Techniques for getting under LTA

marlot

I'm trying to pull together a list of techniques for getting pensions under the LTA (or reducing the charge). Here are my thoughts so far. Can anyone add any other ideas?

Increase Personal LTA

• Various protections available (eg. 2016 IP)

DB Pensions [all are if scheme allows]:

• Take pension early with actuarial reduction
• Commute some pension into lump sum
• Forfeit some pension to be a spouses/dependents pension after death

DC Pensions:

• Move to drawdown - either immediately at 55 (to stop further growth being counted), or when the markets are low. I'm aware that there is a further test at 75.
• Leave any funds over the LTA uncrystalised - either as an emergency fund, or for inheritance

The_Doc

If you have both DB and DC schemes, and iIf you are lucky/unlucky enough to have to pay an LTA charge, it is often better to get the DB scheme to pay this charge (scheme pays) rather than pay from lump sum. And that means that you should crystallise the DC schemes before the DB scheme.

caveman8006

Crystalizing early may help if you would otherwise exceed the LTA, but subsequent investment growth is still liable to the LTA charge at 75 if you have not withdrawn enough as taxable income to stop you going you through your ceiling. For some high earners who intend to retire early and who have saved 75%+ of the LTA, the best strategy may be to switch savings towards ISAs rather than pensions well before you reach the LTA cap and then crystalize the pension pot as soon as you have no taxable income. You can then take out enough income to use the Tax-free allowance in full and maybe the basic rate tax band too. Of course, pots of £800,000+ may easily generate enough annual growth to take you into the higher rate tax band which is a potential problem and is the reason that ISAs can be more efficient for these investors.

ffacoffipawb

The_Doc wrote: »

If you have both DB and DC schemes, and iIf you are lucky/unlucky enough to have to pay an LTA charge, it is often better to get the DB scheme to pay this charge (scheme pays) rather than pay from lump sum. And that means that you should crystallise the DC schemes before the DB scheme.

Surely better to take scheme pays from DC by crystallising the DB first. Better than losing 25% of your guaranteed benefits.

What am I missing?

Daniel54

ffacoffipawb wrote: »

Surely better to take scheme pays from DC by crystallising the DB first. Better than losing 25% of your guaranteed benefits.

What am I missing?

I agree .I could not see any benefit in degrading my DB benefits in priority to my DC pension.Crystallise the DB pensions first and then you know precisely how much of the LTA is left and can then exercise flexibility around when and how much of the DC to crystallise

The_Doc

It depends on your commutation rate. If you have an LTA charge of 10K say and a commutation rate of 33, then you would lose £300 per annum from your gross DB pension. That may be a better deal than losing 10K from your DC.

Daniel54

If you are taking the DB pension then the commutation rate only applies to the PCLS. Once that is done ,there is no further need to about LTA allowances,other than what is left under the DC scheme.

ffacoffipawb

The_Doc wrote: »

It depends on your commutation rate. If you have an LTA charge of 10K say and a commutation rate of 33, then you would lose £300 per annum from your gross DB pension. That may be a better deal than losing 10K from your DC.

Assuming you have used up all LTA and you just have an uncrystallised DB left. In that scenario, dont you just lose 25% of each payment of that pension as the LTA charge?

The LTA charge is stated as 25% if the benefit is taken as income.

If the defined benefit is £12,000 (payable as £1,000 per month) then isnt the LTA charge taken as £250 per month, or the commuted value thereof.

Regardless of commutation factor you lose 25% of the defined benefit, am I right?

anselld

marlot wrote: »

[*]Move to drawdown - either immediately at 55 (to stop further growth being counted), or when the markets are low. I'm aware that there is a further test at 75.

Not sure about that. By moving immediately into drawdown you are losing any CPI indexation of LTA and depending on what you do with the £250k lump sum you are taking this both out of the market and back into your potential IHT estate.

Is it really beneficial to crystallise immediately at 55?

EdSwippet

anselld wrote: »

Not sure about that. By moving immediately into drawdown you are losing any CPI indexation of LTA and depending on what you do with the £250k lump sum you are taking this both out of the market and back into your potential IHT estate.

On balance, it seems to me to be beneficial to crystallise sooner rather than later. You would expect -- or at least hope! -- that your pension and other investments would grow faster than CPI. By crystallising you remove the threat of the LTA charge eating into the real gains.

As for what to do with the lump sum... even if you can't get it into ISAs, investing in the same stuff outside of the pension as you held inside should normally give you a better outcome than leaving it inside. Ordinary income tax rates and (especially) capital gains rates are likely to be lower than the combined LTA penalty charge plus marginal income tax on all future gains.

The IHT issue is the one place where crystallising early perhaps isn't a good idea. If your aim is not to take a pension but rather to leave a legacy, leaving the SIPP alone might be best. But then, this isn't really what SIPPs are designed for.

The_Doc

ffacoffipawb wrote: »

Assuming you have used up all LTA and you just have an uncrystallised DB left. In that scenario, dont you just lose 25% of each payment of that pension as the LTA charge?

The LTA charge is stated as 25% if the benefit is taken as income.

If the defined benefit is £12,000 (payable as £1,000 per month) then isnt the LTA charge taken as £250 per month, or the commuted value thereof.

Regardless of commutation factor you lose 25% of the defined benefit, am I right?

Not quite.

If you have used up all your LTA with just a £12K p/a DB left, the value used for LTA calculations is 12,000 *20 = 240,000. At a charge of 25%, that is an LTA charge of 60,000. At a commutation rate of 30, that translates to a reduction in gross pension of 60,000/30 = 2,000.

So your DB pension becomes 10K rather than 12K. So the value of your DB pension in this case does depend on your commutation rate. A low commutation rate will push you more towards taking the hit from a DC pot (assuming you had some left).

So which would you prefer? Losing 2K from your gross DB or losing £60K from your DC? The numbers will vary according to the commutation rate and your choice will depend on your personal circumstances.