Options as you approach LTA

Daniel54

coyrls wrote: »

I think the point is that the age 75 test is applied to the growth in crystallised funds. So, as an extreme and simple example, say you crystallised at 55 using 100% of your LTA and left all the funds untouched until 75, then all growth over 20 years (55-75) would be taxed as being in excess of your LTA at 75.

My question about which LTA is applied would come into effect if you have say 10% of your protected LTA left and by the time you reached 75 the LTA was higher than your protected LTA. Would the 10% allowance against growth be 10% of your protected LTA or 10% of the current LTA?

Your first paragraph is correct.As Jamesd said,utilisation of the LTA is in percentage terms and once you have used 100%,that is it

Your second paragraph is almost exactly the position I am in and the answer is that the 10% would be against the LTA at the point of
crystallisation.If the LTA was then say £2m then the 10% would be against the higher allowance rather than the fixed protection amount

None of us has a crystal ball as to future LTAs.But leaving a percentage element open to the possibility that the LTA might be higher than the fixed protection in the future provides a hedge against that possibility.

kidmugsy

caveman8006 wrote: »

Are there any other ways of restoring a reasonable risk/return trade-off when at the LTA cap?

Perhaps contribute to your wife's pension?

caveman8006

Over the last few months I have continued to mull over this and still haven't found a sensible investment strategy for funds in a pension draw-down account which is primarily being maintained as an inheritance tax-free fund rather than for lifetime income purposes. Just to recap, for any investor at or even close to their LTA at the point of retirement, then it is likely that normal, equity-based investment strategies will lead to a breach of the LTA and make subsequent gains subject to the punitive LTA tax rates. (Note that crystalizing the pot at the LTA doesn't help, because future gains in the pot will still be retested at 75 or death and then be subject to the LTA tax).


The only way to avoid the tax would be to "skim off" all gains in the pot as you go as taxable income, but given its size (£1m +) these annual returns will themselves likely be well above the upper tax rate band each year. So the risk-reward trade-off for drawdown funds is not very attractive.


My solution: to keep all "risky assets" outside of the pension wrapper (eg in ISAs EIS, VCT etc) and only invest in risk-free "cash" savings instruments within the drawdown fund. This strategy has the advantage of guaranteeing a known size for the (iht-free) Pension fund which is in any case likely to be primarily used to provide for dependants. It will also keep the annual returns subject to tax when "skimmed off" to a relatively low level. Has anybody any better strategies?

jamesd

You have a long time horizon so skimming off and using VCT buys to recover much of the tax is an option.

EIS is exempt from IHT unlike VCT IHT treatment than VCT but is more risky. SEIS also no IHT but even more risk than EIS. Many AIM shares are exempt from IHT after holding for a while and you can use them outside a pension (say inside an ISA, or outside) to improve the IHT position. Skimming off and buying any of these could be a useful approach.

Also the option to skim and give away while you can see the results because you're still alive. Pension withdrawing like this is income and regular giving out of income is also exempt from IHT. While young enough you can use the skim out of pension, buy VCT and defer for the VCT five years to sell or lose tax relief requirement, then gift.

Malthusian

caveman8006 wrote:

(Note that crystalizing the pot at the LTA doesn't help, because future gains in the pot will still be retested at 75 or death and then be subject to the LTA tax).

[STRIKE]Not all of it. [/STRIKE]

[*edit*: text deleted as it was incorrect. I mistakenly thought the amount originally crystallised - i.e. tax free lump sum plus amount designated to drawdown - would be deducted from the value at age 75 when testing against the LTA again. In fact only the 75% designated to drawdown would be.]

This is a very complex area, and although I don't usually take sides in DIY v IFA on this forum, in this case I strongly recommend taking professional advice. The fee you pay for getting it right will almost certainly be dwarfed by the potential tax saving for getting it right. We don't know what you haven't told us and we can't answer the questions you haven't asked.

caveman8006

Sorry Malthusian, but I think you are wrong on that. The tax-free lump sum is added to the remaining value of the fund at age 75 (or death if earlier) and then compared to the LTA. Every penny of additional return (that you do not withdraw as taxable income) will be subject to the LTA tax in your example. Would love for you to be right on this, but don't think you are...

coyrls

caveman8006 wrote: »

Sorry Malthusian, but I think you are wrong on that. The tax-free lump sum is added to the remaining value of the fund at age 75 (or death if earlier) and then compared to the LTA. Every penny of additional return (that you do not withdraw as taxable income) will be subject to the LTA tax in your example. Would love for you to be right on this, but don't think you are...

That's my understanding as well (i.e. growth of the residue is tested against what, if anything, remains of the LTA), so if you've used 100% of your LTA, all growth will be subject to the LTA tax at 75 (or death if earlier).

kidmugsy

What happens if you decamp abroad before you are 75 and establish tax residence in, say, Portugal? Will hmrc still tax your pension fund at 75?

If so, what if you transfer your pension fund abroad; what then?

jamesd

Provided you're willing to remain non-resident in the UK for a few years you can just become tax resident in Portugal, sign up for their scheme, and take out the whole million at the 0% rate applicable to pension income of this sort in Portugal. No requirement to stay in Portugal for the rest of the years. Once you've served the time outside the UK you can go back, the money can go back immediately.

The potential tax saving can pay for a few around the world cruises or just extended holidays in some of the world's nicest tourist destinations. Or extended rentals in the Channel Islands or Isle of Man for a more British environment.

However the potential saving taking it out can easily be offset and far more by the losing of the pension tax wrapper with respect to CGT, say. It's more applicable to relatively modest amounts or a desire to use the money in some way that can't be done within pension.

Malthusian

Sorry Malthusian, but I think you are wrong on that. The tax-free lump sum is added to the remaining value of the fund at age 75 (or death if earlier) and then compared to the LTA.

You are basically correct and I was wrong. Apologies. Although to be strictly accurate, as I understand it now, you can't deduct the tax free lump sum from the value of the drawdown fund at age 75 (as it isn't counted as part of that fund) - only the amount that was originally transferred to drawdown. I'd got it into my head that it was the amount crystallised that was deducted.