Question on crystallizing my pension

MK62

£170k of this £200k is above the LTA. It is worth £158k after LTA penalty if crystallised today. Long term risk-free interest rates are about the same as inflation currently, so 2.5% over 10 years would bring £158k back to £200k. By comparison, if left entirely idle in a pension, the uplift in the LTA decreases the LTA penalty by inflation each year, equivalent to increasing what this sum is worth by the same amount. After 10 years, the LTA penalty disappears so that the full £200k can now be extracted.

I'm still not sure I follow your logic on this, even using the case in post#4 of £1M in pot1, and £200k in pot2.

If you crystallised the £1M pot today, you'd use 97.08% of the £1,030,000 LTA (1,000,000/1,030,000), leaving just 2.92% of the LTA for use in future years.
How could you then extract the full remaining 200k 10years later with no LTA charge?

Judwin

EdSwippet wrote: »

But it gets better. If this £200k is not crystallised but also not left entirely idle, but instead invested in anything offering a positive risk-free interest rate, no matter how slight, you effectively get an inflation uplift plus that interest. Some or all of the gain above inflation might fall into a 55% LTA penalty tax bracket, but that still leaves you ahead relative to crystallising and paying the LTA penalty now.

Yes, but say we leave the £200K not crystallised and invested in something "risky" that returns CPI+5% p/a. The LTA increases by CPI, so we can ignore CPI from both LTA and growth sides of the equation. After 10 years the £200K is worth £325K. You've only got £170K LTA remaining, so £155K is subject to the £25% LTA tax. Hence your £200K if left invested is worth £286K after 10 years.

EdSwippet wrote: »

To the extent that one wants a cash element in a portfolio then, this may be one of the least tax-inefficient ways to accomplish that.

I've been pondering that one. If we accept that the balanced portfolio in drawdown needs to have some very low risk/return cash, plus some high(er) growth/income giving higher risk assets, is it better for the low or high risk stuff to be inside the LTA affected pension, or outside?


If you leave the low risk, low growth stuff in the pension, then the LTA increasing by CPI each year may eventually overtake it and allow you to get it all out LTA free. However that means the high(er) risk stuff is outside the pension, which means the growth is potentially subject to CGT/IT if you can't get it into ISA's quickly enough.


Or conversely you leave the high risk stuff inside the pension, and keep the low risk outside. Less CGT/IT liability, but LTA remains an issue. The plus side is that you can crystallise during any market crashes if/when they occur and potentially get more of your money out LTA free.



I *think* it's probably better for the high risk to be inside the pension up until you've actually crystallised 100% of the LTA, but I'm not sure.

EdSwippet wrote: »

You are in danger of straying into the realms of fantasy. :-)

You're the one that brought up Alice Through the Looking Glass :-)

EdSwippet

MK62 wrote: »

I'm still not sure I follow your logic on this ...

You're right, and the maths is faulty. I managed to conflate details from the original post with numbers from a later and unrelated question, as you suggested earlier.

I have removed the offending section. Thanks for persisting.

MK62

The gist of what they tried convey is that the value to the holder of the part of an uncrystallised pension that is above the LTA effectively increases by inflation as a result of the LTA penalty liability reducing by inflation.

Actually it doesn't - the LTA charge won't decrease in line with inflation.....the LTA is more ingenious/insidious than that (delete as you feel appropriate ).
Don't take my word for it though, run some numbers and check.....

If the LTA in 10 years is £1320000 (having increased by 2.5% pa) and you still have the £200000 in cash sat in uncrystallised pension, (having crystallised £1000000 this year with an LTA of £1030000), what would the LTA charge be if you crystallised the £200000 after said 10 years?

EdSwippet

MK62 wrote: »

If the LTA in 10 years is £1320000 (having increased by 2.5% pa) and you still have the £200000 in cash sat in uncrystallised pension, (having crystallised £1000000 this year with an LTA of £1030000), what would the LTA charge be if you crystallised the £200000 after said 10 years?

Crystallise the £200k now would be £30k below the LTA and £170k over the LTA, for a £42.5k LTA penalty. Leaving the £200k preserves £30k/£,1030k = 2.9% of the LTA. In 10 years, 2.9% of £1,320k is £38,447, so that amount is below the LTA and £161,553 above for a £40,338 LTA penalty. £40,338 is less than £42.5k.

So the LTA penalty doesn't decrease in line with inflation, agreed. It does decrease with inflation though, just more slowly. On the OP's numbers you would (I think!) get a better outcome, as more than just a minimal couple of percent of the LTA is retained and the LTA 'overhang' is a lot smaller.

"Insidious" probably covers this just fine. I doubt anyone who put this stuff in place was "ingenious" enough to figure something like this out. Occam's razor.

( Now please mark my homework :-) )