Pension value calculation for LTA

amountainhigh

I am somewhat confused having seen conflicting advise regarding of the pension valuation for LTA purposes - specifically as to whether the value is now or the projected value when I retire or crystallise. I am trying to assess whether I need to worry about the Fixed Protection looming deadline.

I am 46 and have a deferred final salary Defined Benefit scheme with a value of £25k pa. I understand that there is a multiplier of 20. Do I multiply te £25k or do I need to account for the fact that the £25k will have probably risen to £35k by the time I retire (due to CPI increases).

I also have a Defined Contribution scheme which has a current value of £70k. Do I use the £70k or do I need to use an assumed growth rate (say 6%) to assess what it might be worth when I retire? I have seen references to both current value and projected - so am confused.

Any help appreciated.

Drp8713

£25k x 20 + £70k = £570000, even at the £1.25M LTA that's still only 45.6%.


I think its a bit early to be worrying about protection now, when you have over half a million pounds of room

bigadaj

Your understanding is broadly correct.

The main problem is that politicians keep changing the lifetime allowance limit, so your guess is as good as any in terms of what the lta will be when you retire, your assumptions look reasonable.

It seems unlikely that the lta will reduce below £1 million so you still have a fair bit of room.

Normal advice is to diversify, so if I were you I'd make sure I was paying into isas and probably paying down a mortgage as well.

sandsy

It's the value at the time you start taking the benefits, so you are right to be thinking about what they will be worth in future.


The big unknown though is how the LTA itself will change (or not) over the intervening years.

amountainhigh

Thanks for your responses. My main confusion is that do I need to calculate my Defined Contribution scheme value as the current fund value (£70k) or the expected value at my retirement age based on an assumed growth - my pension statement suggests it could be worth £630k, which when added to my DB pension and another smaller pension means I would be near the £1.25m LTA allowance.

bigadaj

amountainhigh wrote: »

Thanks for your responses. My main confusion is that do I need to calculate my Defined Contribution scheme value as the current fund value (£70k) or the expected value at my retirement age based on an assumed growth - my pension statement suggests it could be worth £630k, which when added to my DB pension and another smaller pension means I would be near the £1.25m LTA allowance.

From your last statement it appears that you are hammering a fair bit into your db, how much is that roughly? Is your reasoning that you're getting higher rate tax relief?

If you are putting large amounts into a pension then what are your retirement and future plans?

As well as isas and mortgage overpayment there are other options. There is obviously property, which this board often rails against but can form a useful part of a wider protfolio.

The primary benefit of pensions is tax relief and when you start hitting the limits that's effectively what you lose. Having good pension provision may open up such things as eis and vct investments. Relatively risky but benefitting from tax relief.

Triumph13

amountainhigh wrote: »

Thanks for your responses. My main confusion is that do I need to calculate my Defined Contribution scheme value as the current fund value (£70k) or the expected value at my retirement age based on an assumed growth - my pension statement suggests it could be worth £630k, which when added to my DB pension and another smaller pension means I would be near the £1.25m LTA allowance.

All the calculations get done at the point you crystallise the pensions, so you will be comparing the value of your DB and DC pots at that point with the level of the LTA at that point. The first two you can model relatively easily, but for the LTA you are going to need to get your crystal ball out.

Is the projected DC figure you gave in today's money (ie inflation adjusted) or absolute?

Either way you probably shouldn't be thinking about fixed protection as I believe that prevents you from making further pension contributions (someone will shout if I have that wrong)

amountainhigh

My Defined Benefit pension is now a deferred scheme so no more contributions. The current £25k valuation is at today's prices and I expect it to rise with CPI. If I use a compound CPI interest rate of 2.5% then it would be worth £39k, so if I multiply that by 20 I get £780k of my LTA.

I am now contributing to Defined Contribution scheme and benefiting from higher rate tax relief and company contributions (so I wouldn't want to apply for Fixed Protection and lose this benefit unless I needed to). The forecast £630k value assumes a same level of contribution until retirement (at 65) and a growth rate of 6%.

I also have an AVC pot of £70k which I would need to make an assumption on future value.

The immediate issue is whether it is worth applying for Fixed Protection 14 but lose the ability to make further contributions.

System

sandsy wrote: »

It's the value at the time you start taking the benefits,

"the benefits" meaning only the value crystalised at the moment of taking the snapshot?
What would happen if he deferred crystalising some of the pension, or indeed never crystalised it?

Triumph13

And that's where you need your crystal ball to guess the LTA in 19 years' time.

If they index the current £1.25M at 2.5% pa it will be £2M meaning you'll have about £1/2M of headroom

If they drop it to £1M (as the Libs want) and index it the same way then it ends up as £1.6M and you still have £100k of headroom

If they drop it further or don't index it then you're potentially stuffed - along with loads of others, me included.

You need to take a view. My personal guess (and it is purely a guess) is that £1M plus indexation is a fairly reasonable number to work on and that's what I'm using in my own plans, but the politicians could just as easily halve it, double it or paint it pink and put it in a party frock

RichandJ

Triumph13 wrote: »

And that's where you need your crystal ball to guess the LTA in 19 years' time.

If they index the current £1.25M at 2.5% pa it will be £2M meaning you'll have about £1/2M of headroom

If they drop it to £1M (as the Libs want) and index it the same way then it ends up as £1.6M and you still have £100k of headroom

If they drop it further or don't index it then you're potentially stuffed - along with loads of others, me included.

You need to take a view. My personal guess (and it is purely a guess) is that £1M plus indexation is a fairly reasonable number to work on and that's what I'm using in my own plans, but the politicians could just as easily halve it, double it or paint it pink and put it in a party frock

The latter is more likely, however, there will be transitional reliefs and protections for those that want to wear jeans instead of a party frock and are allergic to pink. These reliefs and how to apply for them will run to another 10 pages on the HMRC RPSM site. Under no circumstances will blue be allowed.