Lifetime allowance query

TcpnT

Thanks to all who have taken the trouble to reply to my queries. It really is very useful to see a range of views on the possible options. There is obviously no one right or wrong strategy here - the key is to decide on the most efficient for my individual circumstances.

I have talked to IFAs in the past but have always come away feeling that they have been able to tell me little more than I already know. Whilst I may eventually discuss this subject with one I am struggling to see how they can justify charging on a percentage basis for advice only. Any information I can gain on this board is a great help.

The suggestions given have certainly given me food for thought; a few comments and further questions:

PensionTech:
Thanks for your factual answers on the way the LTA charge works - I think I'm clear on this now. I did consider Protection a couple of years ago but at the time the stock market was low and I was not sure that I would ever reach the LTA. As you pointed out, because my employer contributions are so high I decided to take the chance on it and continue paying in. I think that was the right decision.

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.

I was aware of this possiblity and in fact the administrator mentioned that it was an option in the scheme when I previously asked for a pension projection. However I though that to take advantage of it I would need to take all the pensions at the same time at 56 - which I did not want to do. From what you say my understanding is that as long as there is sufficient remaining uncrystallised DC cash in the fund I could used that for a TFLS when I start drawing from the DB scheme - assuming there is sufficient remaining LTA for the sum of the two.

So for example: At 65 take 19k DB pension = 380k towards LTA, also take 127k cash from DC fund at the same time. Total value 507k with the 127k being the 25% TFLS. Correct ?

jamesd
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.

Is there really a worthwhile benefit in doing this. Taking DB pension early would result in a pension reduction of approx £1000pa. I think state pension deferral is worth approx 6%/yr so say approx £500/yr added to pension. So taking DB 1 year early requires deferring state pension 2 years for same annual income. So overall I gain 1 year extra DB pension for the cost of losing 2 yrs state pension - not much net gain. Or is the main point of the excercise that it would also reduce the amount counting towards LTA by £20k ?

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.

I understand what you are suggesting here but can you expand further on the benefits of "crystallise as you go" ? My view at the moment is that I should crystallise as much as possible as soon as possible so that future growth is not subject to LTA excess penalty in the future. But I need to leave enough in the scheme to ensure that there is no LTA penalty on the DB part of the scheme that I want to draw at 65 - also enough LTA left to do this.

fcandmp

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.

Could you explain this a little further please - exactly how this works to limit tax to 40% - or direct me to other relevant threads.

kidmugsy

”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.

Is the LTA ignored if this happens ? If I had used up all my LTA by this time but still had uncrystallised funds in DC scheme could it be passed on without a tax charge ? That sounds too good to be true.

Thanks for the help - currently revising my spreadsheets

Chris

Triumph13

TcpnT wrote: »

I was aware of this possiblity and in fact the administrator mentioned that it was an option in the scheme when I previously asked for a pension projection. However I though that to take advantage of it I would need to take all the pensions at the same time at 56 - which I did not want to do. From what you say my understanding is that as long as there is sufficient remaining uncrystallised DC cash in the fund I could used that for a TFLS when I start drawing from the DB scheme - assuming there is sufficient remaining LTA for the sum of the two.

So for example: At 65 take 19k DB pension = 380k towards LTA, also take 127k cash from DC fund at the same time. Total value 507k with the 127k being the 25% TFLS. Correct ?

Okay, simplified example ignoring both inflation and investment growth post retirement coming up:
Lets say that at retirement your DC funds have grown to £820K. Add in the £380k for the DB scheme and that gives you £1.2M against the lifetime allowance of £1M.
At retirement you transfer £690k out of your DC scheme into a SIPP or personal pension. You take 25% of this as a TFLS (£172,500) and put the rest into drawdown. The remaining £130K of DC funds stay with your employer's scheme.
At 65 you use these funds to 1) Pay the £50k LTA charge (25% of the £200k excess over LTA), 2) Pay out the remaining £77,500 of TFLS that you are allowed - brings lifetime total to £250k; 3)The £2,500 left over gets transferred to your SIPP for drawdown.
In reality you will have to make assumptions about investment growth and LTA changes over the period between retirement and 65 when choosing how much you want to leave behind in the employer's scheme. You want to get all of your TFLS, but you don't want to be paying LTA charge on more growth than you have to.

jamesd

The main point of the exercise is avoiding the lifetime allowance charge on twenty times the income. A 1k reduction in income is a 20k reduction in the LTA value. Since the charge is 25% if the excess is taken as income the initial gain to you is the income for one year plus the 5k LAC avoided. If 5.8% of that is more than the drop you come out ahead from doing it. Ignoring things like differences in inflation linking, lump sum and spousal pension effect.

In the case of a reduction from 19k to 18k there's 23k available to fund the deferring. 5.8% of 23k is 1334, more than the 1k reduction, so it is possibly beneficial.

Triumph13

jamesd wrote: »

The main point of the exercise is avoiding the lifetime allowance charge on twenty times the income. A 1k reduction in income is a 20k reduction in the LTA value.Since the charge is 25% if the excess is taken as income the initial gain to you is the income for one year plus the 5k LAC avoided.

The key thing here is how the actuarial reduction factors on the DB scheme compare to the 5.8% increase on the state pension. If They are equal then the state pension deferral wins as the LTA charge avoided is straight profit (assuming inflation protection is the same in both options).
In my case, unfortunately the DB reduction factors (and the 4 year gap between DB age and SP age) are sufficiently vicious to outweigh the LTA charge savings.

fcandmp

So, before I elaborate, you do realise that you are very likely to need to transfer the DC component of your pension to a SIPP platform in order to access it. In my experience it is very rare for an employer scheme to provide drawdown capabilities, in fact their trust statement may prevent it.

Once you have transferred to such an accessible platform there are a couple of ways you could access the funds.

1. Crystallise the entire £730k in one hit, taking approx £180k tax free, then drawing down the remainder in lumps (typically no more than £45k per year, you avoid paying higher rate tax each year. Or,

2. Take annual £60k UPCLS amounts, from which 25% is tax free and the remainder taxed at the marginal rate, I.e. On this amount £45k after the tax free element, of which the first £11500 is your personal allowance, leaves £33.5k you pay tax at 20% (£6.7k). So each year after tax you have £53.3k after tax.

By doing this each year up to SP, let's say 8 years, with no investment growth you still have £250k in the DC funds uncrystalised. Now given you are planning to take a certain income each year soon, you would move a significant portion of the funds into cash funds. This also has the benefit of constraining growth (I.e. Not making your LTA position much worse) and perhaps leaving a set amount in equities potentially (big if) exposed to a potential stock market drop - this could enable you to benefit from a lower final crystallisation amount - waiting for a hoped for market uptick.

Depending on your Individual Protection 2016 standing, but working on current £1m LTA, each year after 2018 the government has promised to increase LTA by CPI. That being encase, each year you take a UPCLS, you benefit from a small hike in LTA and each fixed £60k uses a slightly smaller % of your LTA.

I think I have the basics right here, but others please correct me as I am still a novice at this.

TcpnT

Triumph13
“
I was aware of this possiblity and in fact the administrator mentioned that it was an option in the scheme when I previously asked for a pension projection. However I though that to take advantage of it I would need to take all the pensions at the same time at 56 - which I did not want to do. From what you say my understanding is that as long as there is sufficient remaining uncrystallised DC cash in the fund I could used that for a TFLS when I start drawing from the DB scheme - assuming there is sufficient remaining LTA for the sum of the two.

So for example: At 65 take 19k DB pension = 380k towards LTA, also take 127k cash from DC fund at the same time. Total value 507k with the 127k being the 25% TFLS. Correct ?
Originally posted by TcpnT
”Okay, simplified example ignoring both inflation and investment growth post retirement coming up:
Lets say that at retirement your DC funds have grown to £820K. Add in the £380k for the DB scheme and that gives you £1.2M against the lifetime allowance of £1M.
At retirement you transfer £690k out of your DC scheme into a SIPP or personal pension. You take 25% of this as a TFLS (£172,500) and put the rest into drawdown. The remaining £130K of DC funds stay with your employer's scheme.
At 65 you use these funds to 1) Pay the £50k LTA charge (25% of the £200k excess over LTA), 2) Pay out the remaining £77,500 of TFLS that you are allowed - brings lifetime total to £250k; 3)The £2,500 left over gets transferred to your SIPP for drawdown.
In reality you will have to make assumptions about investment growth and LTA changes over the period between retirement and 65 when choosing how much you want to leave behind in the employer's scheme. You want to get all of your TFLS, but you don't want to be paying LTA charge on more growth than you have to.

OK thanks - these numbers make sense to me and that is how I thought it should work. Reading back I see that my example was unclear - my assumption was that I had already crystallised £500k at 56 with £125K TFLS - and then another £500K at 65. Anything above this would be subject to the LTA charge of either 55% for cash or 25% for income. - my choice on that.

The portion over LTA that is taxed at 25% can then be directed into my drawdown fund with no further penalties. - is that correct. I assume that once it is in drawdown it becomes part of the fund and is treated in the same way as the other investment in there in the future ?

TcpnT

fcandmp So, before I elaborate, you do realise that you are very likely to need to transfer the DC component of your pension to a SIPP platform in order to access it. In my experience it is very rare for an employer scheme to provide drawdown capabilities, in fact their trust statement may prevent it.

Once you have transferred to such an accessible platform there are a couple of ways you could access the funds.

1. Crystallise the entire £730k in one hit, taking approx £180k tax free, then drawing down the remainder in lumps (typically no more than £45k per year, you avoid paying higher rate tax each year. Or,

2. Take annual £60k UPCLS amounts, from which 25% is tax free and the remainder taxed at the marginal rate, I.e. On this amount £45k after the tax free element, of which the first £11500 is your personal allowance, leaves £33.5k you pay tax at 20% (£6.7k). So each year after tax you have £53.3k after tax.

By doing this each year up to SP, let's say 8 years, with no investment growth you still have £250k in the DC funds uncrystalised. Now given you are planning to take a certain income each year soon, you would move a significant portion of the funds into cash funds. This also has the benefit of constraining growth (I.e. Not making your LTA position much worse) and perhaps leaving a set amount in equities potentially (big if) exposed to a potential stock market drop - this could enable you to benefit from a lower final crystallisation amount - waiting for a hoped for market uptick.

Depending on your Individual Protection 2016 standing, but working on current £1m LTA, each year after 2018 the government has promised to increase LTA by CPI. That being encase, each year you take a UPCLS, you benefit from a small hike in LTA and each fixed £60k uses a slightly smaller % of your LTA.

Yes I am well aware that I will have to transfer to a SIPP in order to be able to use drawdown.

I have not taken protection 2016 - mainly because I am still benefiting from high employer contributions so am am stuck with £1m LTA but will probably be better off for taking the free money from my employer.

I understand your examples and it's clear that there is no cut and dried "best" approach - it all depends on market returns and the future course of the LTA - both uncertain to say the least.

I can see the possible value of the staged approach in taking advantage of future increases in LTA and maybe timing the market to transfer when it is low - but to be balanced against the possibility of good market performance boosting the funds in DC and resulting in greater LTA tax liability.

What I'm still not clear on (maybe I'm missing something here) is whether there is a benefit to using staged withdrawal using UFPLS as opposed to withdrawing the same amounts by crystallising into drawdown. Both seem to result in the same numbers ie 25% tax free and basic rate tax after personal allowance to be paid on the rest. Is there a significant difference ?

TcpnT

Triumph13
“
The main point of the exercise is avoiding the lifetime allowance charge on twenty times the income. A 1k reduction in income is a 20k reduction in the LTA value.Since the charge is 25% if the excess is taken as income the initial gain to you is the income for one year plus the 5k LAC avoided.
Originally posted by jamesd
”The key thing here is how the actuarial reduction factors on the DB scheme compare to the 5.8% increase on the state pension. If They are equal then the state pension deferral wins as the LTA charge avoided is straight profit (assuming inflation protection is the same in both options).
In my case, unfortunately the DB reduction factors (and the 4 year gap between DB age and SP age) are sufficiently vicious to outweigh the LTA charge savings.

Yes I see this. The only way to make an informed decision is to get some real figures from the administrators. At the same time I will enquire about the possibility of sacrificing some DB pension in return for increased spouses pension

kidmugsy

jamesd wrote: »

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.

So a connubially cunning couple might allocate to each other and dodge two LTA bills, while defending the standard of living of the survivor, whomsoever that might be. Heh!

zagfles

Are you sure the value of the spouse's pension is affected by when you retire? In my scheme the spouse pension is not reduced if you retire early, it's 50% of the pension at NPD.

There's no logical reason for the spouse pension to suffer the same actuarial reduction as yours for early retirement, since the spouse pension is paid from your death, and nothing to do with the date of your retirement. So why should your date of retirement affect it?

You'll need to check with your scheme of course - it's possible some schemes apply reductions to the spouse pension if you retire early.