Lifetime allowance query

TcpnT

Hi - first post here.

I have searched the boards and found a mine of useful information here but have not managed to find an answer to this particular question.

My situation is this:

I will be 56 this year and am planning to retire in the next year or two. My pension provisions consist of a DB and DC scheme both from my current employer and administered by the same company. I am still contributing to the DC scheme, despite the LTA limits because, my employer contributes 16% of total pay to my 8% (recently reduced this from 14% to 8% as 16% is max poss company contribution.)

The DB scheme is worth ~10K / yr at 56 or ~19K/yr at 65

The DC scheme is currently worth £730K and growing.

My desired retirement income, after tax, is around 40K / yr. Still up for discussion but possible a bit higher to start with and a bit lower later on

I would prefer not to start drawing the DB pension until 65 in order to secure the maximum possible guaranteed index linked income and widows pension from that age.

Assuming that the LTA does not rise much in the meantime that would mean crystallising 20 x 19K = 380K at age 65 - so 38% of LTA required to be remaining at that time to avoid a tax charge on the DB pension.

Between the ages of 56 and 65 I plan to rely on my DC funds together with our ISA's to provide an income. The problem is that if I crystallised my whole DC fund today it would be 73% of LTA and so there would not be sufficient remaining LTA at 65 for the DB pension to avoid a partial 55% penalty tax.

My thinking is therefore that I can only crystallise £600K or so at 56. I would take the 25% PCLS from this and use it partly to live on for the first few years and move as much as possible into ISAs. The remaining £450K would go into drawdown. I would drawdown fairly heavily in the years between 60 and 65 with some capital depletion knowing that I have an extra £19K/ yr coming onstream at 65

This would leave £130K or so uncrystallised in the DC scheme which at some point will be subject to 55% tax to withdraw.

Finally to the nub of my question: I would prefer to take the 130K - 55% = £58.5K from the DC scheme at 56 as the cash would be more useful then than later. Is it possible to do this ? ie can I ask the administrator to release this money, with the tax deducted, at age 56, on the grounds that I know I will be using the rest of my LTA for the DB pension at 65%.

Or is it the case that it is only possible to take the 55% taxed excess from the fund once my LTA has actually been used up at 65? The way I am looking at it is that I am offering to pay HMRC £70K tax in the near future rather than in 9 years time.

I would be very grateful for any input on this question. Also if anyone sees any obvious flaws or improvements in my retirement strategy please let me know.

Thanks

Chris

PensionTech

380K at age 65 - so 38% of LTA required to be remaining at that time

Not quite. That's based on the current LTA of £1m. If the LTA goes up, as it is meant to, you will need less of it available. For instance, if it goes up to £1.5m, you only need around 25% of it remaining.

That said, current plans are for the LTA to increase in line with inflation, and there's a good chance the £19k you refer to will increase in line with inflation as well, so looking at it in today's terms might not be a silly idea.

Between the ages of 56 and 65 I plan to rely on my DC funds together with our ISA's to provide an income. The problem is that if I crystallised my whole DC fund today it would be 73% of LTA and so there would not be sufficient remaining LTA at 65 for the DB pension to avoid a partial 55% penalty tax.

The LTA was only introduced in 2006. Since then it has been increased four times and decreased three. Eight different types of LTA protection have been introduced. Many question the need for it at all now that the Annual Allowance has been so severely reduced. There is a very real likelihood of significant changes to, or even abolishment of, the LTA in the nine years to your retirement. I wouldn't take drastic action based on assumptions about the distant future of the LTA.

Finally to the nub of my question: I would prefer to take the 130K - 55% = £58.5K from the DC scheme at 56 as the cash would be more useful then than later. Is it possible to do this ?

No.

Or is it the case that it is only possible to take the 55% taxed excess from the fund once my LTA has actually been used up at 65?

Yes.

I would be very grateful for any input on this question. Also if anyone sees any obvious flaws or improvements in my retirement strategy please let me know.

Why not take out some form of LTA protection? You can still apply for Fixed Protection if you haven't added anything to your pension scheme since the relevant 6 April (2014 if you want to protect £1.5m; 2016 if you want to protect £1.25m). Or you can apply for Individual Protection 2016, which would protect the value of your benefits at that date up to a maximum of £1.25m (though it doesn't look like they would have been any higher than that), and you're only taxed on the excess over that value. Remember it's the unreduced DB benefit that counts for the purpose of Individual Protection, so in your case, it's probably the £19k you're talking about rather than the £10k, meaning there might be some value in protecting it.

Or, if you're happy to do without some of the DC cash now anyway, just leave part of it uncrystallised and take it after you take the DB, and the LTA charge will be levied on whatever benefit puts you over the 100%.

EDIT: Just seen you're still contributing to the DC - that's almost a shame as it rules you out of any type of Fixed Protection - but you might still be able to get a nominal amount of Individual Protection, and to be honest with those employer contributions you're better off accruing the extra benefits even if you will eventually be taxed.

Triumph13

Just to make life even more complicated, can your DC and DB schemes be considered together when calculating your tax free lump sum? Some schemes allow this (mine does), some don't.
If yours does then you need to leave enough with the DB scheme to leverage it to get your full lump sum out (£250k at present).
I am in a similar position - my DB is smaller than yours, but taken with my DC will put me over the LTA. I plan to retire ten years before the DB pays out.
The challenge is to leave enough behind in the works scheme such that after 10 years growth it will be sufficient to pay the 25% LTA charge on the amount over the LTA with enough left to fund the remaining amount of TFLS that I'd be entitled to. If I leave too little in, then I don't get as much out tax free as I should (don't want to commute any DB). If I leave too much in then more of the growth gets hit with LTA charge. Crystal ball anyone?

jamesd

One thing that you might do is speculate about possible stock market drops. A 10% drop would mostly solve your problems and 20-40% drops aren't uncommon. The risk is that gains between now and a drop might make the value higher rather than lower. If you want to do this you'd either take benefits when there's a handy drop between now and age 56 or take less than you might at 56 so that say a 20% drop in what you haven't taken would keep you below the LTA.

You might consider taking an actuarial reduction by taking the DB earlier than 65 then getting that income back by deferring your state pension. No LTA charge on a higher state pension and you can take the DB whenever needed to hit the LTA rather than go over.

fcandmp

So, consider what flow of income you need / desire over the period up to your DB pension kicks in. IF you assumed you stopped working in April 2018, by which time the higher rate tax band will be heading closer to £50k per year, you could take a UFPCLS withdrawal from your DC money, giving you £16k tax free, and after tax of £7.6k you would have £58.4k each year. With this approach you crystallise as you go. Well worth building a spreadsheet with years as the columns and modelling the alternative approaches, especially the tax treatment.

Do you really need circa £180k up front, if you were to crystallise he entire Dc pot? If not look at how you might split arrangements leaving some of the DC funds unceystalied - you are most likely going to need to move the money from your employer's scheme in order to access it, and could consider splitting it, with some for immediate crystallisation and some later?

BY the time DB pensio is due to be paid, you are still going to have funds in the DC scheme, potentially uncrystalised, but if you have crystallised all of it, then as long as you don't take a TFCLS from your Db pension, then the scheme will likely pay the tax charge at 25% and any further DC drawdown you take will be at your marginal tax rate - you can manage this so that you don't pay any more than 40% tax overall. There are other threads on this forum which illustrate how the scheme paying would work.

jamesd

It's desirable to take a lot of the DC as soon as possible to limit the potential for growth before crystallising. Doing a few hundred thousand now would probably be a good move for this reason. No need to take an income from the taxable part yet.

fcandmp

I crystalised £200k for similar reasons but had also moved a good deal to cash funds to limit short term growth or significant down-turn. My experience of the time it takes to transfer the DC,component to a platform with drawdown has been very poor. It is typically the sending scheme rather than he receiving a scheme, but that said the level of chase up of receiving schemes is also poor. The first DC funds to be moved took 8 months! The second 6 months, with lots of telephone chasing and written complaints. This is not a quick thing to achieve and markets can move significantly during time.

jamesd

Those times are pretty horrendous, way longer than usual.

kidmugsy

TcpnT wrote: »

This would leave £130K or so uncrystallised in the DC scheme which at some point will be subject to 55% tax to withdraw.

Not necessarily. If you die before you are 75 that fund would pass, assuming you've completed the right form, to your wife or descendants, outside your estate, and they'd be able to draw funds from it tax-free. It's an ill wind etc.

kidmugsy

Here's a question for (amongst others) PensionTech, one which might have some bearing on the OP's case.

Some DB pension schemes offer a provision, sometimes called Allocation, whereby the member can sacrifice some of his future pension and thereby increase the eventual widow's pension. Does using this provision reduce the valuation of the DB pension for LTA purposes?

jamesd

kidmugsy wrote: »

Here's a question for (amongst others) PensionTech, one which might have some bearing on the OP's case.

Some DB pension schemes offer a provision, sometimes called Allocation, whereby the member can sacrifice some of his future pension and thereby increase the eventual widow's pension. Does using this provision reduce the valuation of the DB pension for LTA purposes?

Yes. Allocation, like actuarial reduction and divorce splitting, is one of the ways to reduce the income that the twenty times multiplier is applied to. It's a potentially interesting tool if applicable.