Dealing with LTA excess

Brookley

[FONT=&quot]My husband’s pension savings are currently above the LTA. Aged 62, he doesn’t yet need to draw on his pension. However he is currently considering converting the excess above the LTA (less the 25% tax due) into an annuity in order to avoid future LTA tax. The annuity payments plus his other income would mean he is only a lower rate tax payer. Does this seem to be a tax efficient solution to deal with his LTA excess? [/FONT]

marlot

Has he gone for protection - it was available in 2014 (at £1.5m) and 2016 (at £1.25m).

Are any of the pensions final salary? I'm planning to take some of my final salary pensions early (with actuarial reduction) to help come under the LTA.

Brookley

Thank you. He has fixed protection on his defined contribution scheme and is already drawing on 2 final salary pensions (which are included in the LTA excess calculation).

jamesd

That does not seem to be the most tax efficient method.

The most tax efficient method is probably to wait for the next major stock market drop and crystallise the whole pot then.

Sometimes waiting gives the best deal and this looks like one of those times.

Brookley

Thanks for the idea. I'll investigate further.

zagfles

jamesd wrote: »

That does not seem to be the most tax efficient method.

The most tax efficient method is probably to wait for the next major stock market drop and crystallise the whole pot then.

Sometimes waiting gives the best deal and this looks like one of those times.

This makes no sense. What makes you think there will be a point in the future where the investments are worth less than they are now? And if you do think there's a good chance of that - then you'd be better off staying in cash and waiting till that day to invest!!

The next major stockmarket drop might not be until after enough rise to make the investments, even after the drop, worth more than now, even adjusting for any LTA inflation increases. Meaning the LTA charge would be even bigger for the OP than if they crystallised now.

jamesd

Markets are not about to cease going up and down to accommodate your assertion that it makes no sense, though there certainly is a possibility that it will take a while to happen.

So far as when goes, given the cyclically adjusted price-earnings levels and the theory relating to them combined with the soon to be fact that we're in the second longest US bull market in history,* trends are much more supportive of anticipating a significant drop than otherwise.

A person with a long horizon might want to be invested and stay invested, just moving the money out of a pension wrapper into others makes little difference with such a plan.

Personally given the situation I have a far lower percentage of my total invested assets in shares but that's largely irrelevant to the straightforward observation that markets go up and down and that can be exploited.

However, lets say you still don't like it. The initial suggestion was to crystallise some now by buying an annuity with the part above the LTA. All that happens if there is no drop is that the amount used to buy the annuity gets larger.

Simply, waiting for a drop allows the probability of removing a loss, while not waiting doesn't prevent it. Either way, waiting wins.

*assuming that the no sense drop doesn't happen in the next few hours

zagfles

jamesd wrote: »

Markets are not about to cease going up and down to accommodate your assertion that it makes no sense, though there certainly is a possibility that it will take a while to happen.

Well obviously markets are going to continue going up and down. The point is the next drop could be after a rise of more than the drop.

So far as when goes, given the cyclically adjusted price-earnings levels and the theory relating to them combined with the soon to be fact that we're in the second longest US bull market in history,* trends are much more supportive of anticipating a significant drop than otherwise.

Who says the OP is invested in US equities?

A person with a long horizon might want to be invested and stay invested, just moving the money out of a pension wrapper into others makes little difference with such a plan.

Personally given the situation I have a far lower percentage of my total invested assets in shares but that's largely irrelevant to the straightforward observation that markets go up and down and that can be exploited.

However, lets say you still don't like it. The initial suggestion was to crystallise some now by buying an annuity with the part above the LTA. All that happens if there is no drop is that the amount used to buy the annuity gets larger.

And if there is a drop, the annuity gets smaller. How is that a "win"?

Simply, waiting for a drop allows the probability of removing a loss, while not waiting doesn't prevent it. Either way, waiting wins.

If there's a drop, the OP would obviously have been better off annuitising before the drop!! Nothing to do with the LTA or tax, just the obvious that converting investments into secured income (eg an annuity) is obviously best done when markets are higher than lower!

Anyway we're mixing up two separate issues here - the best time to crystallise and the best time to secure income. The answers are opposites - it's best to crystallise when markets are low and it's best to annuitise when markets are high. The OP is talking about doing both at the same time, ie crystallising through buying an annuity. You could of course crystallise and remain invested.

jamesd

The point of the purchase of the annuity is to spend the money over the LTA, not to buy an annuity. After a market drop that takes the amount over the LTA to nil the money spent on the annuity will also be nil. The win is not buying the annuity at all but instead getting the market recovery without then going over the LTA.

They aren't two different issues, the driving factor for the annuity purchase is just being over the LTA.

zagfles

jamesd wrote: »

The point of the purchase of the annuity is to spend the money over the LTA, not to buy an annuity. After a market drop that takes the amount over the LTA to nil the money spent on the annuity will also be nil. The win is not buying the annuity at all but instead getting the market recovery without then going over the LTA.

They aren't two different issues, the driving factor for the annuity purchase is just being over the LTA.

So you're assuming there'll be a drop taking the OP down to the LTA and it'll then conveniently recover again quickly enough before the OP needs to drawdown/annuitise the rest of the pension?

What if there's a drop and prices then remain stable for a while? Or a drop then a further drop followed by a recovery but only to the level after the first drop?

caveman8006

There is nothing magic about "crystalising" the pot when it is below the LTA in terms of avoiding the excess LTA tax. As long as you leave some money in a drawdown fund in risk assets, then you are still at "risk" of future investment growth taking your pot above the LTA limit at one of the later tests - ie. at age 75 or at death. The only way of permanently preventing you (or your heirs) having to pay the tax is to "skim off" your investment gains when your pot reaches the LTA (as it inevitably will) as (hopefully lower rate) taxable income.