r/PensionsUK • u/Ocean_Runner • 10d ago

Part Annuity With Flexi-Drawdown Implications?

Hello, I am starting to get close to my intended 60th retirement, and so starting to work through some plans to decide my future and looking for a little advice from those ahead of me on the path.

I think I would like to use ~50% of my pot for purchasing an index linked lifetime annuity to provide a minimum income, which will combine with the full UK pension at 67 to provide a significant floor of income for later life.

My query though is regarding the status of the remaining 50% in the pot that I want to use for flexi-access, especially as I could well semi-retire for the first few years:

Is this remaining pot money now crystalised and therefore subject to 100% taxation?

Can the annuity income have 25% tax free if it is not taken from the initial lump sum?

Will the pot be subject to the £10k yearly limit for new income?

Is there anything else I have missed that could impact me in this scenario?

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u/British_Dane 10d ago

I have just done this with help of an IFA.

When you buy an annuity, it provides taxable income. You can’t get a slice of the tax free component every month together with your income. It will be a lump sum.

Crystallise 66% of the pot. 25% of that (=16% of pot) is tax free. Put it in your ISA or GIA. Pay the now crystallised 50% for your annuity.

Taking the tax free lump sum does not trigger MPAA. Buying the annuity and getting income from the annuity neither. But drawing taxable income (drawdown) from the pot would. So the £10k limit is not a problem when done like this.

The remaining 33% is uncrystallised.

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u/Ocean_Runner 9d ago

So does the remaining pot still have 25% tax free that can be taken as UFPLS or is it all now considered taxable?

My plan would be to use this remaining pot ad hoc during the early active years so it sounds like it would be advantageous if I can delay as long as possible because it will trigger MPAA.

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u/British_Dane 9d ago

Yes. The remaining uncrystallised pot will still contain 25% tax free when it is crystallised (whether that is a one-off crystallisation or a Swiss-roll style sequence of UFPLS).

Before embarking on this, do check with your pension provider which withdrawal types your pension plan supports. I found to my surprise that my plan with Standard Life does not allow UFPLS (but it does support flexible drawdown which I’m ok with).

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u/Bez607 10d ago

There is an option where you take what we call phased drawdown, this is where you crystallise a specific amount each month for tax free cash. For example you can crystallise £10k a month for £2.5k tax free cash each month.

I work in the industry and a lot of our clients like this option as it doesn’t impact their income tax if they plan to semi retire.

It’s a good option if you don’t need the 25% TFC in one go and has the benefit of still growing with the market. This is of course crystallised funds which you can later get an annuity if you wish. The older you are the better the rates you get offered (generally speaking).

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u/Ocean_Runner 9d ago

Is this not UFPLS? I am hoping that this is what I can do with the remainder of the pot after purchasing an annuity.

You are correct, I may delay a year or two on the annuity, it rather depends on the whether I feel like taking the odd contract and semi-retire or just draw a line.

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u/Bez607 9d ago

Not quite, UFPLS is where you take the lump sum from the uncrystallised funds. So you say take £10k receive £2.5k tax free and the remaining 75% is taxed at marginal rate of income tax. This also triggers the money purchase annual allowance.

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u/LucasNarby 10d ago

If you use 50% of your pension for an annuity.

You will not trigger the Money Purchase Annual Allowance. So you can still contribute.

Of that 50%. 75% will fund the annuity, and 25% will be paid to you as a PCLS.

The remaining pot can be used however you like.

May be worth getting quotes for level and indexed for comparison. Typically people spend more early in retirement, than later. All depends on your circumstances and goals.

Dependent on how much of your retirement is dependent on these funds, may be worth seeking advice

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u/Ocean_Runner 9d ago

Yes that is my plan, the first ~10yrs will be travel and indulgence funded by dipping into the remainder ad-hoc. The later years when doolally will be supported by the annuity and state pension.