Options as you approach LTA

caveman8006

So to reiterate: once you reach the LTA cap (and whether you take a cash-free lump sum or not) every pound of further investment gains within a drawdown account are either subject to your marginal rate of tax when you withdraw them as income or are subject to the penalty rate of tax at 75 (or death if earlier). So, if at retirement you have, say, £1m in a SIP and £500k in an ISA (assume for the sake of argument that your house is valued at the iht allowance and so can be passed on tax free) and you wish to have a comfortable retirement but also leave as much as possible tax-free to your children, the optimum strategy might be to NOT take the 25% tax-free lump-sum but instead invest all the SIP into cash accounts @ 2%pa and take out the resulting £20k pa as taxable income while still retaining the full £1m pot to be left to your descendants iht tax-free (and even income tax free if you die before 75) Meanwhile the ISA would be invested in risk assets allowing you to withdraw (say) 6% pa reasonably safely for the rest of your life (you could even guarantee a slightly lower return by buying an annuity), If your state pension is £7k, then you have a post-tax income of around £50k.

caveman8006

Of course, in practise, 25% of each annual SIPP withdrawal would be tax-free, but this would be a "positive" complication!

Daniel54

caveman8006 wrote: »

So to reiterate: once you reach the LTA cap (and whether you take a cash-free lump sum or not) every pound of further investment gains within a drawdown account are either subject to your marginal rate of tax when you withdraw them as income or are subject to the penalty rate of tax at 75 (or death if earlier). So, if at retirement you have, say, £1m in a SIP and £500k in an ISA (assume for the sake of argument that your house is valued at the iht allowance and so can be passed on tax free) and you wish to have a comfortable retirement but also leave as much as possible tax-free to your children, the optimum strategy might be to NOT take the 25% tax-free lump-sum but instead invest all the SIP into cash accounts @ 2%pa and take out the resulting £20k pa as taxable income while still retaining the full £1m pot to be left to your descendants iht tax-free (and even income tax free if you die before 75) Meanwhile the ISA would be invested in risk assets allowing you to withdraw (say) 6% pa reasonably safely for the rest of your life (you could even guarantee a slightly lower return by buying an annuity), If your state pension is £7k, then you have a post-tax income of around £50k.

If you are talking about tax planning for an estate of this size,then you would really need to consider also using life assurance policies such as whole of life or offshore bonds.Also the use of trusts( most probably discretionary)

You appear to be focussing on avoiding the 25% surcharge,which may or may well not exist by the time you are 75 .However ,for those who inherit,75% of something is better than 100% of nothing (even if they have to pay tax on it as income )- but it can also be passed down to the next generation,as things stand

I would thoroughly recommend finding a suitably qualified IFA to assist you on estate planning - in my view this is definitely an area where DIY is sub optimal.

EdSwippet

jamesd wrote: »

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.

Can you expand on this? I'm having trouble seeing why it doesn't scale.

Drawn-down pension 'income' is all taxable at income tax rates, even if some of it accrues within the pension tax wrapper as capital gain. If unwrapped, though, at least some of the gains will be at CGT rates, always(?) lower than income tax rates and potentially with added help from the annual CGT allowance. For example, 3% capital gain and 3% dividend income, with allowances used elsewhere, gives a higher rate tax payer a blended rate of (28% + 40%) / 2 = 34% if unwrapped, compared to the full 40% if taken from a drawdown pension.

jamesd

EdSwippet wrote: »

Can you expand on this? I'm having trouble seeing why it doesn't scale.

1.8 million LTA protection in place and 1.1 million pot value today. Inside the pension there is no CGT to pay on the first 0.7 million of growth while that would be exposed to potential CGT outside the pension.

jamesd

patanne wrote: »

It is often mentioned on here that the restrictions re age 55 may change to maintain a 10 year gap under state pension age. Is it also possible that the restrictions re age 75 will also increase to maintain a 10 year gap over state pension age? This may affect some decisions.

That would be logical but I don't remember seeing anything saying so.

EdSwippet

jamesd wrote: »

1.8 million LTA protection in place and 1.1 million pot value today. Inside the pension there is no CGT to pay on the first 0.7 million of growth while that would be exposed to potential CGT outside the pension.

I see. Would it not be optimal for this person to... wait until it hits £1.8m, then move to Portugal, cash out all £1.8m with no tax to pay, wait, and lastly invest it back into the UK unwrapped? £1.8m isn't "modest", but the plan still seems to work at the LTA limits.

jamesd

I doubt it would be optimal because inside the pension the money is outside the estate for IHT purposes as well as in a useful tax wrapper. More likely to be optimal would be doing that with enough to keep it from going over the protected 1.8 million while still being close to it.

EdSwippet

For someone with no plans to use a pension as an IHT guard though (hello!), it still seems to me like this Portugal option works nicely at the LTA limit -- beyond this the tax wrapper turns into a 55% tax sinkhole. Guess I need to think further on it.

jamesd

I agree. I think that well below LTA there's also a significant chance that I will use it, in part because I think I may have use for money that cannot be inside a pension pot when used.