Lifetime Allowance and CETV

AB77

Hi,

I am 55, have recently stopped working and am living off ISA savings.

I have 2 pensions available; a final salary and a personal stakeholder. Both of these added together are below the current LTA limit.

I am considering taking the CETV from my final salary pension, however this would push my total pension value above the current LTA.

So I am thinking that it may be good idea to start drawing from my stakeholder asap, rather than let it grow and potentially incur more tax if I do proceed with the CETV.

Any thoughts much appreciated.

anselld

When you draw down you consume a percentage of your LTA so it would not improve your position with the CETV.

LTA is set to increase with RPI (but only for your unused percentage) or you could live in hope that LTA might be abolished in future, but then CETV might also drop.

You may well be better to stay in DB unless there are other pressing circumstances.

EdSwippet

Besides IHT and other intangibles, how far above the LTA is one thing to consider. Also, note that the LTA rises to £1,030k in April, so a potential slight help there.

Finally, if you haven't contributed to a pension since April 2016 you can still apply for Fixed Protection 2016 to retain the £1.25mm older LTA. And/or if your pension was valued at above £1mm in April 2016, Individual Protection 2016, whether or not you have contributed to a pension since then.

As already noted upthread, crystallising some or all of your DC pension at this point won't help you in LTA terms.

AB77

Many thanks for the replies and for the points raised.

Just to clarify, I will most likely be taking the CETV from my final salary (a lot of consideration already gone into this including advice from IFAs and too lengthy to detail here).

So I guess my question really comes down to this. If my CETV is already above the current LTA, would it make sense to start drawing from my stakeholder asap rather than let it grow even more over the next few years and incur more tax from exceeding the LTA?......or maybe I am understanding the point above about crystallising?

EdSwippet

AB77 wrote: »

If my CETV is already above the current LTA, would it make sense to start drawing from my stakeholder asap rather than let it grow even more over the next few years and incur more tax from exceeding the LTA?

It would if you ultimately do make the transfer and wind up with DC pensions that exceed the LTA. By crystallising some now, you take the future growth on the crystallised portion outside of the scope of LTA penalty tax. (Well, until you reach age 75 when the second spiteful LTA test occurs.)

On the other hand, if you do not transfer your DB pension to DC, by crystallising earlier than the LTA you will have effectively lost a bit of LTA headroom you might otherwise have used. In particular, the LTA is a hard limit on the PCLS.

The bottom line is that the LTA is the level at which a pension flips from being a tax benefit to being a tax ball-and-chain. The optimum is to reach it, but not exceed it. The whole edifice is a nonsense, but I don't see any prospect of early relief from it. If any government does ever decide to address it in future it is a reasonable bet that the cure will be worse than the disease.

AB77

Thanks for taking the time to explain further.

The decision re. the CETV is a tricky one. If I leave the final salary pension as it is I should not breach the LTA based on the standard 20x multiple. However the CETV I am being offered equates to over 40x which although seems very generous, does then push we well over the LTA.

Plenty of time for me to make a decision so will wait until I am completely happy either way.

Appreciate your comments above, thanks again.

EdSwippet

AB77 wrote: »

The decision re. the CETV is a tricky one.

Yup. One final thought -- have you asked your DB scheme trustees if a partial transfer out is possible? Apparently only around one in six or so DB schemes offers partial transfers, but if yours does then that might provide a route to optimising use of the LTA without breaching it.

AB77

Thanks. Yes I have asked but unfortunately a partial CETV is not available.

I think the thing I need to get my head around is although the critical yield on my CETV is only about 2.5%, how is this affected by the breech of the LTA with the CETV compared to just keeping my final salary pension which would not breech the CETV.