LTA confusion

EdSwippet

lisyloo wrote: »

So is it generally considered a good idea to stop before you hit LTA.

Generally? Who knows?!

My own plan is to crystallise my pension exactly on the LTA. This garners me the maximum 25% PCLS, at the cost of having no remaining LTA to protect me at age 75. The uplift to an imminent 25% PCLS is worth more to me than the distant possibility of a tax reduction at age 75.

Judwin

lisyloo wrote: »

According to this moving in a drawdown arangement is an LTA.
https://www.aegon.co.uk/support/faq/pension-technical/Benefit-crystallisation-event3.html


So let's say you reach 55 today, Have £1,000,030 take 25% lump sum and move 75% into a drawdown arrangement.
Then you've use 100% of LTA but are ok as you crystallised it all.
Is that correct?


In which case you can go right up to LTA? as gains post crystallisation don't count?

Gains post crystallisation DO count. At age 75 there is another test on any growth. If you've used up all 100% of your LTA during the initial crystallisation, then you'll pay the LTA charge on any growth you haven't extracted at age 75.

wjr4

LTA is £1,030,000 not £1,000,030

lisyloo

Gains post crystallisation DO count. At age 75 there is another test on any growth. If you've used up all 100% of your LTA during the initial crystallisation, then you'll pay the LTA charge on any growth you haven't extracted at age 75.

Thanks this is the nub of my confusion.
So as I thought originally it makes sense to stop before LTA (if like most people you don't love your job enough to be willing to pay higher rate tax).

kidmugsy

Judwin wrote: »

The other issue is that the state pension (£8.5K ish) will kick in at age 67/68 and require you to reduce your drawdown to £36.5K ish if you're determined to stay a basic rate tax payer.

That gives you a few years to mull over the advantage of a tactical divorce, perhaps?

Anyway, if you accidentally stray into higher rate tax territory couldn't you defray some of the income tax by buying VCTs? Where's jamesd, our principal expositor on the wonders of VCTs?

Also, suppose our protagonist wants to hold roughly 50% gilts and 50% equities in retirement. Then the TFLS goes to equities, possibly spread over two people, and making maximum use of ISAs, dividend allowances, and CGT allowances. The pension would be spread two-thirds gilts and one third equities. That might mean that the value of the pension pot would hold pretty steady while generating an income that might make it easy to stay below the higher rate threshold.

Were I chancellor I think I'd abolish the LTA. The AA does the job required in a much simpler way.

coyrls

Last time I investigated this, you could purchase a short term annuity (up to 5 years) without triggering a BCE, therefore if you get close to 75 with an excess over the LTA that would trigger higher rate tax if you withdrew it, you could essentially spread that excess over 5 years (just before 75 to just before 80) by purchasing a short term annuity with the excess and maybe keep below the higher rate threshold for those 5 years.

lisyloo

That gives you a few years to mull over the advantage of a tactical divorce, perhaps?

Can you explain what a tactical divorce is?
As far as I understand it there are specific grounds for divorce.
Are you suggesting lying for tax evasion purposes and then hiding from anyone that uses social media for the rest of our lives?



How would it help anyway please?
Just in case there is something (above board) we're missing in our tax planning.

Anyway, if you accidentally stray into higher rate tax territory

Much more inclined to retire earlier, than use financial instruments I don't understand.

and making maximum use of ISAs

We have a ltd company. Much more efficient to use salary sacrifice (my employers passes on their 13.8% NI) and pay dividends than to take income to put in an ISA.

Were I chancellor I think I'd abolish the LTA. The AA does the job required in a much simpler way.

The rules could change, but of course we can't predict how.

kidmugsy

lisyloo wrote: »

As far as I understand it there are specific grounds for divorce. Are you suggesting lying for tax evasion purposes and then hiding from anyone that uses social media for the rest of our lives?

'twas but a harmless joke. But I'll bet it's been done.

lisyloo

kidmugsy wrote: »

'twas but a harmless joke. But I'll bet it's been done.

Ah ok.
I did look into I think a little (for second property rather than pensions) which might be why I missed the joke.

Im sure it has been done in the past but with all evidence on social media (and my oyster account knows where I;ve been everyday) its a lot harder these days to cover your tracks. I swipe in/out on the bus, tube, door entry system at home and at work so impossible to hide.

Judwin

lisyloo wrote: »

So as I thought originally it makes sense to stop before LTA (if like most people you don't love your job enough to be willing to pay higher rate tax).

As with most things, I believe the answer is 'it depends'.


If it's your own money paying into a PP/SIPP then it's difficult to see how saving 20%/40% on the way in is worth it if you're going to be paying 40%/55% on the way out. However, it may be worth it for some people caught in the marginal tax rate bands caused by child benefit and personal allowance claw-backs.


If the payments in are via salary sacrifice, and have matching company contributions, then it probably is worth busting the LTA.


Suppose you get matching employer contributions. Every £100 paid in only costs you £50 of gross pay. This would actually cost a HRT payer £29 in take home pay (40% IT, 2% NI).


On the way out, if you're still HRT you get 'taxed/charged' at 55%, so you receive £45. It only cost you £29 on the way in though.


Since you're talking about Ltd companies you have to work out if company contributions to your personal pensions and busting the LTA are the most efficient way of extracting money from your company.