After 2006 I brought all my pensions into one self-invested personal pension and then decided to take some benefits. Now I would like some more cash, how can I work out what is available to me?
Although the question you ask is a common one and, on the face of it, relatively straightforward, it can be fraught with problems.
Taking benefits is now known as a ’crystallisation event’ and, of course, such benefits can be in the form of a tax-free cash payment and/or income. In its simplest form, if all you took after A-day in 2006 was an amount of tax-free cash, you would have crystallised an amount of your Sipp equal to four times this figure.
For example, if your fund was £500,000 and you took £25,000 as cash, you would have crystallised a sum of £100,000, taking £25,000 as cash. What remains in the fund is £75,000 crystallised and £400,000 uncrystallised. At that time, the uncrystallised amount represents 84.2 per cent of the overall fund.
If there were no changes to your fund in the form of income taken or contributions made and you now wished to take the remainder of your tax-free cash entitlement, you 25 per cent of 84.2 per cent of your current fund would be available. If your fund has increased to, say £700,000, you would have cash available of £147,368.
Unfortunately, very few cases are as simple as this example but the principle remains the same.
You have to be able to identify what proportion of your fund is uncrystallised at a point in time and then, ignoring all forms of protection, 25 per cent of that remaining fund is what is available to you.
Problems occur where new money is introduced into your pension scheme, income is withdrawn or a further partial crystallisation event takes place. Such complications are why several insurance companies create separate policies for their drawdown contracts for each amount that is crystallised. And while this helps with the calculation, it creates further complexity in the way of multiple policies with different review dates, renewal dates and charges.
If new money is introduced by either a contribution or a transfer of uncrystallised funds, this will add to the uncrystallised fund at the point the contribution is made. A new calculation needs to be made as and when every new contribution is made.
Of course, the more uncrystallised money introduced to the fund, the higher the amount of tax-free cash available later. Do not forget, however, that if another amount of crystallised money is transferred to the fund, this will not increase the availability of tax-free cash.
The next complication is in drawing down income from the fund. The calculation acts in the reverse way to that of contributions. If money is withdrawn on an annual basis, the amount is taken from the crystallised portion of your fund, thereby altering the relationship between crystallised and uncrystallised funds at every point income is taken. While this does not alter the crystallised amount, it does alter the relationship between the crystallised and uncrystallised amount and, with ever-varying values, further complicates the calculation.
If your Sipp contains protected rights, the money created by contracting out, then the amount of protected rights, whether crystallised or not has to be tracked in a similar way.
One way or another, all of the above conspire to create a complicated calculation and most Sipp providers, quite rightly, require a fee to calculate the amount of uncrystallised funds available at any given point in time.
Richard Jacobs is managing director of Richard Jacobs Pension and Trustee Services