LTA Query - company financial advisor

Mick70

Afternoon all, great forum by way , I know lots of LTA queries out there but sometimes it feels like a minefield made much more complex than it should be , especially for those of us not fully clued up on DC pensions.

I have a transfer value (out of my DB scheme) of £1.47M (say 1.5) to be triggered next year at age 50, if i accept offer. And lets say this fund is then left to grow at say 2% p.a , it would give £1.6m at age 55 when i can access it if want (i can also contribute, with employer, into it to increase that figure further still). Im aware of an LTA that taxes you above £1.05M

Company's financial advisor has said - to think of my DC pension £1.6m (if I take transfer deal) as 3 parts
1., tax free lump sum £250k,
2, £750k which you can drawdown as and when, as if a salary, and pay normal rate tax.
3. £600k LTA amount and when/if access this amount it will trigger 50% tax)

So, for arguments sake I wanted a 40k annual pension/salary

1. At age of 55 - take out the £250k lump sum (tax free) and for 8 years use this money as a salary @ 30k tax free per year. Over these 8 years the rest of the pot will still grow (say 2%) and the £750k is now £878k
2. The £750k element (that is now 878k) can then be used , at age 63, to draw out 40k p.a and the remaining balance each year still grows , meaning this would last until age 83.
3. I could then trigger the LTA and pay the tax , but if I were to pass away before then it would pass to my spouse/children as tax free ?

Is the above correct or has the company advisor put a spin on it all and/or explained it wrong ?

many thanks for any advice,
Mick

anselld

If you take out £250k at 55 your LTA is all used up (give or take). Any growth on the remaining £750k which has not been withdrawn is subject to LTA again at 75.
Any remaining uncrystallised will get a LTA charge on death or at 75 whichever is sooner (or if you choose to crystallise).

It is difficult to see how the advisor can justify recommending a transfer given the huge LTA penalties. Is this FA acting for you or is he acting for the Pension scheme who may be trying to "buy out" DB liabilities?

PS.. LTA charge on lump sum is 55% not 50%

JoeCrystal

Here is the link to Mick70's old thread if anyone wants a reminder.

Cash valuation transfer out of final salary scheme

Frankly, I am already dubious on hearing that the company hired the IFA? How much are the fees for transferring it out by the way or is the company covering the cost?

I much rather go for £26k index-linked pension (& £15k for your spouse) from the age of 50. Your average life expectancy is 85 with 1 in 4 chance of reaching 94. Your pension will pay out (assuming 2% inflation) nominal gross pension totalling £1.2 million by 83 and £1.8 million by 94 plus any spousal pension should you predecease your spouse. I can see why the company is desperate!

Ultimately, it is your choice, but you would have to be prepared to see a serious drop in value should the market crash heavily. How would you feel if you saw your pension pot dropped by a third or £250,000 due to a market crash?

ukdw

You need to be careful to drawdown all of the growth of the £750k before age 75 to avoid the LTA 25% tax charge on this part too at age 75 - so assuming your 2% growth figure is plus inflation, and the inflation is say 2.5% - then you would need to drawdown at least £34k every year between age 55 and 75 from the £750k part. With the rest of your £40k requirement coming from the £250k.

Once you hit age 75 the LTA £600k part will be hit with a 25% LTA charge not 50% and from then on can just be merged with whatever is left of your £750k - and then just drawn down as required.
The 55% tax rate would only happen if you withdraw the LTA part as a lump sum.

ukdw

Another way of thinking about your pots of transferred pension is as follows.
1. £250k tax free lump sum
2. £750k taxable below LTA
3. £600k above LTA - which you could think of as effectively £450k after 25% LTA tax - which would probably end up being paid at age 75.

You could simplify it as
1. £250k tax free lump sum
2. £1.2m taxable for drawdown - which prior to age 75 you need to draw down at least the growth from the £750k part from to avoid extra LTA tax.

You could then maybe consider starting at age 55 living off
1. £47k drawdown from £1.2m pot - to give you £40k after tax

Then at age 67 reduce your drawdown to take into account state pension
1. £9k state pension
2. £38k drawdown from £1.2m pot

The £250k tax free pot probably wouldn't really be needed for day to day living expenses - but some of it could be used to lower the £47k initial drawdown rate in bad growth years.

Mick70

the advisor isnt employed by our company directly, he is just an advisor that our company uses

and yes this is against a 25.5k DB annual pension that rises with inflation (which triggers age 50 next year) , and when key this sum into a spreadsheet and increase say2% inflation each year then its overall value over 30 years (50-80) is £1.2m

GunJack

Mick70 wrote: »

the advisor isnt employed by our company directly, he is just an advisor that our company uses

and yes this is against a 25.5k DB annual pension that rises with inflation (which triggers age 50 next year) , and when key this sum into a spreadsheet and increase say2% inflation each year then its overall value over 30 years (50-80) is £1.2m

Although you may see an overall value of £1.2m, you'll also probably pay less tax on the DB than on the transfer value when you consider LTA AND income tax over that same period.

Do it 50-90 and the DB wll prob be more like £1.5m total.

One possible advantage of the transfer will be on your death and inheriting the pot by your wife, however will that scenario give her major investment/tax headaches when she may not be able to cope with all that, especially at an advanced age??

Mick70

gunjack... funnily enough it crossed my mind about the tax/management headaches managing the pot , my wife is not the best with money/maths and i think she would struggle

the DB also includes a tax free £76k lump sum.

Seabee42

The LTA charge is 25% if taken as income so would also be subject to PAYE tax but 55% if taken as a lump sum so it breaks even if the money is all subject to 40% PAYE tax.

jamesd

Not much spin there. Your choice seems to be transfer and start on say 54.5k a year after tax or 26k defined benefit before tax. It's a good candidate for the most beneficial transfer offer I've seen.

It'd be a mistake to live on the tax free lump sum and not touch the pot. There's a lifetime allowance charge on the increase in the pot value at 75. This means that you should look to use your whole basic rate tax band every year to try to keep that growth under control.

You might also benefit from doing some higher rate drawing offset by VCT buying in the early years.

The lower lifetime allowance charge cost for income could in part be used for gradual annuity buying out of the portion of the transfer value that's above the lifetime allowance. That could prove reassuring for someone who wants to keep some guaranteed income. It's a useful very low risk approach for those who want to reduce the overall risk of where the pot goes while still keeping a good equity portion in the drawdown part.

Don't be misled by the mentions of you paying more tax. You will, barring VCT use to mitigate it. You'll be paying more tax because you're getting more income. More income for you after more tax still means that you're better off. Similarly, counting the DB value over 25 or 30 years neglects mentioning the significant probability after a transfer of getting both a higher income over the same period and having as much capital left a you started with. That happens because safe withdrawal rates are based on worst cases and it's unlikely that you'll live through something as bad.

Mick70

jamesd , are you suggesting in your opinion that its a no brainer to take the valuation and have the £1.4m in a DC pot instead of the DB pension ?
as say if i use a spreadsheet from age 50 - 80 (30 years) the DB of £25.5k p.a rising with inflation each year (say 2%) , over 30 year comes back to £1.2m , but gives security of no crashes

mick