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    • tim9333
    • By tim9333 10th Oct 17, 3:31 PM
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    tim9333
    Minimise LTA tax following DB transfer
    • #1
    • 10th Oct 17, 3:31 PM
    Minimise LTA tax following DB transfer 10th Oct 17 at 3:31 PM
    Having recently completed a DB transfer from my old employer, I would appreciate any thoughts on the best way to manage my resulting LTA exposure: (I know this is a fortunate problem to have - the result of crazy DB multiples)

    My details are as follows:
    - Age 54
    - current SIPP value £2m
    - LTA is £1.25m from FP2016
    - retired from corporate life (now doing voluntary/low paid work)

    My current assumptions are to:
    - drawdown the SIPP at 2-3% pa from age 55 as a basic rate tax payer
    - take the 25% tax free lump sum in regular amounts to use up annual ISA limits (i seem to remember reading somewhere that the 25% tax free was under threat during George Osborne's days?)

    My question is how to handle the LTA exposure?
    - I presume it is best to crystallise at least the £1.25m at 55 to protect any subsequent investment growth
    - But do I pay the 25% LTA tax at 55 or leave uncrystallised? (presume this is possible?)
    - I gather the LTA is tested again at 75. Does it make any difference if something untoward happened to me before then? Would my estate get charged the same tax?

    Any thoughts/ideas are most welcome!.
Page 1
    • HappyHarry
    • By HappyHarry 10th Oct 17, 8:13 PM
    • 416 Posts
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    HappyHarry
    • #2
    • 10th Oct 17, 8:13 PM
    • #2
    • 10th Oct 17, 8:13 PM
    I wouldn’t worry too much about the 25% tax free cash disappearing. It’s been rumoured for every budget and every autumn statement since the stone age and would affect so many people, I can’t see that it would be pulled. Maybe at some point it will affect future contributions, but not for those pots already acquired.

    Death is a BCE (benefit crystallisation event) and the LTA charge will apply at that point.

    Crystallising immediately to remove tax free cash is quite common, as it is generally unfavourable to grow tax free cash in a way that incurs a LTA charge.

    You can leave uncrystallised funds. These will be tested at death or age 75, whichever is sooner.

    As the annual allowance is now reduced and the tapered annual allowance and MPAA are now in place, there are suggestions that at some point, the Lifetime Allowance may be removed. This seems more likely than the 25% tax free cash disappearing. However, pensions are seen as a bit of a cash cow for the treasury, so may not happen at all.

    I would expect that you used an IFA to complete your DB transfer. What did they suggest you do about the Lifetime Allowance Charge?
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • zagfles
    • By zagfles 10th Oct 17, 8:36 PM
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    zagfles
    • #3
    • 10th Oct 17, 8:36 PM
    • #3
    • 10th Oct 17, 8:36 PM
    I would expect that you used an IFA to complete your DB transfer. What did they suggest you do about the Lifetime Allowance Charge?
    Originally posted by HappyHarry
    Yes that was my first thought.

    OP - you did a DB transfer which gave you a SIPP way above the LTA. It might have been above the LTA without the DB transfer but in all likelyhood would have been far less above, if at all, compared to taking the DB pension at 55. Since the DB pension would have crystallised at 20x the annual pension at 55 if you took it then - so the more generous treatment of DB plus the actuarial reduction from taking it early would have been massively in your favour wrt the LTA.

    So the IFA who did the transfer must have surely gone through the LTA aspects in detail with you as it should have been a major factor in the transfer advice. If this wasn't discussed in detail with you then the IFA hasn't done their job properly IMO. So what was their advice on this?
    • tim9333
    • By tim9333 10th Oct 17, 9:35 PM
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    tim9333
    • #4
    • 10th Oct 17, 9:35 PM
    • #4
    • 10th Oct 17, 9:35 PM
    Thanks for the replies.

    The DB transfer analysis assumed that 25% of FP2016 was paid out as tax free cash at 55 and 25% of the excess over FP2016 was paid as an LTA tax charge. My question was whether there was any actual need to crystallise anything over and above FP2016. Having read that the Treasury's LTA tax receipts had increased substantially, I presumed that was what the common course of action. I doubt I would be fortunate enough for the LTA to be abolished.

    Agree that the DB transfer may seem slightly strange given that it creates an LTA charge. However the transfer was more to do with:
    - alleviating the risk of ending up in the PPF due to bankruptcy of the sponsoring company before I had reached NPA (in my view this is highly likely but I could be wrong...) The cap and age related factors would impact significantly
    - the ability to pass on benefits to my dependents.

    I went through various scenarios before I decided to make the transfer and understood what I was giving up. There was no actuarial reduction in the DB pension for early payment. That together with a high multiple was why it created such a high transfer value. On that basis, I accepted that the LTA charge was worth paying...
    • zagfles
    • By zagfles 10th Oct 17, 10:04 PM
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    zagfles
    • #5
    • 10th Oct 17, 10:04 PM
    • #5
    • 10th Oct 17, 10:04 PM
    OK, but your IFA should have discussed the LTA issues with you in detail, it sounds like they didn't.

    It does sound like you're on the right track, crystallise the £1.25m to avoid the LTA charge on any growth on that part, and leave the rest uncrystallised, I can only see disadvantages to crystallising the excess over the LTA until you need it.

    For instance if you crystallised you might end up getting another LTA charge at 75, also if you die before 75 with it uncrystallised, your dependants could (if they chose) avoid the LTA charge and opt to be taxed at their marginal rate instead - by leaving it two years before touching it - this could work out better for them depending on their tax status.

    Your IFA really should have discussed the above with you though. It's fairly basic stuff for an IFA who is qualified for pension transfers
    • EdSwippet
    • By EdSwippet 10th Oct 17, 10:31 PM
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    EdSwippet
    • #6
    • 10th Oct 17, 10:31 PM
    • #6
    • 10th Oct 17, 10:31 PM
    My current assumptions are to:
    ... - take the 25% tax free lump sum in regular amounts to use up annual ISA limits
    ...
    My question is how to handle the LTA exposure?
    - I presume it is best to crystallise at least the £1.25m at 55 to protect any subsequent investment growth
    Originally posted by tim9333
    For what it's worth, these two actions within your plan appear to be mutually incompatible.

    When you 'crystallise' a pension you take the 25% PCLS there and then, as part of crystallising it. Or put differently, the only way to access a 25% PCLS component is to crystallise four times that amount of pension.

    Your likely first move may be(*) to crystallise £1.25mm at age 55, invest the £312.5k PCLS outside shelters, perhaps moving into ISAs as time permits, and immediately defer drawdown on the remaining £927.5k crystallised pension element. That way you avoid growth on this part of your pension expanding into the LTA excess penalty tax zone.

    That leaves just the amount over the £1.25mm as perhaps uncrystallised. See below for more.

    [ (*) Others may suggest that you could wait for a market downturn, crystallise your pension at its bottom or when it drops below your LTA, then wait for a later recovery. They might not be wrong in suggesting this, but it does encompass a lot of unknowns that are not guaranteed to materialise in your favour. A 33% downturn could be preceded by a 50% rise, you won't know when the downturn reaches bottom, recovery might not arrive on a usable timescale for you, you could fortuitously hold downturn-proof assets, and so on. ]

    - But do I pay the 25% LTA tax at 55 or leave uncrystallised? (presume this is possible?)
    Originally posted by tim9333
    It's possible. And whether to take the LTA tax hit now or later is at least mathematically neutral when viewed in isolation -- assuming growth rate G, 75% x (pension x G) is the same as G x (75% x pension).

    With that in mind, I can readily see arguments both ways. The second BCE at age 75 remains a worry. Maybe the government will abolish the LTA. Or maybe cut it further still. Or maybe your heirs will be glad you left it uncrystallised. Or...

    Ultimately, unfortunately there is no good answer to this. Pension simplification, my a---.
    Last edited by EdSwippet; 10-10-2017 at 11:17 PM.
    • ukdw
    • By ukdw 11th Oct 17, 6:07 AM
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    ukdw
    • #7
    • 11th Oct 17, 6:07 AM
    • #7
    • 11th Oct 17, 6:07 AM
    As opinions seem to vary between crystallising 0% and 100% of the above LTA amount then might be worth considering hedging by crystallising some of it.

    The percentage to crystallise could be determined by the perceived likelihood of future removal/increases to the LTA and increases to the 75 age limit vs future lowering of the LTA, increasing of the penalty tax percentages, lowering of the 75 age limits.

    If you do end up crystallising some of the above LTA amount then the next question would be whether to pay the 25% penalty and put the remaining 75% into drawdown or pay the 55% penalty and take the remaining 45% as a lump sum. Could be worth considering a hedging approach to this decision too.
    • goRt
    • By goRt 11th Oct 17, 9:27 AM
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    goRt
    • #8
    • 11th Oct 17, 9:27 AM
    • #8
    • 11th Oct 17, 9:27 AM
    ...Your likely first move may be(*) to crystallise £1.25mm at age 55, invest the £312.5k PCLS outside shelters, perhaps moving into ISAs as time permits, and immediately defer drawdown on the remaining £927.5k crystallised pension element. That way you avoid growth on this part of your pension expanding into the LTA excess penalty tax zone.
    ...
    Originally posted by EdSwippet
    I understand the LTA rules differently - you have to commence drawdown on the crystalised element to keep it at or below the £927.5k as growth will impact at the next BCE (there's no way to avoid the whole SIPP test at age 75).
    One is incentivised to withdraw from SIPP to keep below LTA.

    My position is that I'm FP14 (1.5m) and will be taking 25% PCLS then am incentivised to withdraw to keep below the 1.5m LTA test at age 75. (I retired at 50, took my first PCLS at 55 and will be transferring my DBs to SIPP over the next few months).

    It would be nice if the LTA was removed NOW rather than shortly after I take action to avoid it, as remaining uncrystallised is more efficient tax wise for me bar the BCE test at 75.
    • tim9333
    • By tim9333 11th Oct 17, 11:16 AM
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    tim9333
    • #9
    • 11th Oct 17, 11:16 AM
    • #9
    • 11th Oct 17, 11:16 AM
    Thank you for the helpful comments. To clarify the financial advice I received:
    - this was a fixed (low cost not percentage) fee for the scenario analysis of whether the transfer was to my benefit to satisfy the pension trustees
    - the advice covered the implications of the LTA tax charge both at 55 and 75 (if I hadn't taken sufficient income to remain at or below the LTA)
    - it didn't cover any options to mitigate the charge, hence my post - I may well take further advice surrounding this issue....

    As EdSwippet points out, I hadn't fully understood how drawdown works. My preference is therefore to:
    - crystallise £1.25m and invest the 25% tax free cash to mitigate any further LTA charge on this amount
    - drawdown annually up to the higher rate tax band (actual amount dependent on other additional earned income)
    - manage future growth vs income requirements over time to avoid a further LTA charge at 75 on this part of the pot
    - leave the remainder uncrystallised and plan to accept the 25% LTA income charge at 75 or before if needed for income.

    I must admit that having left the complexity of one corporate life, I wanted to tackle this myself. Now I'm not so sure! Getting to the bottom of anything in this sector is non-trivial.
    • anselld
    • By anselld 11th Oct 17, 12:12 PM
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    anselld
    One thing you have not mentioned is indexation of LTA. LTA is promised to grow with CPI from 2018 (if you can believe any gov promise on pensions) so by avoiding LTA tax on growth you are sacrificing any inflation-proofing of LTA.

    If investment growth significantly exceeds inflation that will be a good decision, but if there follows a period of higher inflation, lower growth it will not.

    Obviously you can't have both and you can't predict the future.
    • zagfles
    • By zagfles 11th Oct 17, 2:39 PM
    • 12,368 Posts
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    zagfles
    Thank you for the helpful comments. To clarify the financial advice I received:
    - this was a fixed (low cost not percentage) fee for the scenario analysis of whether the transfer was to my benefit to satisfy the pension trustees
    - the advice covered the implications of the LTA tax charge both at 55 and 75 (if I hadn't taken sufficient income to remain at or below the LTA)
    - it didn't cover any options to mitigate the charge, hence my post - I may well take further advice surrounding this issue....

    As EdSwippet points out, I hadn't fully understood how drawdown works. My preference is therefore to:
    - crystallise £1.25m and invest the 25% tax free cash to mitigate any further LTA charge on this amount
    - drawdown annually up to the higher rate tax band (actual amount dependent on other additional earned income)
    - manage future growth vs income requirements over time to avoid a further LTA charge at 75 on this part of the pot
    - leave the remainder uncrystallised and plan to accept the 25% LTA income charge at 75 or before if needed for income.

    I must admit that having left the complexity of one corporate life, I wanted to tackle this myself. Now I'm not so sure! Getting to the bottom of anything in this sector is non-trivial.
    Originally posted by tim9333
    Don't assume that an IFA will understand LTA issues - we've seen plenty of examples here where they don't. For instance in this thread an IFA writes "Death is a BCE (benefit crystallisation event) and the LTA charge will apply at that point." which is wrong, a BCE doesn't occur until funds are crystallised from the deceased's pension and can even be avoided as I described above. Also see this thread where the OP was told by his IFA that protection would apply when it clearly wouldn't http://forums.moneysavingexpert.com/showthread.php?t=5716412

    So be very careful who you get advice from!
    • HappyHarry
    • By HappyHarry 11th Oct 17, 3:08 PM
    • 416 Posts
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    HappyHarry
    For instance in this thread an IFA writes "Death is a BCE (benefit crystallisation event) and the LTA charge will apply at that point." which is wrong, a BCE doesn't occur until funds are crystallised from the deceased's pension and can even be avoided as I described above.,
    Fair play - I was simplifying the situation so as not to add more confusion than necessary.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • EdSwippet
    • By EdSwippet 12th Oct 17, 5:00 PM
    • 556 Posts
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    EdSwippet
    I understand the LTA rules differently - you have to commence drawdown on the crystalised element to keep it at or below the £927.5k as growth will impact at the next BCE (there's no way to avoid the whole SIPP test at age 75).
    One is incentivised to withdraw from SIPP to keep below LTA.
    Originally posted by goRt
    Right. Crystallising at the LTA buys you up to 20 years of sidestepping the excess tax, but you indeed want to drawdown over that period to also avoid tangling with the age 75 BCE later.
    • EdSwippet
    • By EdSwippet 13th Oct 17, 7:22 PM
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    EdSwippet
    One thing you have not mentioned is indexation of LTA. LTA is promised to grow with CPI from 2018 (if you can believe any gov promise on pensions) so by avoiding LTA tax on growth you are sacrificing any inflation-proofing of LTA.
    Originally posted by anselld
    The OP has FP2016, so an LTA currently of 1.25mm. It should be quite a while before inflation raises the standard LTA above that.
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