hypothetical example - taking a pension early

squeeks

Should a defined contribution pension do exceptionally well and exceed the lifetime allowance before you hit 55, would you be able to take an "unauthorised payment" and access it early?
I believe unauthorised payments are subject to a 40% tax rate.
Anything taken out of a pension over the lifetime allowance is liable for 55% tax.

In this scenario what would be possible and reasonable?

jamesd

No. The pension firm will refuse to knowingly break the law just because you're willing to pay your part of the penalty. The penalties are in three portions:

1. 40% unauthorised payments charge on member
2. 15% unauthorised payments surcharge on member if the amount is more than 25% of their pension
3. 15% scheme sanction charge levied on the pension scheme, more if 1 isn't paid

Even if you offer to pay their 15% they will refuse because doing it could cost them their permission to run the pension.

Reasonable is following the law, not knowingly breaking it.

Look into the tax benefits of VCTs. 30% once every five years is likely to beat pension tax relief and you don't have to wait until you're 55. Limited to relatively risky small company investments.

lisyloo

Pensions are only accessible at retirement age, death or terminal illness.

Whilst the tax benefits are great it makes sense to hold some money outside of pensions e.g. ISAs and some in cash.
There have certainly been periods of 6-12 months where I wouldn’t have wanted to crystallise any equities and it certainly could be longer.

BTW - any company that tells you this can be done is wrong and you will likely face penalties.

LHW99

Presumably you / your advisor monitors the DC pension and would be aware if the LTA is getting close?

Aretnap

Indeed, except in rare circumstances which you really don't want to apply to you, you are not allowed to withdraw from your pension before you are 55. The tax penalty for doing so is not a charge which you can pay in order to access your pension, it's the punishment in the event that you do somehow illegally access it. So saying that you can withdraw if you don't mind paying the tax penalty is a bit like saying that you can park on a double yellow line for £60, or for that matter that you are allowed to kill people if you don't mind going to jail.

Even if you still thought it was a good idea, the difference between parking on a yellow line and withdrawing your pension early is that you won't be able to do the latter without the agreement of your pension provider. No respectable pension provider will allow you to make illegal withdrawals, and if you have a non-respectable pension provider then the lifetime allowance is likely to be the least of your worries. There did used to be some companies who would promise to use various loopholes or recounting tricks to allow you to access your money early under the guise of "penson liberation". They were virtually all scams and must of the unfortunate punters ended up with no pension AND a large tax bill for the unauthorised payment which the scammers had promptly absconded with.

lisyloo

Most people will be monitoring their pots and taking early retirement when they approach LTA.
Note it’s not a fixed thing because there’s a BCE at 75 which include gains so you need to stop before LTA .

If you’re lucky enough for this to be before 55 then it’s worth having some savings to live off for the years until 55 when you can access your pension.

Malthusian

To expand on Aretnap's analogy, it would be a bit like parking on a double yellow line thinking you're happy to pay £60, and then finding out that your car has been clamped, then towed away, then crushed into a 2" x 2" x 2" cube. Also you owe £200 tow-away fee on top of the £60 and £100 per day cube storage fee.

Or an alternative analogy (I like analogies): you park your Bentley on double-yellow lines. The double-yellow lines are there because it's an ambulance bay. Because the ambulance couldn't get past your Bentley, the patient is left with irreversible damage, and successfully sues you for millions. The moral of this variant of the analogy is that the double yellow lines are there for a reason. They say "don't park here", not "park here for £60".

If you hit the lifetime allowance before age 55 then either

a) you have been extremely dozy

b) you have a very good pension scheme which gives great value for what you pay in, even after factoring in the eventual lifetime allowance charge. E.g. a defined benefit one.

Thrugelmir

squeeks wrote: »

Should a defined contribution pension do exceptionally well and exceed the lifetime allowance before you hit 55

Then your choice of investments over a life time of investing would be exemplary. The LTA increases by the rate of CPI inflation every year. While the maximum level pension annual contributions is capped. Likewise has been fixed for some years which results in the benefit being eroded by inflation. A neat way for the Exchequer to pick peoples pockets without them realising.

MoneyGeoff

Michael Winner used to say: Did you know you can drive in the bus lanes in London for just £60?

ratechaser

That's what I love about this forum, I was thinking this exact same question 1st thing this morning, and lo and behold, a thread appears setting it all out...

I've got 9 years till 55, and pensions currently total about £700k (including notional value of my old DB scheme) - got a couple more years of being able to max out at 40k with prior year carryover and then will be down to 10k due to income tapering, assuming I don't throw in the towel or get fired...

So possible I'll have hit the LTA by 55, depending on performance. Even more possible I'll hit it by 57, if that becomes the earliest I'll be able to access it.

We'll see, possibly an incentive to de-risk depending on how the next few years pan out. Although I've already got a decent chunk in gilts and they have been the best performer for me over the past 12 months!

squeeks

Thanks for all the replies.