Extraction method tradeoffs in FP14

gm0

Pension extraction question for a married couple scenario with one partner in FP2014 not contributing and the other nowhere near the LTA making small annual contributions. All DC funds.

Have considered taking 25% PCLS around 2020 and rebalancing (i.e. continung annual contributions for the low pension partner towards SP age (2880/3600 or more subject to employment). Also making spouse transfers of released PCLS cash to make equity investments in 2x ISA tax wrappers (hedging some potential political risks on 25% of the larger DC pot). Game theory pov on treatment of SIPP, ISA and Crystallised vs Not. Can avoid all eggs in one name and SIPP basket but at the cost of being "all crystallised" at 55.

The rest of the PCLS provides some cash buffering % for the DC fund equity investments and for initial consumption in retirement. Go on to drawdown enough crystallised funds during the next decades and pay the income tax sensibly (not too lumpy) to keep the crystallised value down vs extra LTA BCE test and charge at 75

With the FP2014 main pot the annual contribution allowance for that partner is already zero so the starting drawdown beyond 25% rule restricting contributions is moot. Apart from increased IHT exposure to overall estate if the ISA's are not depleted by consumption, care costs, gifting, charity etc - what are the advantages of ignoring this simplistic approach and going on the more incremental phased flexi drawdown journey crystallising smaller lumps along the way and forgoing the rebalancing/wrapper hedging opportunities described above.

Have I missed some enormous long term tax implication based on limited understanding and the many confusing drawdown papers on the net (which don't talk about protection much if they acknowledge its existence at all).

EdSwippet

As someone aged over 55 with FP16 and DC pensions currently a single digit percentage below the LTA, I have expended a reasonable amount of mental effort on how to most efficiently access my pension. A few thoughts below. I'll leave it up to you to decide how much of this is any use.

How close to your FP14 LTA will you be in 2020 when you plan to crystallise?

If below, it might be worth waiting a bit to optimise the PCLS (the LTA is a de facto limit on the PCLS). Or crystallise part of it, half say, to provide funds to live on and to cover your partner's pension contributions, then the rest when it has grown so that you consume your full LTA.

If over the LTA in 2020, I would crystallise only up to the LTA, leave the rest, and delay the LTA penalty for as long as possible. Use your pension for the low-growth part of your portfolio to minimise the eventual hit at age 75. A future government might abolish the LTA entirely, though if they do its replacement may of course just be worse -- with governments the cure is often worse than the disease.

In practice then, for many folk the optimal point to crystallise everything under current rules is probably when you exactly hit the LTA, but this depends on you being over age 55.

As for using UFPLS to crystallise in segments, the only possible benefit I can see is that this puts off crystallising the bulk of the pension and its corresponding LTA test, so that if markets crash to a sufficient degree you could then crystallise and reduce any LTA penalty, or perhaps even dodge it entirely, and then take the recovery outside of the pension. Or maybe the government will see sense and scrap the LTA entirely. The downside is that if these do not happen as needed you make your future LTA problems worse rather than better.

Several folk around here suggest this wait-for-a-crash strategy. Personally I find it a bit uncertain. It will certainly work for some people, but there is no guarantee it will work for you (or me). The crash might not materialise when you need it, or it might follow a 30% run-up in stocks, or it might not be deep enough to help you, or you might miss it or miscall it, and so on. The problem with it is timing. A crash at some point in the future is more or less certain, but if you don't know when it will appear then you cannot rely on it helping you dodge the LTA. Nevertheless, worth considering if you think it might be a strategy you can use effectively.

My own plan is to wait for my pension to grow to my LTA and then crystallise everything right there at the LTA. I do not plan to leave it to anyone, so the IHT bypass is not a significant factor for me. A future government may see sense and abolish the LTA, but I'm not holding my breath on that, and things could actually worsen, for example the Lib Dem's conference resolution to cap the PCLS at £40k. If I were in your shoes, my plan would look like yours.

Only time will tell if I have done the right thing. But then, with the continually shifting political ground that is UK pensions policy given its dual status as political football and magic money tree, that's true of every part of pension planning anyway.

zagfles

"Wait-for-a- crash" in this context makes about as much sense as waiting for a crash before investing in the first place.

If at or close to the LTA, I'd be fully crystallising particularly with a non taxpaying spouse, the PCLS can be ISA'ed to the maximum extent and the remainder invested in the non taxpaying spouse's name, which could minimise or even eliminate any tax on the unwrapped part.

The main advantage of phasing is not to get too much PCLS out which you'd have to invest unwrapped. But generally the tax hit you'd take investing unwrapped would be lower that the tax hit you'd take for exceeding the LTA. Particularly if you're careful about CGT, using up annual allowances if necessary, using personal/dividend/savings allowances, starting rate etc.

For a married couple in their 50's, IHT shouldn't be too much of a worry at this stage - spouse exemption if one of them dies and likelyhood is second death won't occur for 30+ years, when their financial situation will be completely different.