Strategy to minimize LTA and income tax.

Reluctantpensioner

I'd appreciate comments on my drawdown strategy to avoid paying LTA tax and minimising income tax.

Background: 64, retired (not by choice).
I have quite a bit of funds outside my pension. I do not need to withdraw pension for expenditure for several years.
I have trivial DB entitlements, and DC pots of c. £850K, which if left alone I forecast will hit LTA in about 5 years, even given LTA inflation. (In my modelling I have used 6% growth and 3% inflation: probably not right but a start). The pensions will be merged into a single SIPP during 2018.

I realised last tax year I needed to start reducing LTA risk so took £40K in UFPLS (1: to give me time to think and 2: use my 2017/8 tax band). This, plus £40K cash went into ISAs for me and my wife.
This is not a question about Safe Withdrawal Rate: I am withdrawing to minimize LTA only. I will re-invest any drawdown and place it into ISA (next tax year) or a GIA (which means learning about CGT and Dividend taxation minimisation.)

My goal is: no LTA charge, and avoid the 40% tax band. I have two strategies that look like they might work: A) enter 100% drawdown immediately and withdraw (nearly) all growth UFPLS continuously until 75, then enter drawdown.

Both strategies require me to draw down taxable just under the 40% tax band each year. All are "quite tight", change a number or two and you get LTA and/or 40% tax.

Strategy A: enter drawdown and take 25% Tax Free (c. £200K). This leaves c 600K in the drawdown fund. Then each year draw down all growth to the £600K, planning to end with £600K (or at most £800K). LTA tax should be zero. The amount to drawn down each year would be between £24K and £48K which should be under the 40% limit, even with State Pension in 2020.
Benefits: simple to understand and implement.
Downside: the 2018 tax year will be challenging. I'll have to invest the lump sum and 2018 drawdown into a c. £250K in GIA, (split with non-taxpayer wife. I will have to
start to learn rapidly about CGT and Dividend tax). From 2019 I can Bed and ISA this (at £40K/year) to deplete the GIA over several years.

Strategy B: (I think this would be considered Bed/UFPLS and ISA) Each year make UFPLS withdrawal of c £52K (which at 75 will end with c 60% of LTA used). This should be under the 40% income tax band. I forecast that there would be £700K uncrystallised just before 75 (which should be below 40% of the, then inflated, LTA). I think the correct strategy then is to enter drawdown and crystallize everything before 75th birthday.
Benefit: no 2018 problem with too much cash. Delaying withdrawal makes more opportunity for LTA to increase with inflation. Can take 11 years to learn how to run a GIA account.
Downside: challenging to calculate every year. The pension pot is bigger (by 25%) for 11 years, that will grow more, compounded, increasing the risk of just delaying LTA issues. There is still a big cash inflow, but now at 75. And I should have free ISA allowance (£80K if timed right). Probably more at risk of regulation change. Seems more sensitive to changes in inflation and growth.

PS: I am a wizz with excel, but very aware of: flaky assumptions and only theoretical knowledge.

PPS: one complementary strategy is: rebalance high growth funds into ISA and low growth in SIPP and GIA. This isn't viable for several years though as most is in my pension.

HappyHarry

Just my thoughts.

When did you or your employer last make any contributions to your pensions.? If before 6th April 2016, then you could apply for Fixed Protection 2016 which will set your Lifetime allowance at £1.25m instead of £1m. Of course, the £1.25m won't rise with inflation, and will be taken over by the standard LTA in due course, so won't necessarily help with option B, but could be of great benefit with option A.

Option A looks nice and simple. £250k between two of you is £125k each. You can ISA this over the next few years. You each have a CGT allowance of £11700 per year, so unless you will be crystallising gains of over 9% each year, CGT shouldn't be an issue.

Growth funds have lower dividends than income funds, so if you're looking at funds in the GIAs / ISAs, then look at the yields. If you're looking at shares, then look at the dividend payouts.

Option C would be a cross between the two options. Maybe take, for example, £100k tax free this year, £50K next year and £50k the year after. This reduces the risk of dividend tax, and makes things simpler than option B.

Growth in the ISA/GIA would generally be better than growth in the pension if close to the LTA. Even with a CGT rate of 20%, that's better than an LTA charge of 25%.

Do you have any IHT concern? If so, a 25% LTA charge might be more palatable than a 40% IHT charge.

Reluctantpensioner

Thanks for the input, very useful.

Last pension contribution was November 2016, when I salary sacrificed my redundancy payment. So protection is not relevant. And £1.25M is only 7 years away at 3% anyway, well before 75.

IHT concerns? A nagging thought in my mind. Too many unknowns: longevity, health.
I understand what you mean though, inheritance through pension looks a no-brainer now (which is why they'll nerf it?). But maybe that is a topic post 75? One idea: by living (post 75) off GIA (and even ISA) instead of the SIPP: growth will cause the pension to and be IHT protected.

AnotherJoe

I took half the 25% TFLS and have been pushing it into ISAs. Don't worry too much about CGT, if you hit it then you'd almost certainly pay less tax than if you hit the 55% tax, and you can minimise it or remove it altogether by judicious sells. Plan is, if needed, to remove the next half of the 25% in a year or two.

This method is also, as you say, very simple to understand and implement.

kidmugsy

Reluctantpensioner wrote: »

...DC pots of c. £850K ...will be merged into a single SIPP during 2018.

That's very courageous, Minister.
http://monevator.com/even-brokers-can-fail-you/

AnotherJoe

...DC pots of c. £850K ...will be merged into a single SIPP during 2018.
Originally posted by Reluctantpensioner ”

kidmugsy wrote: »

That's very courageous, Minister.

I missed that :eek: I wouldn't do it, no real additional benefit to the OP, for increased risk which although low, verges on catastrophic if it happens.

Reluctantpensioner

So you recommend I split across 17 different investment companies? Are there 17?

There is a thread on this: https://forums.moneysavingexpert.com/discussion/5837938/what-would-happen-if-h-l-went-into-administration-today&highlight=hl+fail

The funds have to move as they don't offer drawdown.
They will be with Fidelity, one of the biggest companies in the world.

Reluctantpensioner

OEIC:
Fund assets are held in safekeeping on investors!!!8217; behalf by a trustee or depositary.

If an authorised investment firm goes into default, your assets are protected.

You continue to own your investment and the fund!!!8217;s assets are still invested as before.

MK62

If you look at the recent Beaufort Securities news, it seems client assets are not as "protected" as many of us thought.
Plus, there's the potential issue of not having access to your single pension account for however long it takes to sort everything out in the event your chosen platform goes bump.
I think that's probably what previous posters were getting at.
It's hard to say whether going with a bigger company is safer - I tend to agree with your thoughts on that - but in the end it's a judgement call on the risks of a single platform vs the fees and gradually increasing hassle of two or more.

anselld

Have you factored the index linking of LTA with RPI? Every time you move to drawdown or take UFPLS you consume some LTA which from that point forward in not index linked.

So whilst there is advantage to 100% drawdown (that you can withdraw growth to avoid LTA subject to income tax limits), the downside is that you have lost protection from inflation.

You could argue that growth should always exceed inflation so that is not a problem, but personally for a long term investment like pension I think the commitment to maintain LTA in line with RPI is important (so long as future Govs keep to that) an hence in a similar circumstance I prefer Option B.

sandsy

Why don't you crystallise only what you can invest into ISAs each year? ie. crystallise £160k this year, take out 25% (£40k) for ISAs then start drawing down from the remaining £120k as required, up to 40% limit.

Do the same in following years. I reckon you'll be fully crystallised before the end of year 6, and within the LTA assuming your current growth and inflation assumptions.