Lifetime Allowance Tax explained ?

coyrls

[FONT=&quot]One tactic that I think can be used to avoid going over the LTA at 75, is to take out a short term annuity (when I last mentioned this I think I was told that “short term” means 5 years), just before 75 with any excess over the LTA, as taking out a short term annuity isn’t an LTA event.[/FONT]

MarkCarnage

Thanks for reply. I'm currently 58 so not far wrong. I also still run my own consultancy company though only work part time now and take a dividend only from it now.
I would exceed the £1.25m LTA by about 5% currently I estimate.
Fair comments about the suggested strategy of timing a move to drawdown. It might work for some, who are close to the line like me. It would also presuppose a heavy weighting in equities, directly or indirectly as you state. I am probably a bit 'the wrong way round' for historic reasons in that my ISAs and share portfolio are almost entirely investment trust based and have done very well, whilst my SIPP, due to the timing of most of the cash inflows is more liquid and more conservatively invested - 30% equity on a lookthrough basis.

I probably need to take a look at the numbers around moving into drawdown, maybe take a deep breath and bite the bullet. However, I also don't really need an income from it right now, particularly as a Scottish taxpayer I will hit the zone where marginal tax rate is quite high if I do. More efficient to use CGT allowance or take income from ISAs.

Spreadsheet time again I fear.....

MarkCarnage

Thrugelmir wrote: »

No one foresaw the extent of Central Bank intervention in the markets. Difficult not to have made money in the past few years. Challenge is that with gilts and investment grade corporate bonds only offering around 2%. The next 15 years is unlikely to be anywhere as near as rewarding. Taking risk (e.g. high equity allocation) may be the only available option if the objective requires a high level of return.

Indeed. The returns you quote on gilts and IG credit also pre-suppose no material rise in yields, which is probably an optimistic assumption. If we did see that, then returns closer to zero or negative might well prevail for a time. Even in the optimistic scenario, I think it's difficult to see equity returns in general north of 6% or so. My central assumption is 5% and it's easy to be more bearish than that.

Whilst it's probably unlikely, a return to a more inflationary scenario would suit a number of vested interests quite well.....erode real value of debt, improve interest spreads for banks etc etc.

EdSwippet

MarkCarnage wrote: »

However, I also don't really need an income from it right now, particularly as a Scottish taxpayer I will hit the zone where marginal tax rate is quite high if I do.

Just in case you missed this detail in your research ... you can crystallise a DC pension without having to draw any taxable income from it. Move it to drawdown, take the 25% tax-free lump sum, and then immediately defer any actual drawdown of the remaining 75%. This is what I am doing. Flexi-drawdown, not UFPLS.

This does move 25% out of your pension though, so if you reinvest that outside then you have some annual income tax on dividends or interest, and a potential capital gains tax liability some time out into the future when you sell the reinvested assets. However, you do not need to take any other taxable income from the 75% drawdown tranche. Well, except that if you do not drain it of all gains within 17 years you face an LTA problem at age 75; but then, if you didn't crystallise the pension at all you would still face that at age 75, just in spades if you took absolutely no withdrawals from the pension over the years.

All in all, reaching the LTA is actually a pretty good motivator for stopping work. Just as money is fungible, so is income. And drawing income from a pension at the LTA is likely more tax efficient than working, because the penalty tax rates on pensions above the LTA are generally considerably higher than most tax rates on salary income (the exception is the horrible effective 60% band above £100k).

MarkCarnage

EdSwippet wrote: »

Just in case you missed this detail in your research ... you can crystallise a DC pension without having to draw any taxable income from it. Move it to drawdown, take the 25% tax-free lump sum, and then immediately defer any actual drawdown of the remaining 75%. .

Thanks - yes, I was aware of that, which is probably only going to make it a bigger issue a number of years down the road though......higher rate starts quite a bit lower here now than in rUK, thanks to the stealth tax of not indexing the higher rate band, and sticking an extra 1p on too....drip, drip, drip.

It will come into play when I reach State Pension age anyway. Because my wife hasn't done paid work for quite a number of years, the tax burden falls pretty much on me.

I need to take a closer look at the likely profile of my future income and work out what's best to do. One part of me thinks that the system is likely to have changed yet again by the time I'm 75 though I suspect it won't be for the better. Difficult to see how they could make more of a mess of it though.....

MarkCarnage

EdSwippet wrote: »

All in all, reaching the LTA is actually a pretty good motivator for stopping work. Just as money is fungible, so is income. And drawing income from a pension at the LTA is likely more tax efficient than working, because the penalty tax rates on pensions above the LTA are generally considerably higher than most tax rates on salary income (the exception is the horrible effective 60% band above £100k).

Agreed! Which is why I have stopped drawing a salary from my company as taking a modest dividend income is much more tax effective. My wife does all the paperwork for the company which means I can pay her a modest salary and make a pension contribution for her too.

I remember that 60% band, not fondly, from my days as an employee, not that long ago. Another example of the perverse impacts of tax tapers.....

ratechaser

EdSwippet wrote: »

(the exception is the horrible effective 62% band above £100k).

Fixed that for you... my own wife is in that wonderful position of having just under 125k annual income. Additional pension contributions are a no-brainier there...

Almost surprised it's not seen as aggressive tax avoidance these days!

EdSwippet

ratechaser wrote: »

Almost surprised it's not seen as aggressive tax avoidance these days!

It's definitely avoidance of an aggressive tax!

Triumph13

The horror scenario if you are over LTA and fully crystallised, is if we return to the days of high inflation. With say 2% inflation and 4% real return then you can get all the growth out within the HRT band - 6% of £750k is £45k. If that was 7% inflation and 3% real then £25k a year either has to be taken out with HRT or suffer the LTA charge at 75.
I can't imagine fixing this would be a political priority, particularly for a left wing government who would find it much easier to just paint the people in that position as 'rich' and rake in the tax.

cjking

I intend to crystallise all funds at the start, then I have three strategies for staying below LTA at 75.

1. To the extent necessary to remove funds above my LTA target balance, always take income up to the the higher rate tax threshold.

2. To the extent necessary to remove excess funds, buy a short-term annuity just before age 75, which for me could remove up to about 200k from the drawdown balance without triggering an LTA test or putting me into the higher-rate income tax band.

3. If the balance climbs to the combined total of (a) the LTA target in 1, (b) the maximum amount that can be removed by 2, and (c) the total cash needed to fund an income at the higher rate threshold until age 75, then bale: switch the entire portfolio from risky assets to safe ones returning nothing. (Switch back after 75.) (This strategy has some opportunistic timing built-in: the date on which one bales out of equities is likely to be better than average for selling. Surges in equity prices take you toward the trigger, declines move you away.)