Phased or total crystallisation?

saver_ali

A year or two ago I posted about LTA concerns, and was given some very useful comments. Time has moved on, my husband's investments have done well, and he retires in a couple of weeks. It's getting to be crunch time with the LTA.

I manage all our finances and pensions, and I'd like to run my plan past this forum. I appreciate that this is a very nice problem to have, but we have been very careful with our money, squirrelling away as much as we can, and being very tax-efficient.

My husband is now 60. He has DC pensions of £660k (comprising 525k Sipp, two old pots of 28k and 7k, current employer's pension 100k).

He also has a deferred DB pension of £17k pa if he takes it at 65 (December 2023). If he takes it early, the actuarial reductions are very punitive, so at 61 it would be £11k, at 62 it would be £12.5k, etc. (I've double checked that this is correct, as that was queried when I posted here a couple of years back.)

All this means that he is already nearly at the LTA, so has little scope for further investment growth. It seems that taking the DB pension early is not the most efficient way of keeping under the LTA, and we'd like to wait to get the £17k pa, for the security of guaranteed income. So my current plan is to partially crystallise his SIPP in the near future. The question is, how much do we actually crystallise - nearly all of it now, or take a phased approach?

If, for example, we crystallised £500k, with the market quite high at the moment, we would be getting a good TFLS, but would also be using up a lot of LTA.

Or we could take a more phased approach, crystallising over several years? Is it really that bad to exceed the LTA if the market continues to grow?

Or should we go the whole hog and crystallise the other DC pots too?

We don't desperately need the TFLS, and would put as much as possible in Stocks and shares ISAs over the coming years. We might help our sons with buying a house, but that is a couple of years off yet.

We can withstand a market drop if necessary, as we have some cash to fall back on, although we would take a certain amount from drawdown each year to make use of personal tax allowance/basic rate tax.

Just as some other background, I'm already drawing a DB pension of £12k, and have a small SIPP and DC pot. We have concentrated on my husband's pension contributions as he has been a higher rate tax payer. I get a full state pension in 2023 (just made a voluntary NI contribution to get there), and my husband gets his in late 2024.

I'd be very grateful for comments and suggestions on the above.

Linton

The problem with taking a large one-off lump sum if you are not going to spend it in the near future is that it can take some time and effort to move it back into a tax protected environment. This adds costs and hassle.


Money to finance life in a 5 year gap between retirement and the availability of DB and State pensions should be in cash anyway so taking it as a tax free lump sum could make sense. If there is no reason to keep money in a pension (eg IHT planning) a better way for many people of managing drawdown in the longer term could be to use UFPLS to drawdown as much as possible just keeping within your tax band. Any excess money can be moved into S&S ISAs.

saver_ali

Linton wrote: »

The problem with taking a large one-off lump sum if you are not going to spend it in the near future is that it can take some time and effort to move it back into a tax protected environment. This adds costs and hassle.


Money to finance life in a 5 year gap between retirement and the availability of DB and State pensions should be in cash anyway so taking it as a tax free lump sum could make sense. If there is no reason to keep money in a pension (eg IHT planning) a better way for many people of managing drawdown in the longer term could be to use UFPLS to drawdown as much as possible just keeping within your tax band. Any excess money can be moved into S&S ISAs.

Thanks Linton. That all makes sense. At least with a large tax free lump sum we can use the personal savings allowance on interest earned until we could put it back in a S&S ISA. I could invest some in funds outside a tax free wrapper, but would need to watch out for CGT.

i have used an UFPLS for my own pension, but if we did that for my husband that just gives us cash, and we don't move anything into drawdown with the relative protection from LTA.

Dox

People do get very fretful about possibly breaching the LTA (a problem lots of others would love to have!), but given the tax isn't regressive, it's not necessarily such a big deal if you do. After all, it means you have even more in your pension; it's not as if the tax takes away all the benefit of that.

saver_ali

Dox wrote: »

People do get very fretful about possibly breaching the LTA (a problem lots of others would love to have!), but given the tax isn't regressive, it's not necessarily such a big deal if you do. After all, it means you have even more in your pension; it's not as if the tax takes away all the benefit of that.

Fair point. Maybe a smaller crystallisation would be in order then, with just enough TFLS to put in both our S&S ISAs.

shinytop

saver-ali, are you sure you're not my wife?:eek:

seriously your situation is, give or take a few k and a couple of years, the same as mine. I'm watching with interest.

saver_ali

shinytop wrote: »

saver-ali, are you sure you're not my wife?:eek:

seriously your situation is, give or take a few k and a couple of years, the same as mine. I'm watching with interest.

Ha ha! That made me smile :)

zagfles

Dox wrote: »

People do get very fretful about possibly breaching the LTA (a problem lots of others would love to have!), but given the tax isn't regressive, it's not necessarily such a big deal if you do. After all, it means you have even more in your pension; it's not as if the tax takes away all the benefit of that.

Yes but you could avoid the LTA charge by crystallising! At least the initial one...

zagfles

Linton wrote: »

The problem with taking a large one-off lump sum if you are not going to spend it in the near future is that it can take some time and effort to move it back into a tax protected environment. This adds costs and hassle.

It might not be a big deal having unwrapped investments for a while, there's the savings and dividend allowances, the starting rate for savings, and the dividend tax at basic rate is quite low. It could well be more tax efficient than breaching the LTA, in fact is highly likely to be. You should be able to avoid any CGT by timing sales to use allowances.

Money to finance life in a 5 year gap between retirement and the availability of DB and State pensions should be in cash anyway so taking it as a tax free lump sum could make sense. If there is no reason to keep money in a pension (eg IHT planning) a better way for many people of managing drawdown in the longer term could be to use UFPLS to drawdown as much as possible just keeping within your tax band. Any excess money can be moved into S&S ISAs.

Bear in mind UFPLS will trigger the MPAA, probably not an issue for the OP.

zagfles

Do you know what happens with the DB scheme if that's the one that tips the LTA? You probably won't want it to be reduced to pay the LTA charge, or to have to pay the LTA charge from outside the pension.

Is it £17k in today's terms?

saver_ali

zagfles wrote: »

Do you know what happens with the DB scheme if that's the one that tips the LTA? You probably won't want it to be reduced to pay the LTA charge, or to have to pay the LTA charge from outside the pension.

Is it £17k in today's terms?

The illustration for the £17k DB does rise very slightly each year. It is now £17,200 and a year ago it was £17,050. I'm going to keep monitoring it and if it's looking like breaching the LTA we might just have to take it early.

Thanks for your other comments too, about investments. I've been reading up on CGT this evening, and if I'm careful we can sell to avoid getting charged. It's 10% for basic rate tax payers as well, so not the end of the world if we have to pay a little.