

    Moving on to tax-free cash. So, the second options is 100% tax-free cash is received through drip-feed drawdown. So, £1000 tax-free cash is paid from the uncrystallised part of the fund. That does require three times that amount to be moved across to drawdown. £3000 is moved across to drawdown but no money is paid out from the drawdown account. So, £4000 has to be crystallised in total, and £1000 is paid out as tax-free cash. 

    The disadvantage of this option is that it requires the highest crystallisation amount. So, you do get the minimum income tax liability, no tax on the withdrawals, but it does consequently require a much higher amount to be crystallised. You’ve utilised more tax-free cash and you’ve moved a higher proportion of the fund over to drawdown which then limits growth on the tax-free cash. So, this might be appropriate for a client who is receiving significant other income. So, perhaps they are 45% tax payer, or perhaps their income sits within that effective 60% rate of tax. They want to avoid receiving anything more that is taxable in the short term. The advantage here is that it doesn’t trigger the money purchase annual allowance, but as soon as you switch on any drawdown income at all, then it will be triggered from that date on. So, the example we’ve used here is where a client does sit within that 60% effective rate of tax. So, from 100 000 up to 123 700. So, anything else that they receive in that band will be subject to tax. So, they deem it more appropriate to receive tax-free cash if they want £12 000 out of their pension. And by receiving all of that as tax-free cash, they could avoid that effective 60% rate of tax. The disadvantage is that it does exhaust tax-free cash for the future. So, they just might want to consider whether that, it is appropriate to utilise all your tax-free cash now. 

    Okay, moving on to option three. So, this is the intermediate position, where somewhere between the two. In this case, £1000 withdrawal, half of it is paid out tax-free cash, half of it is paid as drawdown income. So, £500 is paid out, three times that amount is designated across to drawdown, and £500 is then paid out of that fund. So, this is an intermediate position between the previous two options. So, the client should be able to select the most appropriate mix between those two. And it might not be 50/50. It might be 60% cash, 40% income or some other percentage between those two. So, this allows the client to optimise their tax position. So, they maintain some uncrystallised fund, and they are incurring additional PCLS in the future, but they’re also using a significant portion of tax-free cash to keep the effective rate of tax down. So, this might be suitable for a client who needs perhaps what is loosely referred to as a bridging pension, just some additional income until another income source becomes available, state pension or a DB pension. And as with option one, or in fact any option other than option two, triggers the money purchase annual allowance - there is an element of drawdown income being paid as well. 

    So, this client receives £5850 in other income. So, they’re £6000 short of the personal allowance in 2018-19. So, if they want to receive £12000 income, but really want £6000 of that to be taxable, then they’d have to set up to be drawn on a 50-50 basis. And that ensures they stay within the personal allowance. And this might be particularly suitable for a low earner, because they’re likely to be a non-tax payer in the future. So, exhausting some tax-free cash to save tax now might be the best approach as future income that they receive even if it’s drawdown income, may well be within the personal allowance. 

    Okay. So, that’s just a brief run through of some simple examples. But the key point is the flexibility of drip-feed drawdowns and how it can be adapted for different circumstances. But no doubt there will be much more to come from your SW point of contact on drip-feed drawdown. 

    Okay, let’s just move on to the lifetime allowance. So, whether you’re using drawdown in a standard way or you’re using it via drip-feed drawdown, the benefit crystallisation events are as follows. The designation is to flexi-access drawdown, or it can be to capped drawdown but that has to be an existing contract that is already in place and the designation has to go to the existing arrangement, not to a separate arrangement. Linked to that will be the payment of tax-free cash, that comes under BCE6. And where you are using drip-feed drawdown then every month, or every quarter you will have a BC1 and a BC6 and they will accumulate over the year. The actual value for lifetime allowance purposes is straightforward. It’s just the value at the date of the event; and again, if you’re using drip-feed drawdown say on a monthly basis, then it will be the fund value at each time. That’s the initial movement across into drawdown, but there is another benefit crystallisation event. That’s at age 75 or annuity purchase if that is done before you get to age 75, and that just looks at the drawdown growth since the original designation. So, BC5A, that’s the age 75 test, that just looks at the monetary increase in the drawdown fund between the original movement across to drawdown at age 75. So, it is as simple as just taking the value at age 75 and deducting from that the amount that was moved across into the drawdown fund. And if that was done in tranches then you have to look at each separate tranche individually.

    Tax planning with drawdown transcript continued

    If the drawdown fund is used to purchase an annuity, then it’s the same process. You look at the value used to purchase the annuity and you deduct from that the amount originally designated across. And crucially there’s no adjustment for income withdrawals received. So, that does give you a way of controlling the value for the second lifetime allowance test. But those withdrawals are subject to income tax. And in both cases, it’s the same process. It’s just the fund value at age 75 or nearest purchase, deduct from that the amount you put into the drawdown account originally. 

    So, the purpose of the second lifetime allowance test is to prevent drawdown being used to take investment growth outside of the lifetime allowance. So, in the absence of this rule, you could just move all of your funds to drawdown age 55 and then you’d avoid a lifetime allowance test on growth for up to perhaps 20 years up to age 75. 

    Just an example to show how that works. So, someone with a £800,000 fund at age 65 and takes that fund, takes 25% tax-free cash and moves the rest across to drawdown, on current rate that would use 77.67% of the lifetime allowance. We’ll be using very fiddly numbers with the lifetime allowance even when we have those round numbers in the examples because the lifetime allowance is no longer going to be a round number. So, that fund is then left to grow; at age 75, BC5A, and then you’d look at the amount in the drawdown fund at that time, grown to one million, and you look at the growth. And it fits the 600,000 figure, not the 800,000 figure that you deduct. So, the growth is 400,000. And from there on that’s just treated as any other benefit crystallisation event. And it’s just tested against what is left of the lifetime allowance. So, during that time, the lifetime allowance, assuming inflation of 2.5%, would have moved up to £1.319 million. And there was around about 22% of the lifetime allowance left. So, 22% of that figure is £294533. So, as you can see, the drawdown growth is more than what’s left of the lifetime allowance. The £105,467 is the excess over the lifetime allowance. And a 25% lifetime allowance charge will be raised against that. 

    That’s assuming no withdrawals. Withdrawals will reduce the size of the fund, perhaps more than the growth. So, the graph on the left-hand side, the blue figure just shows the drawdown fund each year from age 65 to 75. The red bar at the bottom is the withdrawal at £30000. So, you see the withdrawal is clearly more than the growth in the fund. So, the drawdown growth, drawdown value reduces over time. It’s just the same example on the previous slide, other than the withdrawals. So, the client used 77.67% of the lifetime allowance, but when you get to age 75, the fund, that £410,000 is less than the original designation, and there’s nothing further to tax. But those £30,000 withdrawals would have been subject to income tax in a year of receipt. And whether that is worthwhile depends on the income tax position then. So, if the client was a 45% or effective 60% tax payer that time, then it might not have been worthwhile to receive those withdrawals. Whereas if they had their personal allowance and basic rate band available, then it might well have been. 

    Just one other point to mention about the second lifetime allowance test, and that is the effective loss of CPI indexation to the lifetime allowance, which is just a slight warning that has to be given before moving funds across to drawdown and then not taking any withdrawals. So, the example should hopefully illustrate that. So, taking someone with a fund of £1.03 million, say crystallise that full fund, that is 100% of the lifetime allowance. They take their cash and they move £772,500 across to drawdown. They leave that to grow. During that ten-year period, to age 75, the drawdown grows approximately 30% to £1 million. All of that is growth. There is no CPI indexation on that part there. So, you just deduct from £1 million the drawdown fund that at age 75, the amount that was originally moved across £772,500. So, all of that amount there, £227,500 is a lifetime allowance excess. Whereas if they’d left the fund uncrystallised in 2018-19, then using that same growth assumption of 30% the fund would have grown to £1.339 million. However, during that time the lifetime allowance would have been indexed by 2.5% each year. That’s the assumption. And that would have grown to £1.319 million. So, that is an uncrystallised fund, you just then taking the difference between those two. So, the lifetime allowance excess will then be £20,000. So, the excess is significantly smaller. That’s just something that just has to be considered, it’s a bit of an extreme example of having a fund equal to the lifetime allowance and moving it all across to drawdown. But hopefully it just illustrates the point of that by moving across to drawdown you do potentially lose the indexation of the lifetime allowance which does cover a proportion of the growth. 

    Okay. I’m going to hand you back to Chris who’s now going to look at transfer issues. 

    Chris: thanks, Tom, yes, this is a quick look at transfers. Transfers must still be to new emty arrangements. So, it’s still not possible to merge drawdown arrangements by doing a transfer. The following are allowed. Capped drawdown to capped drawdown transfer, so those in existing cap drawdown arrangements can transfer to a new provider. Flexi-access drawdown to flexi-access drawdown transfer of course is possible. And if you don’t want capped drawdown anymore, you can transfer that to flexi-access drawdown plan. And uncrystallised to immediate vesting  is another option. Uncrystallised funds can still be designated into an existing cap drawdown plan if you still have one in place from pre-15th April. And you can transfer into an uncrystallised arrangement and then crystallise that into more capped drawdown where the product allows you. 

    Why would you do that? So, capped drawdown to capped drawdown transfers help to ensure that the money purchase allowance is not triggered. To ensure this withdrawals must always remain within the GAD limit for the contract. A transfer from a capped drawdown to a flexi-access drawdown will trigger the Money purchase annual allowance when the first payment is made. A member can request] for cap drawdown to be converted to flexi access drawdown on the transfer. 

    Finally, we'll just have a look at death benefits. So, now a wide range of beneficiaries that can receive drawdown following members’ death. The overall term is called a beneficiaries drawdown and that applies to the traditional dependents drawdown, nominees drawdown – which allows the member to nominate anyone; and then the successors drawdown, which is the next level down, where the beneficiary, if there’s any funds left, can then nominate their own successor.

    So, the pension fund can be used in the traditional way, to provide an income to the retiree and then, still pretty traditional, to provide income to the spouse on their death. Other than that, they can also pass the funds down to their adult children or, indeed, anyone else.

    In fact, this along with the tax changes, where payment pre-75 are all free of tax or subject to the beneficiary's rate of tax post-75, means that drawdown can be used as an efficient inheritance tax planning tool. Funds can remain invested in a tax-efficient environment and importantly outside of anyone’s estate for IHT purposes. There’s no longer any death benefit disadvantage of moving into drawdown, the tax is just depended on the age of death, not whether the funds are crystallised or not. 

    Finally, there is slight oddity in the tax rules, which means that uncrystallised benefits in excess of the lifetime allowance can either be paid as a lump sum after a 55% tax or as beneficiary drawdown with just a 25% deduction. But there's no further tax from the withdrawals from drawdown. This option is clearly more favourable. The provision of beneficiary drawdown is a particularly important feature of those with large funds which may be subject to a life allowance. 

    To show a little example, in flexi-access drawdown,  client aged 76, so over 75, that key figure where the benefits become taxable at the beneficiaries’ marginal rate. In this example, he chooses his widow as the beneficiary. They can either take a taxable income or just leave the funds invested, take it as or when they need it, any funds left over on their death will then be passed onto whoever they choose. And this example, they died below aged 75, they choose to pass it on to their children. And then in this case, the funds are now no longer taxable, they become free of tax. So, it all links to the age of the last person to die.

    That's all the technical content. I'll pass it back to Simon who’s going to tell you about some of our other support material.

    Simon Harris: Thank you, Chris. What I'd like to do is to highlight the range of support that is available from the Scottish Widows’ financial planning team. Hopefully, many of you will receive or access the TechTalk magazine. If you currently do not receive this or access this and would like to, you can speak to your Scottish Widows’ contact or you can register on the advisor extranet and the link to do that is highlighted there at the top of the screen. The latest edition of TechTalk focuses in on the important changes in the automatic enrolment world; and a list of the articles there is on the screen for you. The next edition, scheduled next month, will focus in on the @Retirement market, including the areas that Tom and Chris have covered today. Please take a look at this popular publication. I’ve also highlighted there at the bottom of the screen, there’s a link to an index of TechTalk articles where you can access relevant material from previous additions.

    There's also further material available on the financial planning area on the advisor extranet. This contains access to a suite of tools. All these tools highlight there, including carrying forward calculator have been updated for the 2018-19 tax year. There’s also a range of materials, including technical guidance, case studies and other topical news items and, of course, access to the TechTalk articles which I’ve just highlighted.

    And, as mentioned in my introduction, all the MasterClass series are recorded and are logged on the financial planning section. So, you can access previous MasterClass sessions and review the material that was contained in them. Again, the link to that area is included on the screen.

    What I'd like to do now is offer you the opportunity to raise any questions you might have. And again just to remind you, I'll hand you back to Jenique, who is going to tell you how you can do that.

    Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, simply type this in the ‘Ask-a-question’ window on the webcast platform.

    Chris Jones: Okay. We’ve already got quite a few in. Let’s start with one from earlier on about the process of when you take UFPLS and you trigger the money purchase annual allowance. So, when that happens, we are required by HMRC to notify the client that may have triggered the money purchased annual allowance, they have – and within that, we tell them what they need to do, which is within three months, notify any other pension provider to which they are paying a premium.

    Tom Coughlan: So, there was a drip-feed drawdown question here. So, someone uses 25% tax-free cash and 75% income; presumably this is no different to staggered UFPLS?  Yeah, absolutely, it is the same effect, it’s just under the drip-feed drawdown, you have the option to automate that rather than having to fill out a form perhaps every month. So, it gives you that convenience to set that up on a regular basis. And then there’s the flexibility, of course, to change it from 25%, 75% to some other percentage. So, it's only in that situation, then 25%, 75% is the same as UFPLS. 

    There's a product question here around drip-feed drawdown. One for Simon perhaps. Are there minimum monthly withdrawals under your drip-feed drawdown offering?

    Simon Harris: No, there will be no minimum. So, there is a pound, but hopefully that will more than cater for a vast majority of the scenarios; but no, there’s no minimum as such.

    Chris Jones: Okay. How do you define a lump sum versus regular income for the purposes of lifetime allowance if one takes an ad hoc lump sum of £50,000? Look, it’s by definition, so whenever you take a withdrawal, part of that will then come under the tax-free cash crystallisations event and the rest will be income. So, it’s not up to you to define it, it is a statement of fact. So, if you take £50 000, and it just depends on what option you do. So, how much you’ve crystallised will be the tax-free cash amount. So, if 50% of that was tax-free cash, then 25% – £25,000 will be tax-free cash.

    Tom Coughlan: Okay. Here’s another question. Who monitors the amount of PCLS that’s been drawn to ensure that the overall 25% level is not exceeded? Even if it’s drip-feed drawdown, we still have to collect information about our clients’ available lifetime allowance, so that will give us the information that we need to be able to ensure that they pay only – no more than a maximum of 25% on their remaining lifetime allowance. So, as the provider we will collect that information and we will use that to ensure that they don’t get more than 25% of their lifetime allowance at the time.

    Okay. There’re a few questions about the slides. These will be available on the website. There’ll be a recording of the session which will include the slides, and that will be on the website in the next couple of days.

    Chris Jones: The question about emergency tax, have we not mentioned yet? Emergency tax is – it can be annoying, but it’s more about process, whereas we’re trying to look at the principles here, but yes, there are cases where the provider will have to deduct emergency tax. That’s usually a UFPLS payment and maybe also some drawdown payments if we don’t have any tax code. But the processes are:, we may well have to deduct too much tax upfront, but there’s a good reclaim process now by HMRC which allows clients to reclaim that excess tax. So, this presentation just covered the kind of overall tax principles when all the tax is shaken out.

    Tom Coughlan: Okay. There’s a question on the lifetime allowance. Can there be any lifetime allowance test after age 75. Generally, no, because everything should have been tested on the 75th birthday. There is one odd situation where someone has had a scheme pension increase by more than a certain amount. That can be subject to a post-75 lifetime allowance test, but that’s quite an unusual situation, it’s more of an anti-avoidance rule. So, generally, no, because everything should have been tested at age 75.

    Tom Coughlan: Are there any more questions in there? 

    Chris Jones: This one has just come in, Tom. Are we saying BCA5 is triggered at the purchase of an annuity or at age 75, even though the LTA was tested on crystallisation? 

    Tom Coughlan: So, BCA5 A is when you reach age 75, which just looks at the drawdown growth. That's just the increase in value, so it’s not a second lifetime allowance test in that sense. It’s just looking at the growth in the drawdown fund and it’s only at age 75, whereas if you use a drawdown to purchase an annuity, that comes under BC4. And, again, it’s not strictly speaking, a second lifetime allowance test it’s just looking at the increase in value since those funds were designated.

    Chris Jones: I think we’re through, but we may have missed one. If we have, we'll e-mail you later with the answer to your question.

    Simon Harris: Okay. Thank you to Tom and Chris for taking us through the presentation today. As we heard the use of drawdown as efficient retirement planning vehicle can demonstrate significant benefits to the client. To make the most of this opportunity does require some careful consideration both upfront and ongoing. Chris and Tom have highlighted this morning some of these areas, and particularly the use of the commencement lump sum where this is not required upfront as an efficient stream of income. A lot of these features will not be apparent to clients who decided to transact directly. So, the opportunity is there to engage with clients to make sure they fully appreciate how advice will benefit them.

    Please speak to you Scottish Widows' contact to understand the support we can offer in this market through the retirement account which includes a comprehensive drawdown facility, and the excellent suite of investment options and the proposition that is backed by strong online credentials. 

    And next week, as already alluded to, sees the addition of a phased drawdown or drip-feed drawdown facility. Please make use of the materials and tools available from the financial planning team, which I highlighted earlier, to compliment this market. 

    As a reminder, a recording of today's session will be placed on the advisor extranet for further review and, indeed, if you wish to review any of the other recordings from previous MasterClasses. CPD certificates will also be issued following today’s presentation. So, finally, my thanks to Chris and Tom for taking us through the slides today. And thank you for joining. And that concludes today’s presentation.

    Operator: Ladies and gentlemen, this concludes the Scottish Widows MasterClass. Thank you for your participation, you may now disconnect.

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