Benefit Crystallisation event and LTA

IanSt

EdSwippet wrote: »

As for how they handle a mix of crystallised and uncrystallised pensions ... somewhat eccentrically -- and unhelpfully, in my opinion -- they keep everything in the one single account, and just record what proportion of that account is crystallised and what proportion is not.

I started paying into my DC pension 30 odd years ago and plan that it will be in existence for the next 30 to 40 years minimum, with little to no difference between the funds I held 20 years ago with what I hold now and what I plan to hold in 20 years time.

So although I realise it's not your preferred way, for me there's no difference in the types of funds that I would hold whether they were in a crystallised or non-crystallised portion. Having separate accounts for each type would complicate life and require additional purchasing/selling if I had to do things across two accounts simply because one was crystallised and one wasn't.

lisyloo

david78 wrote: »

This is my understanding:

When you crystallise an amount (say £4000) and take 25% tax free cash (£1000) and move 75% (£3000) into drawdown, the transfers happen simultaneously but there are two Benefit Crystallisation Events:

BCE1 - moving money into drawdown (£3000 crystallised).
BCE6 - payment of tax free cash (£1000 crystallised).

Pension payments/withdrawals from the drawdown account are not BCEs and do not qualify for a further 25% tax free cash!

Another BCE occurs at age 75:

BCE5A - the value of the drawdown account (less an amount equal to the total value of all BCE1 events) is tested against the remaining life time allowance at that time.

Thank you david78, this is very clear and helpful.
So let’s say someone has £900k and puts £675k into drawdown.
I tend to use 7% for growth, so that would be £47,250 per annum and higher rate tax is £43430.

So am I correct is saying that if one doesn’t want to drawdown more than £43430 (and less when getting State pension), then on those figures £900k and 7% there is a risk that the fund grows i,e. Capital growth exceeds drawdown and exceeds LTA at 75?

I’ve just checked and my portfolio average over the last 5 years is 6.84. That may be before fees but I think 7% isn’t far off.
I can see using 6% puts the growth below drawdown (excluding SP) so that surely means there’s a risk if growth is even a little better?

Is there a concensus on a good number in their scenario?
I would have thought £900k would give enough wiggle room.

I am always calculating without SP as initially we will be without but of course for most of retirement (assuming longevity) there will be SP as well.
We are forecasted £168.

EdSwippet

lisyloo wrote: »

So am I correct is saying that if one doesn’t want to drawdown more than £43430 (and less when getting State pension), then on those figures £900k and 7% there is a risk that the fund grows i,e. Capital growth exceeds drawdown and exceeds LTA at 75?

Yes, but if you crystallise £900k, don't forget that you should still have some LTA percentage remaining to you, which you can then use to cover you somewhat at the spiteful age-75 BCE. On current numbers, £900k is 85.3% of the LTA, leaving you 14.7% of whatever is the then-LTA as headroom against an LTA penalty at age 75.

Also, note that under flexi-access drawdown, paying any LTA penalty at age 75 is more-or-less optional. A few years prior to age 75, drawing down any excess that has built up above the LTA may well push you into the 40% tax bracket, but this still beats the likely 55% you would face on breaching the LTA at age 75. In this case it is better to draw down more than needed, even at higher rate tax.

lisyloo

Thanks Ed.
So is £900k a sensible number to retire on at say 55?
I mean a trade off between max income but enough wiggle room.
State pension of £168 kicks in at 67.
I would estimate LTA of £1120k in April 2021

Good point about the 40%

cfw1994

lisyloo wrote: »

Thanks Ed.
So is £900k a sensible number to retire on at say 55?
I mean a trade off between max income but enough wiggle room.
State pension of £168 kicks in at 67.
I would estimate LTA of £1120k in April 2021

Good point about the 40%

Is it enough? Depends on your outgoings!!

lisyloo

cfw1994 wrote: »

Is it enough? Depends on your outgoings!!

I think it’s enough without mortgage, debts or dependents.

If you go too high towards LTA you face paying higher rate tax and for many that’s a disincentive to save more.
Depends on how much you love your job but in this case very jaded, sick and fed up of it all, only a means to an end, can’t wait to finish.

ffacoffipawb

lisyloo wrote: »

... very jaded, sick and fed up of it all, only a means to an end, can’t wait to finish.

Snap, maybe 2 days a week from July is 2 days too much for me too.

I am coming up to 55 and have pension savings in excess of LTA (just).

lisyloo

ffacoffipawb wrote: »

Snap, maybe 2 days a week from July is 2 days too much for me too.

I am coming up to 55 and have pension savings in excess of LTA (just).

So can you share your plan please.
Do you plan to drawdown and pay 40% and avoid breaching LTA.

Is there a reason you didn’t stop putting money in before breaching LTA and retire earlier?

david78

lisyloo wrote: »

So let’s say someone has £900k and puts £675k into drawdown.
I tend to use 7% for growth, so that would be £47,250 per annum and higher rate tax is £43430.

So am I correct is saying that if one doesn’t want to drawdown more than £43430 (and less when getting State pension), then on those figures £900k and 7% there is a risk that the fund grows i,e. Capital growth exceeds drawdown and exceeds LTA at 75?

With the assumed growth rate of 7% and a 6.43% withdrawal rate, the initial £675000, will grow by 0.57% per year net (growth - withdrawals). It will take a while to build up the further £155,000 needed for you to reach the current LTA. However if the LTA is index linked to CPI you may never reach the LTA before 75.