LTA - To SIPP Or Not To Sipp?

leedsfan757

Hi there and greetings,

I would be grateful to hear any views which may be of help regarding the following question please. Thank you for reading this.

With the recent announcement by the chancellor that the LTA will reduce to 1m I am in a quandry as to whether or not I should open a SIPP. I am aged 53.

I am fortunate in that I have 2 DB pensions (1 a military one already in payment, the other a private sector employer one closed to further contributions due to pay out at age 60). These DB pensions are broadly similar in 'value'. I also have a small-ish amount of AVCs (also closed to future contributions). Finally, I also contribute heavily to my employer's DC scheme which has generous employer contributions for only a fairly nominal personal contribution.

The recently announced reduction means that I will likely exceed the LTA at some point in retirement. I still wish to attract employer DC contributions so applying for protection is not immediately attractive. One option, given the change in 'death taxes' is to plan to leave the DC pension untouched, thereby avoiding any breach of the LTA, yet enjoying tax relief at 40%, and to open up a SIPP into which I could also contribute up to the Annual Allowance (plus an additional £17.6 k of unused previous years).

This raises the following questions:
1. Is this strategy sound?
2. If I do contribute to a SIPP at the same time as an employer DC scheme are there any potential downsides and financial penalties (eg greater NI or tax levies etc) other than having to claim back 20% tax through PAYE?

Thanks very much indeed for your time.

leedsfan757

Any helpful replies would be genuinely appreciated since we are close to a new financial year.

Thank you.

madeinireland_2

I have a similar situation and I think one thing you need to be careful of is buying a SIPP which will make your LTA position worse especially if your remaining DB scheme is still growing as a result of less actuary reduction.

leedsfan757

Thanks very much indeed for the reply.
I'm afraid that I used up all my pensions knowledge in composing my question! Any further explanation would be greatly appreciated please.
Kind regards

madeinireland_2

I don't think you give enough information but if you are likely to exceed the LTA as you have stated then opening a SIPP will just make that position worse and mean you will eventually have to pay a charge of 55% for the amount over £1m.

madeinireland_2

I'm sure someone with more knowledge than me will be along soon to help but I think your strategy will not work as there is a LTA check at 75 which would catch you if you are planning to leave as an inheritance.

jamesd

The SIPP idea is good but there are two issues:

1. The LTA check at age 75. Avoid this by withdrawing money. Also by taking benefits while the LTA is as high as possible or during a market downturn so the percentage of the LTA that is used is lower. the percentage is tracked, not the value.

2. You might find it better to enjoy seeing how your beneficiaries have an increase in quality of life from the money. You can only do that if you give it away while you are alive.

leedsfan757

Very many thanks for your replies, it is much appreciated.

Yes, in essence my original proposal was based on the assumption that having several different pension pots might be more advantageous with regards to the LTA than having one single one to the same value. That way, I thought, could provide a more structured approach and give the individual more control over when (and by how much) to exceed the LTA?

Assuming the individual had sufficient funds to live on in retirement whilst not breaching the LTA, I had read that the recently announced changes in legislation regarding the taxation of unused pension benefits might be beneficial here. This is an extract:

"If the pension money inherited includes some that was in excess of the lifetime limit, the total tax paid when death occurred before 75 will be just the 25pc original penalty. For deaths after 75, a basic-rate taxpayer will see withdrawals taxed at 20pc, meaning the total tax is, as above, 40pc of the sum originally in the pension plan, exactly cancelling out the tax relief paid on the way in if the original saver bwas a higher-rate taxpayer. A beneficiary who is a higher-rate taxpayer will pay 40pc on the withdrawal – a total tax, as before, of 55pc."

jamesd: thank you also. I understand point 1 I think. Regarding point 2, yes, that is one view and I will consider the wider implications I promise, but I am merely trying to get a grip of the purely financial pros and cons of
what is currently an idea I recently hit upon.

Any further thoughts and suggestions would be most welcome.

Cheers