Opinions on SIPP and LTA.

bearshare

I am looking for suggestions on how to proceed wrt a SIPP, and lifetime allowance conciderations. As this may be a once-off action, I want to get it right!

I have:
1. A DB pension in payment which used 10% of LTA
2. A SIPP I payment which used 20% of LTA
3. A DB pension which I plan to not draw until SAT which will use 10% LTA
4. The SIPP in question worth £500k today

I have unsheltered investments which will take about 5 years to ISA (using 2 x ISA annual allowance)

I am 63, married, neither of us working, full state pension at SPA. Own house, no mortgage, debts etc
I have 2016 LTA protection, so £1.25m. However, I am getting close to LTA.

I think I should crystallize the full SIPP and take 25% out of tax shelter now, to minimise tax (which seems odd).

Any other opinions?

B

kidmugsy

bearshare wrote: »

1. A DB pension in payment which used 10% of LTA
2. A SIPP I payment which used 20% of LTA
3. A DB pension which I plan to not draw until SAT which will use 10% LTA
4. The SIPP in question worth £500k today
I have 2016 LTA protection, so £1.25m. However, I am getting close to LTA.

By your own account you still have 0.6 x £1.25M = £750k unused LTA. I don't see why £600k is "close".

EdSwippet

bearshare wrote: »

I think I should crystallize the full SIPP and take 25% out of tax shelter now, to minimise tax (which seems odd).

When you hit the LTA then crystallising the pension, moving into flexible drawdown, and taking out the 25% PCLS even if you don't yet need it can indeed be the most tax efficient move. Yes, it seems odd, but that's the LTA for you. In many ways the LTA is the poster child for 'perverse incentives'.

As mentioned above already though, on the numbers given you don't appear to be close to your protected LTA just yet.

bearshare wrote: »

As this may be a once-off action, I want to get it right!

I hear you. I am going through this process myself just now, as my DC pensions have hit 94% of the LTA.

I have become used to signing off pieces of paper with standard warnings on them like "...by taking this action, I understand that I may receive less money in retirement." No, I won't. I will receive more overall because I dodge the LTA penalty, and this is why I'm doing it. The haunting fear though, is that it is irrevocable. No going back, so you have to be certain it's the right thing to do.

An additional disincentive is that annual SIPP fees for some providers can go up a fair bit when in drawdown, likely double or close to double those from before. Not ideal, but still far better than a deadweight loss of 25% of all future investment gains.

bearshare

kidmugsy wrote: »

By your own account you still have 0.6 x £1.25M = £750k unused LTA. I don't see why £600k is "close".

Well at some stage I will crystallize the second SIPP of £500k+, and I would rather have some headroom for growth unill the next LTA calculation event at 75. (I think?)

bearshare

EdSwippet wrote: »

i hear you. I am going through this process myself just now, as my DC pensions have hit 94% of the LTA.
/QUOTE]

Ok so that leaves you with 6% of LTA for growth between now and 75. As fixed protection is not index linked, that will be about £60k in real terms. Your plan is to pull out all growth I assume?

EdSwippet

bearshare wrote: »

Well at some stage I will crystallize the second SIPP of £500k+, and I would rather have some headroom for growth unill the next LTA calculation event at 75. (I think?)

Right. Using up the entire LTA now means there is nothing left for the spiteful age 75 LTA test that comes later. I plan to finesse things so that I finish up my last bit of crystallising at exactly at 100% of the LTA.

bearshare wrote: »

Ok so that leaves you with 6% of LTA for growth between now and 75. As fixed protection is not index linked, that will be about £60k in real terms. Your plan is to pull out all growth I assume?

If done right it should leave me with 0% of the LTA for growth. In which case, yes, exactly. I view a definite uplift in the PCLS now as worth a decent amount more to me than a possible bit of tax headroom way off -- that is, several governments and chancellors and budgets and likely rounds of pension tax rules worsening -- into the future. It also means that inflation doesn't erode my remaining FP2016 LTA protection, so that I actually get to use all of it.

My plan is to spend down my SIPP rather than leave it as an inheritance tax bypass. Your plan may differ, or it may not. I am a handful of years younger than you, but not all that far behind.

bearshare

@edswippet
Thanks, yes I follow your reasoning.

I was thinking more in terms of being forced in the future to withdraw from the crystallized SIPP at a rate that would incur tax at an - unknown - higher rate to avoid breaching the LTA. As you say, governments have been known to change things.

EdSwippet

bearshare wrote: »

I was thinking more in terms of being forced in the future to withdraw from the crystallized SIPP at a rate that would incur tax at an - unknown - higher rate to avoid breaching the LTA.

Yes, probably that will happen. Once the LTA is fully used up, the only way to avoid a later LTA penalty at age 75 is to draw down (and pay income tax on) every shred of nominal growth -- that is, both the real and the inflationary growth, over a period of 15-20 years. With some planning it might be possible to wriggle mostly into basic rate tax for a while, but once the state pension kicks there's a likely push into higher rate tax. Even if I do nothing at all until the day right before my 75th, taking all that growth in one go would not push far past 45% tax (remember the appalling 60% band!), and should still come in well below the 55% that comes from LTA penalty plus 40% on the remainder.

So saving up some LTA percentage could mitigate the need to draw all of the inflationary growth before age 75, but as a strategy it seems unlikely to me to be as beneficial as using all the LTA now. Of course, that's all based on the completely invalid assumption that rules don't change again. Swings and roundabouts then, but where -- to stretch the metaphor beyond breaking point! -- the swings are built, painted, and ready for use, but the roundabouts are still on the drawing board.

In practice you might think that it is not really in the government's interest to motivate heavy drawdown of a pension close to the point where funds might be needed for critical care. But again... perverse incentives.

kidmugsy

You can always ameliorate the effect of the State Pension by deferring it for a few years.


As for the perils of growth, drawdown as much as you can during the coming crash and reinvest the money in ISAs and other tax shelters e.g. your wife.

EdSwippet

kidmugsy wrote: »

You can always ameliorate the effect of the State Pension by deferring it for a few years.

Thank you for mentioning this. I may well, but in essence my sense is that this rather kicks the can down the road more than it does actually solve the problem. You have to claim it in the end -- well, perhaps you don't have to, but it would be silly to forgo it entirely! -- and at that point unless the SIPP is entirely drained of growth the problem still remains, less SIPP growth to handle, but commensurately more State Pension income.

That said, I'm not fully conversant with exactly how the State Pension will work out for me, being still a decade shy of it. And mine will be shrunken due to contracting out for some years and living abroad for others, so that I'll get considerably less than full State Pension. Seems like it is time to engage fully with that nightmare too anyway, then, by the sound of things. Hopefully the OP is in a better, and clearer, position than I am.

kidmugsy wrote: »

As for the perils of growth, drawdown as much as you can during the coming crash and reinvest the money in ISAs and other tax shelters ...

Ah yes, the regularly promised upcoming crash.

You have been predicting this for at least a couple of years now. When is it coming, exactly?

kidmugsy

EdSwippet wrote: »

. When is it coming, exactly?

Exactly? I don't know. The 1999 one was a piece of cake to get right, but the world of QE and ZIRP, even in retreat, is much harder.
But what are you proposing: the bubble continues for ever?