Options as you approach LTA

caveman8006

I have the £1.8m LTA protection and haven't made any SIPP contributions for several years. However, I have recently calculated that the combination of a £30,000 pa DB pension (payable in 4.5 years time) and my current DC pot of £1,150,000 puts me very close to my cap. If I remain fully invested in (fee charging) active funds, the expected return of, say, 5-8% pa will easily breach the cap, so effectively leaving me with only 45% of any upside but all the downside from "market" investments. Instead, I could use a combination of multiple £75,000 fixed rate cash deposits and perhaps some NS&I monthly income account to achieve the cap on a risk-free basis which seems preferable to me. Thoughts?


Thereafter, I assume I should crystallise my DB pension and move the remaining assets (approx. £900k after taking the 25% TFLS out of my DB AVC pot) into a drawdown account. Although I don't intend to touch the capital in this account (as I have sufficient income elsewhere in ISAs etc and wish to preserve the maximum pot to pass on the dependents without IHT), I will still be at risk from the LTA tax charge if I resume an active investment policy won't I? Is the best I can do, to "skim" off any investment gains each year and pay marginal tax (presumably partly top rate 45%) tax to protect against a punitive 55% charge on death, or can I safely defer this until I get closer to 75? Are there any other ways of restoring a reasonable risk/return trade-off when at the LTA cap?

jamesd

Your age is a critical piece of information. Are you 55 or older and hence able to crystallise now to prevent future increases in DC pot value from having a negative effect until you get to the age 75 check?

As soon as you take the 25% tax free lump sum portion from part of a DC pension pot the growth no longer matters until age 75 because you've used whatever percentage of the LTA it took at the time of crystallisation.

You can also use strategic timing of crystallisation to do it in pieces with chunks after stock market downturns, anticipating future recovery.

You could also consider some use of P2P investing within a SIPP. SIPPClub is one potential way provided you meet their eligibility requirements. This won't reduce your growth much if at all because it's easy enough to get over 8% interest rate, up to perhaps 14%. What it can do is eliminate stock and bond market risk.

You might also look into VCT use as a way to reduce your tax burden and generate ongoing tax free income via the always tax free VCT dividends. If you search for posts about VCT from my account with the advanced search you'll find a fair bit of it discussing hte lower risk end of VCTs that can pay perhaps 10% of the net purchase price as annual income.

kidmugsy

caveman8006 wrote: »

the expected return of, say, 5-8% pa

In the next 4.5 years? Expected by whom?

EdSwippet

kidmugsy wrote: »

Expected by whom?

The FSA, perhaps?

From 6 April 2014 your pension statement will have to show the value of your fund and what it would be worth at your retirement date if it grows by 2%, 5% or 8% a year.

caveman8006

Thanks jamesd


Yes, I am 55 so could begin crystalizing the DC part of the pot and potentially reinvesting any tax-free withdrawals into other protected assets like VCT. But, within the IHT-friendly pension pot, once I use up the life-time allowance, I am still facing a punitive charge on any further investment gains achieved before I reach 75 (or die) so it still reduces the risk/reward attractiveness of an equity linked investment strategy for this pot.


And, yes of course kidmugsy, there is great uncertainty over achieving any, let or alone 5-8% pa, returns on the retained funds in the next few years, but there would be no point taking on the extra risk over cash unless you expected to achieve something like that in the medium-term. So, again, by the eve of one's 75th birthday, there could easily be over £1million of "excess" returns liable for the 55% LTA tax or whatever the top marginal income tax rate is then - so surely makes sense to keep skimming as you go, particularly if you have any headroom to use up some "basic" or "middle" tax band income?

kidmugsy

EdSwippet wrote: »

The FSA, perhaps?

What happened to the 2%? Why no possibility of negative returns?

kidmugsy

OP, if the penalty for drawing your DB pension early isn't too excruciating, you could draw it early and thereby get yourself some more headroom under the £1.8M. After all, if the actuarial reduction is actuarially neutral then the only bad feature would presumably be an extra tax bill.

Is there any mileage in jiggering around with pension vs TFLS for the DB pension?

There's also the option of waiting to see whether a Chancellor grasps the nettle of abolishing LTA - that may be rather a long shot, though.

milford59

OP - my situation is not a million miles from yours. DB pension of £38k payable in 4 years and a DC pot of £800k . My solution is to take a Transfer of just over £1 mio from my DB provider, crystallise the whole lot (my LTA is only £1.5 mio) , pay the excess tax charge now, and then let the remainder grow without any concern about the LTA. Your mileage may vary. Best of luck with whatever you decide.

EdSwippet

kidmugsy wrote: »

What happened to the 2%? Why no possibility of negative returns?

OP asked about options where his pension grew to exceed the LTA. Under 2% or negative returns it's likely that it would not. So no point agonizing over these possibilities.

caveman8006

There appears to be some confusion here over what happens to any potential excess LTA tax liability after an initial crystallization either exactly at the LTA cap (my intended scenario) or slightly above it so with some initial tax paid (milford59's route). My understanding (correct me if I'm wrong) is that if any of the crystalized pot is left in a drawdown account, then there would still be a (in milford59's case second) tax liability on any further retained capital growth on death or at age 75. If I am right, then milford59's approach seems completely wrong, as he could instead have just crystalized his DC pot here and kept the DB pension almost avoiding the complete LTA tax bill now. Of course, if you don't need an income at all, then the conversion of the DB pension to a larger drawdown fund might make sense as an IHT minimising strategy, but there would still be income tax to pay on any withdrawals and/or an even bigger 55% tax bill on the increase in any capital balance left at the time of death or 75 (whichever comes first).


As for playing around with taking the DB pension early, this just seems to reduce the benefit from the guaranteed growth of 6.25-7.5% pa in the GMP portion of my DB pension which has increasingly dominated my final DB pot, not to mention the generous spouse benefits etc.

kidmugsy

caveman8006 wrote: »

As for playing around with taking the DB pension early, this just seems to reduce the benefit from the guaranteed growth of 6.25-7.5% pa in the GMP portion of my DB pension which has increasingly dominated my final DB pot, not to mention the generous spouse benefits etc.

Your first point is good. The second is good if the scheme rules determine that your widow's pension would decrease too. Unless you know that to be so, it's worth checking.