Lifetime allowance sense check

Workerbee999

Hi
I’m 49 with £340k in my DC/SIPP, most of which is in the company default multi-asset fund. I plan to retire @ 55 and withdraw annually up to the 40% tax band and 25% tax free. I also have a 20k DB kicking in @ 60 (and will top up to get max SP). For the next 6 years I will also be contributing 31kpa (need to put in 10% to get employer 15% max).

So far I have been concentrating on tax efficient contributions maximising annual allowance and available carry forward to avoid as much 40% and effective 60% tax as possible. But now I have started thinking about the lifetime allowance and I’m struggling to know what growth rate I should realistically use to make sure I don’t ruin my current tax planning by overshooting the limit. Or if there is anything else I am missing.

Any advice about anything smart I should be doing would be great. It doesn’t feel right to go below the 10% and miss out on employer money unless I really need to. OH also has his own good DB and we are contributing to a SIPP to cover personal allowance before the DB is paid at 63. We don’t have a mortgage but also no ISA savings as it has all been going into the pensions as we are both 40% tax payers. But will be building up cash ISAs now with the mortgage money to provide the cash buffer.

Thanks

pphillips

As well as through pensions, you could also get some income tax relief if you make charitable donations.

Charitable giving has the effect of increasing the basic rate threshold, so your able to claim back income tax paid above the basic rate.

But the tax on charitable gifts within the basic rate can only be recovered by the charity themselves through the gift aid scheme.

You might also want to look into the inheritance tax advantages of making different types of lifetime gifts and get some professional estate planning advice.

BobbyFrench

Growth rate - difficult to say without knowing what your pensions are invested in.

I think you’ve got the right idea to think about it, and it’s a question of crunching the numbers.

Your LTA position would need to take account of:
-the DB annual pension times 20, plus any lump sum;
-Current SIPP value escalated to the point you access it using realistic growth rates;
- the increase in the LTA limit which is currently pegged to inflation
- the current employer pension assuming contributions continue for 6 years, and add a realistic growth rate

Work out the total value, then the excess above the LTA limit, and then take off the LTA tax charge on this excess bit. And get a net figure after the tax.

Do the same again but leave out the employer contributions for the next 6 years. Compare the net figures.

Odds are you’ll be better off carrying on.

I’d be wary of giving up free money from the employer contribution.

I wouldn’t let the thought of the LTA charge dictate what you do. Keep an eye on it sure, but remember it’s a “recovery charge” designed to take back excess tax relief, it’s not a penalty.

Also think what other benefits you might be losing by not contributing to the workplace scheme, potentially life assurance cover.

jamesd

Workerbee999 wrote: »

I have started thinking about the lifetime allowance and I’m struggling to know what growth rate I should realistically use to make sure I don’t ruin my current tax planning by overshooting the limit. Or if there is anything else I am missing.

When you take a tax free lump sum that is a benefit crystallisation event causing lifetime allowance calculation for that portion of the pot. You can leave the taxable portion untouched in a flexi-access drawdown account. You can start to do this from age 55, retired or not.

A general plan might be at 55 to take 40k tax free lump sum and use it to fund ISA allowance for you and spouse. 120k into flexi-access drawdown. That's the percentage of the LTA for that 160k done. Repeat as needed. Or do it all at 55 if close to but not over the LTA.

There's a test on growth only at age 75. You avoid going over the LTA then by withdrawing taxable money so there's not enough increase in value to go over.

Some prospect of you exceeding the LTA if you do these things though.

20k DB uses 400k

340k + 6*31k = 526k of 655k remaining LTA. 655/526 => 24.52% growth in five years. Annualised 3.7%.

But that assumes all 186k of the 31k annually is there at the start. 5% plus inflation is the long term UK stock market average so you should manage it.

Just carry on maximising employer contributions for now and monitor. At 55 you might need a bit of a market downturn to stay within the LTA or you might be fine.

shinytop

Workerbee, I'm a few years head of you, just about to retire. I didn't start thinking about this until a couple of years ago. I too maxed out my contributions and am in the fortunate position of overshooting LTA slightly. I say fortunate it's only better than anticipated growth in the last 6 months that has caused this. One way I can stop it is to withdraw from my pension scheme and lose employer's contribution - I'm not going to do that. I'm probably going to do as jamesd suggests and get as much of my pension out as quickly as I can without paying HRT.

Another option I'm considering is to take my DB pension a year early. The actuarial reduction is OK and this will probably tip me under LTA because it's 20x a smaller number.

Albermarle

Another possibility is to move to investments within the pension into ones that are more medium/low risk/growth . In this case they might only grow at 2% above inflation .
On another thread another poster , with drew TFC into ISA's where it was kept in 100% equity type investments, whilst the remaining money in the pension was in more defensive investments .
Could also be part of your strategy.

Workerbee999

Albermarle, thanks that’s a good idea. Rather than building up too much cash savings now (beyond 1-2 years requirements) I might put it into S&S ISAs and then hold some cash in the pension instead. Same overall risk for the total portfolio, just a different mix of locations. Ill just keep an eye on the growth over the next few years.

I saw the other thread about potential for the 20x DB valuation increasing. Not thought about that potential before! I know it’s a fortune “issue” to have.

Albermarle

I saw the other thread about potential for the 20x DB valuation increasing. Not thought about that potential before!

As pensions are by nature long term, then the probability of legislation changes at some point is always there.
e.g. the LTA has been reduced significantly in recent years & pension freedoms were introduced.
For the future we could see a removal/reduction of 40% tax relief for HRTaxpayers . A reduction in the annual allowance or maybe no more inflation linking for the LTA, must be a possibility and now we have the idea floated of increasing the 20X for DB schemes.
No doubt could be others ….

shinytop

Workerbee999 wrote: »

Albermarle, thanks that’s a good idea. Rather than building up too much cash savings now (beyond 1-2 years requirements) I might put it into S&S ISAs and then hold some cash in the pension instead. Same overall risk for the total portfolio, just a different mix of locations. Ill just keep an eye on the growth over the next few years.

The trouble is you generally get next to no return in cash in pensions.

cfw1994

Albermarle wrote: »

Another possibility is to move to investments within the pension into ones that are more medium/low risk/growth . In this case they might only grow at 2% above inflation .
On another thread another poster , with drew TFC into ISA's where it was kept in 100% equity type investments, whilst the remaining money in the pension was in more defensive investments .
Could also be part of your strategy.

This is something I have been considering....it is mostly due to funds performing well that I am now very likely to overshoot the LTA (barring any downturn in the next 6-12months, which of course is a reasonable possibility).

I moved 20% into some bond & gilt options about a year ago, & I now know they proactively helped reduce the “losses” from the winter downturn.

BUT......the funds beyond when I turn 55 will still (hopefully!) fund the next 30+ years.....so I kind of still want the exposure to risk with the returns that should bring.

So my point is that yes, if I overshoot by 100k+, then there is a tax hit....but if I am ultimately getting more money back, then that is a “nice problem” to have.

If we had a crystal ball, this would be easy stuff :rotfl:

jamesd

If waiting for a dip you'd want the most volatile assets in the uncrystallised part so the drop is concentrated were it'll do you the most good.

Opposite way around before that, to try to keep the growth outside the pension in say an ISA.