Lifetime allowance

EdSwippet

DairyQueen wrote: »

On the information provided, and assuming inflation/investment growth both at annual 3% ...

Unless I'm misreading, your investment growth figure looks pessimistic. Long-run return on stocks is more like 6-7%, so around 3-4% above inflation. And it's the above inflation part combined with the £270k SW DC pension that you missed first time around that will cause a drift into and then perhaps above the LTA.

If this were me, I'd be looking now at ways to mitigate potential LTA issues. For example, crystallise some DC pension early to avoid taking the LTA penalty hit on the DB one later, as done by your OH earlier this year. Also, consider simply retiring earlier than planned.

AnotherJoe

DairyQueen wrote: »

At around £1,042,324 total that's still well under the (projected) LTA of £1,187,400. Having said that, in the OP's position I would be watching investment growth and inflation.
OP would also need to be careful about investment growth from ages 62 thru 75. May be worth crystallising sooner, taking max TFC, and/or drawing down up to 20% income tax limit in retirement to be on the safe side.

I disagree, that's not well under at all. I was in a similar position but with an even bigger gap two years ago and the drop in the value of the Pound plus investment growth now has me right up against the limit, maybe over it. The OP also has further contributions to make as well.
So, as you say, he will have to take some actions to drop it down.
I am in the position now where I am waiting for a drop in the market to crystallise the remainder of my pension to hopefully just squeeze underneath the LTA but probably that's not going to happen.

shinytop

AnotherJoe wrote: »

I disagree, that's not well under at all. I was in a similar position but with an even bigger gap two years ago and the drop in the value of the Pound plus investment growth now has me right up against the limit, maybe over it. The OP also has further contributions to make as well.
So, as you say, he will have to take some actions to drop it down.
I am in the position now where I am waiting for a drop in the market to crystallise the remainder of my pension to hopefully just squeeze underneath the LTA but probably that's not going to happen.

If you'd be, say £50k over if you crystallised now, isn't it better to pay the LTA charge on that rather than wait until the £50k has disappeared in a downturn?

AnotherJoe

shinytop wrote: »

If you'd be, say £50k over if you crystallised now, isn't it better to pay the LTA charge on that rather than wait until the £50k has disappeared in a downturn?

Good point. The complication is that the LTA wont be breached until an £8k DB starts in a years time so AFAIK I cant do anything about it until then. I'm not sure what happens when a DB comes into payment whether the extra tax comes off the DB or off my other lump sums or what. Don't want to derail the OP maybe I'll post a new thread.

EdSwippet

shinytop wrote: »

If you'd be, say £50k over if you crystallised now, isn't it better to pay the LTA charge on that rather than wait until the £50k has disappeared in a downturn?

The assumptions for crystallising on a dip are that a) it is just that, a dip, b) the PCLS is reinvested in the same assets as before, and c) there will be an inevitable recovery. In that case, crystallising in the dip perhaps ducks you under the LTA, and the subsequent gains from the recovery then arrive outside the LTA penalty zone. Some in the reinvested PCLS, the remainder in the drawdown element, but both now free of LTA issues.

I don't see anything wrong with these assumptions, and the idea seems valid, but personally I've always found it somewhat unconvincing. The dip might not turn up when you need it, might not be deep enough for you, or you might entirely fail to time it accurately to get the desired outcome. Since I first saw this idea, markets have risen steadily by perhaps 30-40%. Anybody waiting since then for a dip now needs a significant crash to limbo under the LTA. Not saying it won't happen, but as markets rise the probability of getting a big enough crash to get a given pension under the LTA falls.

Still, it might work for some. To me though, it seems to require more luck than strategy. A gamble, in other words.

Albermarle

Long-run return on stocks is more like 6-7%, so around 3-4% above inflation.

Of course this will depend on what type of funds the DC + SW + employer pension is actually invested in.
If you are approaching LTA issues then makes sense to dial down the risk level of investments . There does not seem a lot of point being in higher or even medium/high risk funds as if the markets turn down you will lose more and if markets are good you pay extra LTA tax. So lose/lose.

ffacoffipawb

Albermarle wrote: »

Of course this will depend on what type of funds the DC + SW + employer pension is actually invested in.
If you are approaching LTA issues then makes sense to dial down the risk level of investments . There does not seem a lot of point being in higher or even medium/high risk funds as if the markets turn down you will lose more and if markets are good you pay extra LTA tax. So lose/lose.

Conversely...

Invest the funds in excess of LTA in riskier assets.

If it pays off, the extra growth will pay the LTA charge compared to less risky assets.

If it doesnt pay off, the LTA charge is lower.

That is what I am doing. My main fully crystallised DC is invested in IT such as City of London, Temple Bar etc.

My uncrystallised funds in excess of LTA are invested in funds like Fundsmith, Lindsell Train Global, Bufettology and so on. Much riskier but may pay off. Or may not. May annuitise this when I am older instead of waiting til age 75, depending on whether I need more guaranteed income.

My guaranteed DB in payment is £7.5k p.a. at the moment. Using savings for the rest but will start flexible drawdown in the next few months. I have earned more than the personal allowance this tax year.

EdSwippet

ffacoffipawb wrote: »

Conversely... Invest the funds in excess of LTA in riskier assets.

Indeed, that's one option where you are stuck with a pension that has exceeded the LTA.

The case under discussion here though is one where the funds are currently under the LTA, and there is an opportunity to crystallise or take other actions so as to keep them fully under the LTA in future.

EdSwippet

Albermarle wrote: »

If you are approaching LTA issues then makes sense to dial down the risk level of investments. There does not seem a lot of point being in higher or even medium/high risk funds as if the markets turn down you will lose more and if markets are good you pay extra LTA tax. So lose/lose.

My own approach was to dial down the risk level in my pensions, but dial up the risks in my ISA and trading account to compensate. Overall I kept the same profile -- same ratio of stocks, gilts, bonds -- just with the assets with the lower long-term growth potential now concentrated in the pensions. As of today, my pensions are more than 80% bonds, but my allocation is still 60% stock and 40% bond.

UncleZen

Update, in my 2nd post I said 64%, I meant 54% (typo probably) that would account for some of the sums and figures mentioned.
I could always reduce my SW DC contributions if needed and divert them to savings/isa etc if I was nearing the LTA.
Regardless, this is quite complex for the average person (of which I am one!) to understand, TBH