Exceeded LTA

anselld

I would welcome any opinions on what strategy to follow....

I have accumulated various pension pots which already just exceed the LTA. There is c£1m in SIPP and c£100k in a pot derived from contracting out of SERPS which has decent guaranteed annuity rates.

I am 55, semi retired, with sufficient sustainable income from business and other investments to support our lifestyle for the foreseeable future.

I don't want to dwell on why I have exceeded LTA and the various protections are not available to me ( hands up, lack of planning to date!)

What I am now concerned about is how to extract maximum benefit for my family whilst minimising the benefit to HMRC. Preferably to maximise benefit to our three children either now or through inheritance.

My thinking so far is as follows:
Crystallise the £1m SIPP and take £250k tax free
Draw down any future growth as income to avoid LTA charge on investment growth.
Reinvest via VCT, EIS if income sufficient to avoid high rate tax.
Gift from income / PETs where required to avoid IHT.
Pay LTA charge on the £100k pot and draw income based on GAR asap.

I will certainly take professional advice before proceeding but welcome any other input.
TIA

The_Doc

Some thoughts:

If you already have "sustainable income for the foreseeable future" and you wish to minimise future IHT, why take the lump sum? This will immediately be part of your estate and subject IHT. If your intention is to pass on an inheritance to your children, leaving the money in your pension is the best place for it.

Additionally, you don't have to crystallise now. You could wait for a downturn in the market and do it then when the total value is less and thus you'd be liable to less LTA charge. Or hedge your bets and part crystallise.

If the pot with the GAR is a good rate, you would probably want to maximise the amount available for an income, so ensure that any LTA charge is not taken from this part. That would mean crystallising and taking income from this pot first.

anselld

The_Doc wrote: »

Some thoughts:

If you already have "sustainable income for the foreseeable future" and you wish to minimise future IHT, why take the lump sum? This will immediately be part of your estate and subject IHT. If your intention is to pass on an inheritance to your children, leaving the money in your pension is the best place for it.

Additionally, you don't have to crystallise now. You could wait for a downturn in the market and do it then when the total value is less and thus you'd be liable to less LTA charge. Or hedge your bets and part crystallise.

If the pot with the GAR is a good rate, you would probably want to maximise the amount available for an income, so ensure that any LTA charge is not taken from this part. That would mean crystallising and taking income from this pot first.

Thank you.

My thinking was that any growth in uncrystalised funds will be subject to LTA charge eventually. LTA may grow with inflation but one would hope the pot to grow faster than inflation in the long run. Hence the need to crystallise early and withdraw future growth to avoid LTA. I accept there may be opportunities during any downturn, however the overall trend would be sooner rather than later.

Regarding lump sum, if I ctystalise for reasons above surely I would have to take lump sum otherwise lose the large tax free benefit. Or am I missing something??

Good point with the GAR pot. I had assumed I could pay the LTA charge separately but I guess it must come out of the pot.

kidmugsy

(i) The Doc's right: if the GAR is good, use that pot for that. The decision you have to make is whether to take a TFLS from that pot or to annuitise the lot. That depends on how wonderful the GAR is.

anselld wrote: »

My thinking was that any growth in uncrystalised funds will be subject to LTA charge eventually.

(ii) If I may say so, bonkers. You could be volunteering to pay tax that quite possibly may never need to be paid. Growth is likely to be erratic; the art is to crystallise when markets are down so you can thereby avoid the LTA charge.

anselld wrote: »

one would hope the pot to grow faster than inflation in the long run.

Talk of the long run is entirely beside the point: exploit the short run. Talk of "hope" is irrelevant to outcomes. Look at the performance of the Japanese stock market over the last generation: hopes dashed, and dashed, and dashed again.

The_Doc

To maximise benefits to your children, you could use your excess income to create SIPPs and ISAs for them. This will not be subject to IHT (not a PET). They will of course have rights to this money at 18.

A TFLS is not classed as income (so would be a PET if you gifted it). Taking an annuity is income, so could be used for above or outright gift (not subject to IHT).

You could also put the money into trust for them but that starts to get a bit more complicated.

Its may not be a good idea to annuitise now though for two reasons. Firstly you may not need the income (unless you are going to give it away as excess income) and secondly annuity rates are likely to improve. So you could crystallise some now and designate it for drawdown and purchase an annuity later. Leave the rest uncrystallised and crystallise after a fall in the market.

zagfles

kidmugsy wrote: »

(ii) If I may say so, bonkers. You could be volunteering to pay tax that quite possibly may never need to be paid. Growth is likely to be erratic; the art is to crystallise when markets are down so you can thereby avoid the LTA charge.

It's bonkers, if I may say so, to keep investments if you're sure that one day they'll be lower than today. Sell them all and buy them back on that day!

But trying to time the market is almost as bonkers anyway. Personally I'd go with the OP's plan and crystallise to avoid potential further LTA charges.