Lifetime allowance

NeilC1965

Is having a dc pot close to the LTA really a big issue?If I take a drawdown pension, withdraw say 30k pa ,but the pension grows by 35k exceeding the LTA limit by 5k, I pay tax at 25% on the amount above the LTA, leaving me with more than I started with by 4k? I then take out the 30k again and repeat.

I know this sound simplistic, and ideal, but my fund remains high , I'm just paying more tax . Is this not a good position to be in? Or have i got this wrong?

Albermarle

Is having a dc pot close to the LTA really a big issue?

I think this is a 'luxury' issue and many people would be very happy to be in this position.
The usual advice on this forum is do not let tax issues dominate your investment/drawdown strategy. Especially in this case when you are only marginally above the LTA. Could be the markets have a big drop and then the LTA issue would just go away.

I think though you have misunderstood how the LTA works . You can have a pot well over the LTA and pay no extra tax . The LTA only applies when you take benefits over the LTA limit , so it would not kick in until much later . However at 75 , all unused pension is then taken into account as well and is when many people get caught out.

westy22

It's only a big issue because people hate paying tax.

In the worst case you end up paying 55% tax on the value above the LTA; personally I would take 45% of something all day long rather than keeping 100% of nothing.

NeilC1965

As the LTA is planned to increase each year in line with CPI, I surmise that also helps significantly with the scenario above also?

Albermarle

As the LTA is planned to increase each year in line with CPI, I surmise that also helps significantly with the scenario above also?

If you assume this inflation link will continue ( which is not guaranteed of course ) then you only have to take into account of the fund growth above CPI . Plus of course fund growth is not guaranteed either …..

westy22

Yes it does.

Of course, 'planned' is a very loose definition - that decision could be easily reversed on a political whim, as could the LTA limit itself.

EdSwippet

westy22 wrote: »

It's only a big issue because people hate paying tax. ... In the worst case you end up paying 55% tax on the value above the LTA; personally I would take 45% of something all day long rather than keeping 100% of nothing.

That's true for people who might have to give up a useful employer match if they opt out of pensions. However, it's not true for everybody.

For example, gains on investments held outside a pension that is over the LTA are going to be more tax efficient than those inside one. This is because ordinary dividend and capital gains tax rates are all lower than the combined 25% LTA penalty and then normal income tax on the remaining 75% that would come due on pension withdrawals. This is not a case of 45% of something rather than 100% of nothing.

EdSwippet

NeilC1965 wrote: »

Is having a dc pot close to the LTA really a big issue?If I take a drawdown pension, withdraw say 30k pa ,but the pension grows by 35k exceeding the LTA limit by 5k, I pay tax at 25% on the amount above the LTA, leaving me with more than I started with by 4k? I then take out the 30k again and repeat.

For clarity, the way it works is that you pay a 25% LTA tax charge for money taken out above the LTA, and then ordinary income tax on the remaining 75%. That works out to a blended 40% (25% plus 20% of 75%) for someone who is a basic rate taxpayer in retirement, and 55% (25% plus 40% of 75%) for a higher rate one.