Close to LTA limit

settingsun

Hi folks,

Just need some ideas and suggestions.

I am closer to the 1m lifetime allowance than I realised. I calculated that my sipp/ work pension pot is at about 720k now plus I have a defined benefit scheme estimated to be about 8k.

I have planned to remain fulltime for a year or 18 months and pay in around 30k a year in during that period.

If I add to that a healthy growth of say 7%, I could be within touching distance of the lta limit in a couple of years.

I have an interest only mortgage I have to pay in 5 years (fixed till then). I am looking for around 200k as a lump sum to pay of the majority of the mortgage (total mortgage is 300k). I have other isas to pay the rest or i can persuade someone to give me a mortgage for the balance.

I am 55 and my plan is to remain full time working till around end 2018 and to go part time for another couple of years. My intention was to stop making any more pension contributions or cut them down when part time, so I can maintain the same standard despite only working 3 days.

So I am confused as what to do.

1. If I keep to my plan I will exceed my lta before i need the money for retirement or to pay the mortgage. May be that's ok and I just pay the extra fine for exceeding.

2. I could take out the lump sum for my mortgage sooner (keep as cash or drip feed into isas) or when i get close rather than in 5 years as planned . I could avoid the lta charge but would not be able to contribute much more to the scheme (I currently put in 15% and my company adds 10% to it).

3. I could stop making any more contributions or reduce them. I then creep up to the limit slowly. That potentially means not making the most of the high rate tax relief and the matched contributions.

4. If the markets take a dive by say 30% after I have taken the lump sum I won't be able to make that up if I can only pay 4k a year in the future.

I wanted to keep working for a few more years as I felt that we are in uncertain times and planning finances for a possible 40 years contains a lot of risk which is reduced by working a bit longer. Also I had assumed modest growth of 4% a year but it was more like 15% for the last couple of years. I know it's a nice problem to have but it's still keeping me awake at night!

Other relevant info is that OH is same age, 55, part time and self employed and has a Sipp.

Thoughts much appreciated!

marlot

The LTA is due to rise by inflation in April.

As you're 55, you could crystalise some or all of your pot?

You could take the DB pension early with actuarial reduction?

cjking

If all your contributions would otherwise be taxed at higher rate, and you will always be a basic-rate taxpayer in retirement, I'm not sure it matters if you breach LTA. The excess contributions would be taxed at 42% (2% employee NI) if you took them now, or a total of at most 40% when taken as pension income. (I see you have an employer contribution, so actually the pension route advantage is much bigger than 2%. Even if they will give you extra salary in place of their contributions, a cost-neutral offer will give you less money, as they have to pay full employer-NI on it.)

If you only take the lump sum and don't take any drawdown income, I think you are allowed to carry on contributing as much as before? But I don't think when you take you lump sum makes much difference to the LTA charge. You only avoid growth on the lump sum contributing to you overall balance. The lump sum itself uses up a portion of your LTA.

EdSwippet

settingsun wrote: »

4. If the markets take a dive by say 30% after I have taken the lump sum I won't be able to make that up if I can only pay 4k a year in the future.

I suspect you might have missed a detail here that could help you. You are only restricted to £4k/year in pension contributions if you have crystallised your pension and taken taxable income from the drawdown portion. However, crystallising, taking the 25% PCLS, and immediately deferring all drawdown on the remaining 75% does not trigger the 'money purchase annual allowance' of £4k.

With that in mind, your best path forwards seems to be to crystallise some or all of your pension now or very soon, take the 25% PCLS and immediately defer taxable drawdown. This leaves you LTA headroom into which you can still save up to £40k/year in new contributions. With careful timing you should be able to arrange things so that your remaining pension contributions and LTA headroom match closely.

Of course, you also need to watch for LTA inflation increases, possible LTA decreases in future budgets, possible further reductions in annual and MPAA allowances, the ridiculous annual allowance taper, the potential for higher rate tax relief on pension contributions to be curtailed or even eliminated, and any other number of nonsense things that the government could come up with between now and when you plan to retire.

kidmugsy

settingsun wrote: »

plus I have a defined benefit scheme estimated to be about 8k.

Do you mean £8k p.a.?

settingsun

Thanks for those replies. I will have a proper read tonight when I am back home, lots to think about.

Kidmugsy, yes my final salary pension is estimated as being 8k pa (it was 3.9k in 1994 with RPI increases till 2022 when I am 60).

Thanks again for the suggestions, some good ideas and some of my misunderstandings have been cleared up.

kidmugsy

cjking wrote: »

You only avoid growth on the lump sum contributing to you overall balance. The lump sum itself uses up a portion of your LTA.

Yes, but taking the lump sum does reduce by 25% the problem of the capital value growing. Mind you, growing market prices may not be much of a problem over the next five years.

It also constitutes selling out of the high markets, which may prove to be a good thing in itself.

@OP: There is one possible complication about taking the DC/SIPP lump sums. If you then want to increase your contribution rate to pensions you might fall foul of the anti-recycling rules that are intended to restrain recycling of tax-free lump sums. Hie thee to google.

settingsun

So I have learned a few things.

1. I can take the lump sum and not go into drawdown so continue to pay up to the 40k a year.
2. Taking the lump sum reduces the lta.
3. Lta will go up by inflation so I may have a bit more headroom.

Marlot- yes i can look at taking my Final salary pension earlier. I have the numbers and I can compare that loss in long term guaranteed income versus gain of getting the high rate tax back and company contributions for 20 times that reduction.

EdSwippet said:

With that in mind, your best path forwards seems to be to crystallise some or all of your pension now or very soon, take the 25% PCLS and immediately defer taxable drawdown. This leaves you LTA headroom into which you can still save up to £40k/year in new contributions. With careful timing you should be able to arrange things so that your remaining pension contributions and LTA headroom match closely.

Yes that sounds like the right thing. And yes all the rule changes don't help with the planning. It's possible that we all get the rug pulled out from under us.

Kidmugsy said:

It also constitutes selling out of the high markets, which may prove to be a good thing in itself.

@OP: There is one possible complication about taking the DC/SIPP lump sums. If you then want to increase your contribution rate to pensions you might fall full of the anti-recycling rules that are intended to restrain recycling of tax-free lump sums. Hie thee to google

Yes getting my 25% tax free lump sum gets it out from what could be a peak, then I have to figure out what to do with it for 5 years. OH kindly suggested an Alaskain cruise along with Rocky mountains rail trip . On the recycling rules I have been paying the max 40k/50k for about 4 years now so I would be doing it anyway.

In general this is complicated enough so that I need to get a professional to help me but i like to understand what they are saying and know what questions to ask. So far any i have spoken to are not sounding as knowledgeable as you lot, but that was a while ago.

Thanks all.

anselld

To be clear on LTA use, as I understand it ...

If you want, say, a £200k lump sum you need to crystallise £800k in total so you would use 80% of the LTA currently.

Only the remaining 20% of LTA would be indexed with inflation.

settingsun

Thanks Anselld. I can see that yes the indexed linked increase will only apply to the 20% which makes it less attractive.

I understand my problem and can monitor where I am regarding the LTA, but taking out about 200k as a lump sum starts to solve one problem. It however creates another problem as to what to do with that lump sum as I dont need it for nearly 5 years!

Probably use 2 years Isas for the 2 of us, thats 80k. Probably a little more into Wifes Sipp.
Probably next port of call is VCTs.

Malthusian

settingsun wrote: »

Probably use 2 years Isas for the 2 of us, thats 80k. Probably a little more into Wifes Sipp.
Probably next port of call is VCTs.

That's a big leap up the risk scale with no reason given. The natural next port of call would be unwrapped mainstream investments. £120k of unwrapped mainstream investments targeting growth potential rather than yield may not generate any income tax liability at all if you use both dividend allowances. (Unless of course you're already using them.) And you can keep moving £40k each year into ISAs.

VCTs are, despite the tax benefits, a shot in the dark and should only be considered once you've got so much in mainstream investments that you can take a punt on early-stage companies without minding too much if it makes zero return or a permanent loss. They are the classic example of not letting the tax tail wag the investment dog.