Phased or total crystallisation?

zagfles

shinytop wrote: »

Say my DC pot plus 20xDB is £10k over the LTA. What happens if I crystallise all my DC pot now then take my DB pension in a couple of years time? My DB pensions will have increased at the same rate at the LTA and I will be able to draw down any growth on the non-TFLS part of the DC. Will I get a bill for the additional tax on that £10k?

The DB scheme administrator will, and they'll almost certainly reduce your pension to pay it. I'm not sure if there's an option to pay it yourself. But it's likely to be best to make sure you keep enough DC uncrystallised so the DB doesn't tip the LTA.

shinytop

The DB scheme administrator will, and they'll almost certainly reduce your pension to pay it. I'm not sure if there's an option to pay it yourself. But it's likely to be best to make sure you keep enough DC uncrystallised so the DB doesn't tip the LTA.

that makes sense, thanks.

I_want_to_break_free

Most in equities market but a couple of years worth of pension will be in cash or similar so if / when the market takes a dive I don't have to draw on the equities investments. Looking back when the equities market take a dive they do recover given time. Overall 6% looks modest and realistic. There will be years when that is not met, but they will be few and more than countered by other years.

I_want_to_break_free

zagfles wrote: »

So you end up paying LTA tax at 75? Why do you consider that a better approach than full crystallisation while you're under the LTA (allowing for the DB pension)?

Not saying that's the right approach, several reasons why it might not be for you.But initial thoughts would be as above - crystallise as much as possible ensuring the DB doesn't tip the LTA.

So far the modelling shows I'm better off that way. Also, 75 is a good few years away for me at the moment. I've not factored any increases to the LTA limit. Its inconceivable the LTA is increased before I hit 75 so the tax is less than model shows or even I don't hit the threshold.

I_want_to_break_free

saver_ali wrote: »

Interesting. I can see that this method makes sure it's the DC pot that takes the LTA hit, rather than the DB pot. I suppose I was hoping we wouldn't need to take any LTA hit at all. It looks like you are already over the LTA though, so slightly different from my husband.

So far this looks the best option for me, but always open to looking at other approaches. The model does not factor in any increase in LTA in the next 15 plus years so reasonable to assume that changes by time I make 75. Finally, of all the pension problems to have hitting the LTA at 75 is not one that keeps me awake at night.

gm0

A speculative risk not yet discussed around crystallisation and TFLS/PCLS is an emergent political one around the 25% cash.

Loose talk and policy kite flying in political circles re: reducing the maximum level of TFLS as a stealth tax on pensions or just abolishing it. See also extensions of the lifetime allowance concept in other areas such as max size for ISA's, removal of IHT avoidance via PETs 7 year rule etc. (Lifetime inbound gifting limit). Yet more complications and exceptions and protections being the signature approach in this area of the tax code.

For pensions this is unlikely to be retrospective to an already had it and spent it cohort.

Where the line gets drawn for who gets thumped and with how much notice (if any - via general anti-avoidance provisions in finance bills) is a question of political and operational convenience.

My own take is that considered reform on all axes at once Pension and ISA is less likely. So tax free cash and consumption + ISA recycling is appealing if you share this view and are not concerned about losing the pension protections currently enjoyed for IHT for holding these particular funds within the pension (itself a protection which may or may not last another 30-40 years).

If you have big ISA balances but think both will happen then your mileage may vary and SIPP recycling to ISA's may look less attractive.

As others have commented - based on the government distribution of DC pension values this is not a widespread issue. Which reduces the both the size of the target and the political costs of hitting it.

saver_ali

gm0 wrote: »

A speculative risk not yet discussed around crystallisation and TFLS/PCLS is an emergent political one around the 25% cash................

Thanks - that's certainly an interesting extra factor for consideration. Of course we can only guess what might happen, but I'm sure future governments will continue to tinker with taxation around pensions and IHT. Personally, I think ISAs are safer.

zagfles

I_want_to_break_free wrote: »

So far the modelling shows I'm better off that way. Also, 75 is a good few years away for me at the moment. I've not factored any increases to the LTA limit. Its inconceivable the LTA is increased before I hit 75 so the tax is less than model shows or even I don't hit the threshold.

How have you modelled it? Your results don't make any sense - unless it's down to something like eg keeping the tax free cash as cash rather than reinvesting in the same stuff that was in the pension (unwrapped/ISA), ie a difference in your asset mix rather than crystallisation strategy.

If you're at or almost at the LTA, the fundamental choice is between paying the LTA charge on growth or paying tax on unwrapped investment growth on the 25% TFLS until you can "ISA up". I can't see how the former could ever be better. (IHT and other peripheral issues aside).


ETA: in fact, if you haven't factored in any LTA increase it makes even less sense. Your uncrystallised growth will be subject to a 25% tax (plus income tax when you withdraw), ie you'd only receive 75% of the growth (before income tax is considered).

If you had crystallised, you'd have 75% of the pot in drawdown, but no LTA tax (you'd pay income tax on withdrawal as above - so that's the same, so can be ignored for the comparison).

So net - you'd get the exact same net growth from the crystallised 75% as you'd get from the uncrystallised 100% !! 100% of 75% is the same as 75% of 100%.

So even if the TFLS doesn't grow at all you'd break even! Any net growth in the TFLS is profit over the uncrystallised method.

Have I missed anything? I've assumed with the crystallised methed that you drawdown enough to avoid the BCE on crystallised funds at 75.

ffacoffipawb

gm0 wrote: »

A speculative risk not yet discussed around crystallisation and TFLS/PCLS is an emergent political one around the 25% cash.

Loose talk and policy kite flying in political circles re: reducing the maximum level of TFLS as a stealth tax on pensions or just abolishing it. See also extensions of the lifetime allowance concept in other areas such as max size for ISA's, removal of IHT avoidance via PETs 7 year rule etc. (Lifetime inbound gifting limit). Yet more complications and exceptions and protections being the signature approach in this area of the tax code.

For pensions this is unlikely to be retrospective to an already had it and spent it cohort.

Where the line gets drawn for who gets thumped and with how much notice (if any - via general anti-avoidance provisions in finance bills) is a question of political and operational convenience.

My own take is that considered reform on all axes at once Pension and ISA is less likely. So tax free cash and consumption + ISA recycling is appealing if you share this view and are not concerned about losing the pension protections currently enjoyed for IHT for holding these particular funds within the pension (itself a protection which may or may not last another 30-40 years).

If you have big ISA balances but think both will happen then your mileage may vary and SIPP recycling to ISA's may look less attractive.

As others have commented - based on the government distribution of DC pension values this is not a widespread issue. Which reduces the both the size of the target and the political costs of hitting it.

People have been paying in to pensions for decades on the premise that 25% (sometines more) is available as tax free cash.

Politicians will meddle with that at their peril.

I am 55 in 2 months so unlikely to be affected. But that is not the point. I can see a few dead politicians if they steal that much off people.

anselld

zagfles wrote: »

How have you modelled it? Your results don't make any sense - unless it's down to something like eg keeping the tax free cash as cash rather than reinvesting in the same stuff that was in the pension (unwrapped/ISA), ie a difference in your asset mix rather than crystallisation strategy.

If you're at or almost at the LTA, the fundamental choice is between paying the LTA charge on growth or paying tax on unwrapped investment growth on the 25% TFLS until you can "ISA up". I can't see how the former could ever be better. (IHT and other peripheral issues aside).


ETA: in fact, if you haven't factored in any LTA increase it makes even less sense. Your uncrystallised growth will be subject to a 25% tax (plus income tax when you withdraw), ie you'd only receive 75% of the growth (before income tax is considered).

If you had crystallised, you'd have 75% of the pot in drawdown, but no LTA tax (you'd pay income tax on withdrawal as above - so that's the same, so can be ignored for the comparison).

So net - you'd get the exact same net growth from the crystallised 75% as you'd get from the uncrystallised 100% !! 100% of 75% is the same as 75% of 100%.

So even if the TFLS doesn't grow at all you'd break even! Any net growth in the TFLS is profit over the uncrystallised method.

Have I missed anything? I've assumed with the crystallised methed that you drawdown enough to avoid the BCE on crystallised funds at 75.

I think I agree with the theory, but in practice over the last two years the LTA has grown more than my pot. Fortunately I was too indecisive to do much in the way of crystallisation. Still undecided!