Dealing with LTA excess

kidmugsy

caveman8006 wrote: »

when your pot reaches the LTA (as it inevitably will)

Only death and taxes are inevitable.

EdSwippet

kidmugsy wrote: »

Only death and taxes are inevitable.

At least death does not worsen with each successive government.

jamesd

zagfles wrote: »

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?

No, I'm just assuming that markets will drop at some point, not that they will recover. It's the drop that leads to the LTA saving, not any potential recovery.

The money is invested either in or out of the pension so it makes no difference for drawdown, the money is affected whatever happens. The difference is the LTA effect.

caveman8006 wrote: »

There is nothing magic about "crystalising" the pot when it is below the LTA in terms of avoiding the excess LTA tax.

It's not magic but it means that less of the LTA is used, so there's more LTA margin available to cover future growth.

caveman8006 wrote: »

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

Yes, even after crystallising it's necessary to draw money to avoid having to pay at one of the later tests.

The post-crystallisation issue can be addressed alternatively by just taking all of the money out of the pension. For pots near the TLA that's only really tax efficient for those planning to be resident outside the UK for five years, who can move to a place with a low, say nil, income tax rate on pension income that has a double taxation agreement with the UK. A bit over half of the year in say Portugal and the rest in UK, Channel Islands or Isle of Man, say. Definitely not something that everyone will want to do, but possible.

zagfles

jamesd wrote: »

No, I'm just assuming that markets will drop at some point, not that they will recover. It's the drop that leads to the LTA saving, not any potential recovery.

The money is invested either in or out of the pension so it makes no difference for drawdown, the money is affected whatever happens. The difference is the LTA effect.

So you're assuming that at some point in the future, your investments will be lower than they are now, enabling an LTA saving? Why would anyone be invested in anything they think will drop? I prefer to invest in stuff that I think will rise in value. If it does rise and already over the LTA, the LTA charge will get bigger!

And yes we all know markets do go up and down, but the next drop could be after a rise larger than the drop, so the investments might still be worth more after the drop than today. So a bigger LTA charge.

If you really think there'll be a point in the future where your investments will have dropped enough to avoid or reduce an LTA charge, and you can time that point, then you'd be better off converting your pension to cash, crystallise and pay the LTA charge now, and wait until that point in time before re-investing!

jamesd

One problem with anticipating a drop is knowing when it will happen. Since that is hard to know with any accuracy it is often preferable to just leave the money invested and wait.

You're right that maybe there won't be a drop in time to save LTA excess but with average UK stock market returns at about 5% plus inflation and dips of 20% routine and 40% quite frequently it's likely to work out. No certainty, of course. Just something that historically has been more likely than not and in some markets that today are pretty well primed for drops.

Of course some people might well switch out of markets that might drop. I've been doing that myself for a while now based in part on cyclically adjusted P/E and in part on just the length of the bull run and market behaviour. But a lot of people won't like to do that, preferring to stay invested.

No guarantee either way, of course. Just what I'd do if I thought that markets would be going up and wanted to stay invested, but knew that dips along the way are routine. That's not where I want to be today but it is where I wanted to be for most of the last ten years.

zagfles

jamesd wrote: »

One problem with anticipating a drop is knowing when it will happen. Since that is hard to know with any accuracy it is often preferable to just leave the money invested and wait.

So exactly the same would apply to crystalling. If you can time the low point for crystallising, you can time it for investing.

jamesd

For crystallising while remaining invested you can just wait for it to happen. You're not out of the market and potentially losing investment returns as you would be if you left the market.

zagfles

jamesd wrote: »

For crystallising while remaining invested you can just wait for it to happen. You're not out of the market and potentially losing investment returns as you would be if you left the market.

This is like wading through treacle. If you're "potentially losing investment returns" by leaving the market, then you're potentially increasing your LTA tax if you stay in it without crystallising.

RickyB2000

Isn't it about timescales and probability?

If there wasn't likely to be a drop in the market in the timescales you need the money then you would be better crystallising, taking the hit and getting straight back in again. If there was likely to be a drop better waiting for it to happen.

I was always told not to try and time the markets.

What about crystallising some of it well below the allowance every year until you need it? That helps you to lock in the gains on the crystallised bit if things go up (and reduces the tax hit as the pension will be going up slower than it would be if full) and means no tax hit if things go down. Is this even possibles? If you have multiple pensions it would be.

jamesd

zagfles wrote: »

If you're "potentially losing investment returns" by leaving the market, then you're potentially increasing your LTA tax if you stay in it without crystallising.

Yes, both are potential outcomes. We just know from the past that it's likely that while on average there will usually be growth, there are dips along the way. While there's no guarantee that a dip will happen in time to be useful it is likely. Not certain but not certain of not paying the charge beats the certainty of paying without waiting.