When to crystallise

jaybeetoo

I have DB and DC pensions which total more than the LA (even with protection).

I am currently taking the DB pension.

I'm not sure when to take the DC pension - I don't need it to live on - so it is fully invested.

As I'm above the LA, I'm going to pay additional tax on part of my DC pension at some stage.

Should I crystallise now, take the 25% tax free lump sum (to feed into my ISA), pay the additional tax and leave the remaining sum to grow in the SIPP and take a drawdown income when I need it?

Or, should I crystallise later, when I need my DC pension, and pay more tax later (assuming the investments grow faster than the LA)?

Thanks

EdSwippet

jaybeetoo wrote: »

Should I crystallise now, take the 25% tax free lump sum (to feed into my ISA), pay the additional tax and leave the remaining sum to grow in the SIPP and take a drawdown income when I need it?

My sense is that you should crystallise now, up to but not over the LTA. That way, you reduce the amount of money that is producing growth that will be subject to the 25% LTA penalty, while buying yourself some time to take money out at normal tax rates rather than the LTA penalty rate. Tax rates outside a pension are generally lower than tax rates you would face on an uncrystallised pension that is above the LTA.

You will need to find a home for the 25% PCLS. You can reinvest it in the same assets. Ideally that would be in an ISA though that might take some time; otherwise outside and so liable to income tax on dividends and possible capital gains tax (both should however be lower than LTA penalty rates). You can defer normal taxable withdrawals on the 75% drawdown until you want or need them, with the proviso that you will want to have withdrawn all the nominal growth in it by the time you reach age 75, otherwise you will pay an LTA penalty then.

How much (or little) this works for you depends on your current and future tax rates, but if you work through some numbers and projections you should find that it optimises your outcome reasonably well. The other consideration might be inheritance tax. Anything you take out of the pension loses its inheritance tax sheltering.

Planning around the LTA is a huge pain though, isn't it?

jaybeetoo

EdSwippet wrote: »

Planning around the LTA is a huge pain though, isn't it?

It seems crazy to penalise people on investment performance rather than on the amount paid in.

jaybeetoo

For the last 2 years I've been expecting a correction on the stock markets. If that happens it could be a good time to crystallise.

cfw1994

jaybeetoo wrote: »

For the last 2 years I've been expecting a correction on the stock markets. If that happens it could be a good time to crystallise.

If only we had a crystal ball, eh :rotfl:
We have had a correction last autumn. Soon recovered. Slightly to my surprise.

I am kind of thinking the same (the LTA is, I guess, a nice ‘First World’ problem to be having to think about)

It does feel like a sharp drop is overdue, but on the other hand, we could be repeating your statement again in 2 years.
And in the meantime, the markets continue to climb....

Who knows!

Albermarle

If the OP crystallises a large part of the pension ( up to LTA ) as advised . Is it then sensible to actually potentially restrict further growth in the pension by moving to lower growth /lower risk investments.
Normally the advice on here is to stay invested with a significant equity % until at least your 70's but If you are over the LTA , there seems not much point taking the risk of a high equity% when the rewards are so heavily penalised .
Does that make sense or is there a flaw in the reasoning ?

EdSwippet

Albermarle wrote: »

If the OP crystallises a large part of the pension ( up to LTA ) as advised . Is it then sensible to actually potentially restrict further growth in the pension by moving to lower growth /lower risk investments.

There's no need to restrict growth overall, but it can be sensible to restrict future growth in the pension, not least due to the spiteful age 75 LTA test.

What I have done is kept my stock/bond allocation constant, just located my fixed-income assets inside my crystallised pensions, and located stocks outside, at least to the extent possible. In a simple example, taking the 25% PCLS from the stock part of a SIPP and reinvesting that 25% in the exact same stock assets, just outside the SIPP. For gains above the LTA, tax rates are nearly always lower outside a SIPP than inside one.

Ideally, I will transit the PCLS into an ISA, but that will take a few years. However, I'm still better off with the PCLS taken and outside the pension rather than inside, even if taxable annually (the yearly CGT allowance is very useful here, and it helps that I use only passive trackers). And notably, my stock/bond allocation is the same as before crystallising, so I have not changed my overall future returns. Just shifted the risk profile around so that the pension is weighted towards lower volatility and lower return assets.

In other words, my crystallised PCLS element is still effectively part of my pension when it comes to spending down. Just no longer siloed inside my pension.

shinytop

EdSwippet wrote: »

There's no need to restrict growth overall, but it can be sensible to restrict future growth in the pension, not least due to the spiteful age 75 LTA test.

What I have done is kept my stock/bond allocation constant, just located my fixed-income assets inside my crystallised pensions, and located stocks outside, at least to the extent possible. In a simple example, taking the 25% PCLS from the stock part of a SIPP and reinvesting that 25% in the exact same stock assets, just outside the SIPP. For gains above the LTA, tax rates are nearly always lower outside a SIPP than inside one.

Ideally, I will transit the PCLS into an ISA, but that will take a few years. However, I'm still better off with the PCLS taken and outside the pension rather than inside, even if taxable annually (the yearly CGT allowance is very useful here, and it helps that I use only passive trackers). And notably, my stock/bond allocation is the same as before crystallising, so I have not changed my overall future returns. Just shifted the risk profile around so that the pension is weighted towards lower volatility and lower return assets.

In other words, my crystallised PCLS element is still effectively part of my pension when it comes to spending down. Just no longer siloed inside my pension.

Yup I'm doing a similar thing. It's not too difficult in my situation because (1) a big part of my pension is DB and (2) I can split ISAs/CGT/savings 2 ways as OH only has DB pension. I'm aiming to get enough out of my pension to stay below LTA whilst avoiding HR tax, and re-invest.

Albermarle

In other words, my crystallised PCLS element is still effectively part of my pension when it comes to spending down. Just no longer siloed inside my pension.

Useful answer Ed, Thanks .
I am not quite in this position, but IF I work a couple more years and keep contributing near the max. and IF pensions keeps growing etc then I could be going over the LTA limit at some future point. I had the idea to start crystallising some funds now already, take £20K TFLS and put it in an ISA with high % equity funds, and be a bit more defensive in the pension funds . Sounds like I am on the right lines as that is basically the same as what you and shinytop are doing on a slightly different scale.

cfw1994

EdSwippet wrote: »

There's no need to restrict growth overall, but it can be sensible to restrict future growth in the pension, not least due to the spiteful age 75 LTA test.

Hi again Ed,
Just on this point: it is any uncrystallised funds PLUS the growth in the 'drawdown pot' (the crystallised fund) that is checked again at age 75, I believe (you explained it months back!)

Presumably the plan to restrict or remove the future growth of that pot could be simply by taking any growth each year, ideally within the nil-rate tax band or at worse, the basic rate?

My funds are performing well to the point I may be bordering the LTA at 55 (I know, luxurious 1st world problems!)....
.....but this includes 2 'small' DB pots that will not be touched for 5-10 years: I *think* I need to be careful to leave things so *they* don't trip me over the LTA at their start dates - eg, by not crystallising ALL the DC part at 55 & taking any potential hit later against that part later. Does that make sense?

Complex stuff.....

EdSwippet

cfw1994 wrote: »

Just on this point: it is any uncrystallised funds PLUS the growth in the 'drawdown pot' (the crystallised fund) that is checked again at age 75, I believe (you explained it months back!)

Yes. There are some examples in this article.

cfw1994 wrote: »

Presumably the plan to restrict or remove the future growth of that pot could be simply by taking any growth each year, ideally within the nil-rate tax band or at worse, the basic rate?

Yes, although even if in basic rate tax, capital gains and annual dividend taxes are lower than basic rate income tax plus LTA penalty on a pension that is above the LTA. Even taking money out at higher rate tax would beat the 55% LTA rate.

The age 75 LTA test strongly motivates drawing taxable income down before age 75. One its more absurd consequences is that it takes no account of inflation, so that you need to draw down all the nominal gain, both inflation and real, to avoid a heinous LTA penalty at age 75. This depletes your retirement savings right at the point where you might face needing more for long-term care, say. The LTA has morphed over time into a morass of perverse incentives.

cfw1994 wrote: »

My funds are performing well to the point I may be bordering the LTA at 55 (I know, luxurious 1st world problems!)....
.....but this includes 2 'small' DB pots that will not be touched for 5-10 years: I *think* I need to be careful to leave things so *they* don't trip me over the LTA at their start dates - eg, by not crystallising ALL the DC part at 55 & taking any potential hit later against that part later. Does that make sense?

I think so. The general rule seems to be that it is better to take an LTA hit, if any, on a DC pension rather than a DB one. That said though, I have only DC pensions, so know next to nothing about DB ones. So take my comments as guesses rather than facts.

cfw1994 wrote: »

Complex stuff.....

Indeed. Pension simplification, my a..e.