When to crystalise?

The_Doc

I am 54 and have a DB scheme paying £40K (with 50% spouse pension on death) payable from 60. I have £500K in 2 DC schemes. Together, these would take me over the current LTA of £1M, so I have both Individual protection 2016 and fixed protection 2016, giving me an LTA of £1.25M.

I am looking at ways to reduce a potential future tax charge at the point of crystalisation that uses the final bit of the LTA.

The DB scheme is enough to meet our living expenses and I am current still working and am just in the high rate tax bracket.

My plan is to take the DB early (no lump sum required) as and when work finishes (this will reduce the value of the pension for LTA evaluation). I need to decide when to crystalise the DC schemes (putting them into drawdown but not taking any income). The idea is that these funds would be used as an inheritance, as I have enough other funds in ISAs to cater for potential future expenses such as care costs.

Would there be any advantage in crystalising the DC scheme now (and leaving them invested) or leaving it untouched (and invested) until it gets BCE'd at 75?

jamesd

Maybe some now and some after the next big market drop, speculating that reduced value will cut LTA use.

I'm not keen on the plan. I'd go with taking some DC money to live on at least and DB at or closer to normal retirement age. At some point markets will drop and you may find that everything ends up within the LTA. If events don't favour you, just commute some of the DB, paying for it out of the lower actuarial reduction you got by waiting.

Maybe hedge by starting gradual DC crystallising now by taking 25% tax free lump sum from say £50k a year. That way if markets do rise enough so you don't get out at a lower value you will have done some crystallising at today's prices.

Moving beyond that, I don't think that your long term inheritance plan is prudent, nor do I think that it maximises the joy value to you and your intended beneficiaries. The issue is that pension as an inheritance tax dodge is a thing that is highly political and the benefit you see today has a high chance of changing negatively.

Instead of pension as inheritance I favour something like taking the money out gradually and using VCT buying to keep the tax cost low, then making regular gifts out of income that will immediately leave your estate for inheritance tax purposes. There's no limit on how much you can give away provided it's just routine giving out of income. And you get to see the beneficiaries enjoying the benefits while you're still alive instead of not when dead.

There are also alternatives like trusts that can be used but those are likely to have higher tax costs than the withdraw and VCT combination.

The_Doc

Thanks, jamesd.

I agree that my original ideas are subject to political risks, so your suggestions are a good way of diversifying in order to reduce those risks and the comments are much appreciated.

Gifting is also something I considered and the gifting out of income is a useful trick.

The use of VCTs is certainly something I need to investigate further. Would moving funds from my iSA into a VCT have any advantages over moving pension funds into the VCT? Buying sufficient VCTs once I start drawing my pension would allow me to reduce my income tax, but using ISA funds first seems like a sensible approach?

Bootsox

The_Doc wrote: »

I am 54 and have a DB scheme paying £40K (with 50% spouse pension on death) payable from 60....

The DB scheme is enough to meet our living expenses and I am current still working and am just in the high rate tax bracket....

Just curious, if your salary is just in the higher rate tax bracket (£43k), how come your projected DB pension is so high?

Or do you mean your salary is just in the additional rate tax bracket (£150k)?

https://www.gov.uk/income-tax-rates/current-rates-and-allowances

jamesd

I'd do withdrawing from ISA last because that money is protected from tax and CGT reporting hassles. Also there's the five year minimum holding time of the VCTs to consider and this tends to make getting started early a good move. If needed I'd want to withdraw from the pension to keep fully funding the ISA each year.

ISA pot size at death can now be inherited by a spouse or civil partner and that could add some value for them, particularly vs taxable as income receiving from a pension if death is after age 75.

You could also do some VCT buying while still working to reduce your tax bill provided you like the investments. I am.

The_Doc

Bootsox wrote: »

Just curious, if your salary is just in the higher rate tax bracket (£43k), how come your projected DB pension is so high?

Or do you mean your salary is just in the additional rate tax bracket (£150k)?

I worked for 30 years with 27 years of a 1/60th DB pension. I am now contracting part-time (3 days/week). Saying I am just a high rate taxpayer was actually misleading, as I am contracting with a small salary and the rest taken as dividends. The dividends on top of the salary will take me to the border of the £43K (careful not to go over in any tax year).

The_Doc

jamesd wrote: »

I'd do withdrawing from ISA last because that money is protected from tax and CGT reporting hassles.

Investments in the pension are equally protected from tax and CGT hassles as ISAs, are they not?

jamesd

They are but not from possible increases in income tax rates. The ISA is protected from that. Which is part of why moving money out of pension into ISA is likely to lead to a better result.

You can still use the VCT approach if tax rates increase but that assumes they will still be around with similarly good relief.

So pension to ISA is another risk reduction tool to exploit.

cjking

I would guess that future tax charge is minimised by crystallising as soon as possible, so that the (extracted) 25% tax-free lump sum's growth doesn't contribute to any increased balance.

I could be wrong, but I think in the case of death before 75, crystallised funds aren't tested against the limit again, whereas uncrystallised ones are. So that's another minor advantage.

The_Doc

cjking wrote: »

I would guess that future tax charge is minimised by crystallising as soon as possible, so that the (extracted) 25% tax-free lump sum's growth doesn't contribute to any increased balance.

I could be wrong, but I think in the case of death before 75, crystallised funds aren't tested against the limit again, whereas uncrystallised ones are. So that's another minor advantage.

Indeed, I was working on the premise that my funds over 20.5 years (now until 75) would grow faster than inflation, the rate at which the LTA would grow from 2018 (assuming no changes to law). If I could crystalise all now, only the growth would be measured against what is left of my LTA at 75 (BCE 5A) rather than all the uncrystalised DC scheme against the LTA (minus by DB crystalisation amount).