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Crystallised Pension Drawdown Guide

The basics of pension drawdown and contributions after crystallisation

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By Tony Stevens  | Pensions Expert

Updated: 18th September 2019 *

We often hear from customers who are coming up to retirement and have questions relating to what’s known in the pensions industry as ‘crystallised pension drawdown’. 

While this may sound complicated, it’s actually quite simple. ‘Crystallisation’ simply refers to the process of cashing in a pension, from which you can take a tax-free lump sum of up to 25% and draw an income from it via a flexi-drawdown or an annuity. You can crystallise your pension from the age of 55, and an ‘uncrystallised’ pension is one which hasn’t been cashed in yet. 

The decision as to when and at what age to start taking benefits has some big implications for tax and retirement planning, so it’s important to understand these before dipping into your pension. 

To cover the basics, we’ve written this article which will include: 

We recommend first speaking to an expert, and we’d be happy to refer you to one of the specialist advisors we work with – give us a call on 0808 189 2301 if this is something you’d like to discuss. We won’t charge a fee for this service. 

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What is pension drawdown crystallisation?

A personal pension is said to be ‘crystallised’ from the first time you dip into it and start taking your retirement benefits, which most UK savers can do once they reach the age of 55 (subject to having a pension that has the facilities to do this or by transferring to one that does). There are different rules for pension contributions after drawdown as well as tax implications, so it’s important to know what will change from this point onwards.

What are the types of pension crystallisation?

There are several ways that a pension can be accessed and become crystallised, but the two main methods are purchasing an annuity and drawdown. 

Drawdown is the more flexible option that many people are moving towards nowadays as it allows greater control over how and when you take your benefits. It shows that funds are still active, meaning that your pension funds still have the potential to grow.

Tax, Income drawdown and pension contributions 

When considering the timing of your first pension drawdown there are some key issues to think about: the impact this event will have on your tax position, how any future payments into your pension will be treated, and whether you are comfortable that you’ll have enough left to live on. 

These are big questions that will ultimately come down to a personal decision, but there are a few certainties to keep in mind:

Can I still make pension contributions after drawdown?

Yes, you can still make contributions to your pension pot, which will continue to grow in line with the funds your savings are invested in. However, from the first time you withdraw money from your pension using annuities or drawdown it is considered to sit ‘within your estate’, meaning you will have to pay tax on it (see below).

You will also be subject to far tougher restrictions on what you can put back into your pension in a given tax year. Your allowance will drop from £40,000 per year (or 100% of your income if lower) to £10,000. 

It’s also worth being aware that HMRC may take an interest in any payments being made soon after a withdrawal (known as ‘recycling’), as this can be viewed as a form of tax avoidance that can incur surcharges of up to 40%

Tax implications of pension drawdown crystallisation

Pensions that have not been crystallised are considered to exist outside your estate for tax purposes and are therefore tax exempt, but this stops being the case as soon as you access the funds held within it.

The good news is you are still entitled to take a 25% tax free lump sum called a ‘pension commencement lump sum’ (PCLS), or distribute this tax free allowance across several smaller withdrawals. 

You may have to pay tax on the remaining 75% of your pension pot if doing this does not exceed your pension allowance. The rate you’ll pay depends on whether you’re a basic, higher or additional rate taxpayer, i.e. 20%, 40% or 45% respectively, or if you are eligible to pay tax at all. 

Uncrystallised funds pension lump sum versus drawdown

What are your options if you want to benefit from a personal pension but you aren’t ready to live with the implications of crystallisation just yet? 

Well, an alternative to drawdown is an Uncrystallised Funds Pension Lump Sum also known as a UFPLS or a FLUMP, which allows you to withdraw a lump sum from your pension pot without using drawdown or buying an annuity. As is the case for a PCLS, 25% of the sum is paid to you tax free.

However, the crucial difference is that if you choose to take a UFPLS, you can continue to make contributions to your pension pot without the post-crystallisation rules applying. 

This means you can pay in up to £40,000 per year and the money remaining in your pension stays tax free until you choose to access it using annuity or drawdown.

What about flexi access drawdown?

Once you’re in a position to want a regular income and easy access to your pension, flexi-access drawdown give you the choice between ad hoc lump sums of any size as well as the ability to set up regular payments for as long as you have funds to draw on.  

As its name suggests, it’s the most flexible drawdown option, so check with your provider if they offer this feature. 

Whether you want to opt for UFPLS first will depend on several factors, such as how much you have in your pension in the first place, whether you want to combine income with a tax free lump sum and how keen you are to make the most of your lifetime allowance. 

Speak to an expert and explain your priorities and circumstances to ensure you make the most of these options, as there are many different combinations to explore. 

Speak to a specialist advisor about crystallised pension drawdown

Need some expert advice on the best retirement options for you? The specialist advisors we work with have a whole-of-market view of the available products and are ideally placed to help you out. Give us a call on 0808 189 2301 or make an online enquiry and we’ll get right back to you. 

We don’t charge fees for this service and you are under no obligation to take the advice offered. All you need to do is sit back and let us do the hard work, while we find the most suitable solution for you.

Updated: 18th September 2019
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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