Investment options when approaching Lifetime Allowance

jamesd

I got it, I just didn't agree that markets are never again going to drop by 20% or 40%. There's no need to be 20% or 40% lower than now. 20% or 40% lower than the highest price ever bought at would be helpful. That could be the price paid five years from now and twice today's price.

It's not close to trying to time buy or sell decisions because that's done with a view to trying to make more money in the short term while this has at least a five year span initially. It's still not guaranteed to happen but it beats the alternative of paying the lifetime allowance charge.

If someone does want to assume that markets will never again have 20% or 40% drops there's the take benefits at 55 option.

zagfles

jamesd wrote: »

I got it, I just didn't agree that markets are never again going to drop by 20% or 40%. There's no need to be 20% or 40% lower than now. 20% or 40% lower than the highest price ever bought at would be helpful. That could be the price paid five years from now and twice today's price.

It's not close to trying to time buy or sell decisions because that's done with a view to trying to make more money in the short term while this has at least a five year span initially. It's still not guaranteed to happen but it beats the alternative of paying the lifetime allowance charge.

If someone does want to assume that markets will never again have 20% or 40% drops there's the take benefits at 55 option.

The choice someone has at 55 is crystallise now or crystallise later. So the idea of delaying crystallisation to avoid the LTA charge only works if you assume the market will be lower than it was at age 55 at some point in the future.

If the 40% drop occurs when prices are twice what they were at age 55, the decision to delay crystallisation to avoid LTA charges will have backfired as the LTA charge will be bigger than it was. Assuming the LTA has stayed the same.

jamesd

The original question: "all around 50 years old ... expected pension fund at age 60, and they all exceed £1 million to some degree or other... we are considering our options over the next 10 years".

There is not an age 55 deadline, the contemplated period for making new pension contributions is ten years. So a drop at any time in the following five years would be of use in your posited situation of prices not being lower than at age 55 because those purchases after age 55 would be at those higher prices and would benefit from a drop to today's price or the age 55 price.

With two or three 20% drops a decade and one or two 40% drops a decade being normal it's very likely but still not certain that delaying crystallising at least a portion of the money beyond age 55 will reduce the potential of the lifetime allowance charge being payable.

It's too early to do it in this situation but for those who are closer to age 55 what I've done sometimes is illustrate how much can be crystallised at 55 with what level of potential future drop needed to stay under the LTA threshold. That might involve crystallising say 60% or 50% and waiting for a potential 10% drop on that value on the rest. Or crystallising 70 or 80% and needing a 20% drop.

If the drops don't happen it's also a win: it'll mean that investment returns have been higher than normal so that'll compensate for the LTA charge anyway.

caveman8006

In a sense, you are both wrong, because you seem to think that crystallization is a one-time event which then protects the pot from being subject to the excess LTA penal tax in the future. But all drawdown pots, whether crystalized or not, are retested at 75 and any subsequent increase, even from investment returns, is then subject to the LTA tax. So yes, timing crystallization on"dips" may help, but the main long-term tax mitigation strategy has to be to drawdown some (and eventually probably all) annual investment returns at your marginal tax rate (which will hopefully be lower than 55%) or else you will almost certainly be subject to the excess tax.

So, for instance, a pot of £1m at age 55 could be crystalized using up 100% of your LTA and leaving £750k in the drawdown account which then grows to £1.5m at age 75 and would leave an excess of £750k subject to the 55% tax. But suppose you decide not to crystalize at 55 and there happens to be a 40% stock market dip when you are 60 which takes the pot to £600k allowing you to "crystalize" the whole pot and only use 60% of your LTA leaving £450k in drawdown. As in the first scenario, the market then recovers its loss and goes on the double its initial level by the time you are 75 and again your drawdown account ends up valued at £1.5m. It will then be tested again and will show an untested post-crystallization investment return of £1.05m of which £400k will be covered by the remaining 40% unutilised LTA (giving a further £100k TFLS) still leaving £650k subject to the 55% tax. Thus "timing" the crystallization decision doesn't materially change things: the only way that most people will avoid the punitive tax is to take the "growth" in their drawdown pot out year-by-year so that it is subject to their (hopefully lower) marginal income tax rate.

zagfles

jamesd wrote: »

The original question: "all around 50 years old ... expected pension fund at age 60, and they all exceed £1 million to some degree or other... we are considering our options over the next 10 years".

There is not an age 55 deadline, the contemplated period for making new pension contributions is ten years. So a drop at any time in the following five years would be of use in your posited situation of prices not being lower than at age 55 because those purchases after age 55 would be at those higher prices and would benefit from a drop to today's price or the age 55 price.

So what? If there is no drop to below "age 55" values, then you use up less of the LTA by crystallising what's there at 55. If you crystallise that chunk later you use up more of the LTA. Irrespective of what you do with conts after 55.

zagfles

caveman8006 wrote: »

In a sense, you are both wrong, because you seem to think that crystallization is a one-time event which then protects the pot from being subject to the excess LTA penal tax in the future. But all drawdown pots, whether crystalized or not, are retested at 75 and any subsequent increase, even from investment returns, is then subject to the LTA tax. So yes, timing crystallization on"dips" may help, but the main long-term tax mitigation strategy has to be to drawdown some (and eventually probably all) annual investment returns at your marginal tax rate (which will hopefully be lower than 55%) or else you will almost certainly be subject to the excess tax.

So, for instance, a pot of £1m at age 55 could be crystalized using up 100% of your LTA and leaving £750k in the drawdown account which then grows to £1.5m at age 75 and would leave an excess of £750k subject to the 55% tax. But suppose you decide not to crystalize at 55 and there happens to be a 40% stock market dip when you are 60 which takes the pot to £600k allowing you to "crystalize" the whole pot and only use 60% of your LTA leaving £450k in drawdown. As in the first scenario, the market then recovers its loss and goes on the double its initial level by the time you are 75 and again your drawdown account ends up valued at £1.5m. It will then be tested again and will show an untested post-crystallization investment return of £1.05m of which £400k will be covered by the remaining 40% unutilised LTA (giving a further £100k TFLS) still leaving £650k subject to the 55% tax. Thus "timing" the crystallization decision doesn't materially change things: the only way that most people will avoid the punitive tax is to take the "growth" in their drawdown pot out year-by-year so that it is subject to their (hopefully lower) marginal income tax rate.

Which is the general idea of a pension. Use it to provide income in retirement. If your crystallised pot is larger at 75 than it was at 55, particularly a large pot exceeding the LTA, then I'd be wondering what exactly the purpose of the pension is. An IHT dodge?