Approaching LTA....

caveman8006

Put your drawdown funds in low risk/low return assets (like fixed deposits or government bonds) and you should comfortably stay in the basis rate income tax bracket, even with a substantial DB pension on top, and you will sleep better at night too! Put the high octane assets in your ISA, where returns are all tax-free.

EdSwippet

jaybeetoo wrote: »

I don’t know how this works on DB but if it’s DC then don’t you need to stop before £1m? Or £1,055,000?

Incorrect.

There may be no actual need to stop pension contributions so as to avoid exceeding the LTA, but unless there is some offsetting benefit(*) against the usurious tax rate applied to pension withdrawals above the LTA, it will almost certainly be tax-efficient to do so.

(*) Examples include a generous employer match and/or salary sacrifice scheme, and an intention never to withdraw from the pension but rather to use it purely as an inheritance tax bypass.

lisyloo

caveman8006 wrote: »

Put your drawdown funds in low risk/low return assets (like fixed deposits or government bonds) and you should comfortably stay in the basis rate income tax bracket, even with a substantial DB pension on top, and you will sleep better at night too! Put the high octane assets in your ISA, where returns are all tax-free.

Well that’s one option but if you expect to live 35 years or more isn’t that a bit (or a lot) risk averse for all assets?

I’m averse to paying higher levels of tax not averse to investment risk.
I understand higher levels of tax only occur when you’ve done well but my preference would be not to work.

EdSwippet

lisyloo wrote: »

Well that’s one option but if you expect to live 35 years or more isn’t that a bit (or a lot) risk averse for all assets? I’m averse to paying higher levels of tax not averse to investment risk.

The idea here is to stay at the same asset allocation -- same percentage of stocks, gilts, property, cash, whatever -- but configure the asset location so that the things with the highest expected return over time live outside the pension, to the extent possible. That way you stay at the same risk level, just with potentially better tax efficiency overall.

That's what I have done. Once close to the LTA, I swapped things around so that my pensions are now heavily bonds and gilts and my ISA and trading account are all stock, but overall I still have the same 60:40 stock/gilt split that I have maintained for a couple of decades now. Below the LTA, a pension is often more tax-efficient than most other investment vehicles. Above the LTA, a pension is generally less tax-efficient than pretty well everything else.

cfw1994

lisyloo wrote: »

Well that’s one option but if you expect to live 35 years or more isn’t that a bit (or a lot) risk averse for all assets?

I’m averse to paying higher levels of tax not averse to investment risk.
I understand higher levels of tax only occur when you’ve done well but my preference would be not to work.

A wise friend did once tell me that whilst tax is painful, the more tax you pay, the better you have done!

So....whilst working, being in the high rate tax bracket (but not the mega high...) to take advantage of the tax relief on pensions is a GoodThing™

Once you are ready for the decummulation phase, the LTA can have an impact....but whilst it is unpleasant (& nastily rechecked at age 75 in case you’ve benefited too much from growth in the crystallised pot...), it is perhaps not quite as heinous as is made out.

Here is an example someone once kindly penned for me, assuming you get a company matched contribution....

If:

- The X% matched contribution was £500 gross, so the total matched contribution is £1000
- You got relief at 40%, so the above £500 actually cost you £300

£1000 less 25% LTA tax = £750 pension income
£750 less 20% income tax = £600 or
£750 less 40% income tax = £450

So for an outlay of £300 net, you get £450 or £600 net :T

In fact, even if you didn’t get matched contribution, tax would be neutral as long as you pay 20% income tax rate.
Going into HRT at that point is the bit that would have cost you, which is a BadThing™

ffacoffipawb

If we were to switch pension to less risky assets, is there an ETF equivalent of Vanguard 60/40 (say) to save on platform fees.

SIPP is currently invested in 13 investment trusts and has a yield of about 4%.

Crystallised 90% LTA this tax year and have about 20% LTA uncrystallised. So I am over LTA.

I am pleased to have exceeded LTA and will be punished for it, said no-one ever. :rotfl:

Thanks

cfw1994

ffacoffipawb wrote: »

If we were to switch pension to less risky assets, is there an ETF equivalent of Vanguard 60/40 (say) to save on platform fees.

SIPP is currently invested in 13 investment trusts and has a yield of about 4%.

Crystallised 90% LTA this tax year and have about 20% LTA uncrystallised. So I am over LTA.

I am pleased to have exceeded LTA and will be punished for it, said no-one ever. :rotfl:

Thanks

I agree with the sentiment of this (the LTA is an abomination IMHO)...

.....but just on that last comment: do you think my figures are wrong?
They show that even going over the LTA, you are still better off, surely?

lisyloo

EdSwippet wrote: »

The idea here is to stay at the same asset allocation -- same percentage of stocks, gilts, property, cash, whatever -- but configure the asset location so that the things with the highest expected return over time live outside the pension, to the extent possible. That way you stay at the same risk level, just with potentially better tax efficiency overall.

That's what I have done. Once close to the LTA, I swapped things around so that my pensions are now heavily bonds and gilts and my ISA and trading account are all stock, but overall I still have the same 60:40 stock/gilt split that I have maintained for a couple of decades now. Below the LTA, a pension is often more tax-efficient than most other investment vehicles. Above the LTA, a pension is generally less tax-efficient than pretty well everything else.

I get your point but if you are taking the max drawdown already e.g. £50k then there’s no scope to withdraw further from pension to ISA without paying HRT on the drawdown income.

lisyloo

cfw1994 wrote: »

I agree with the sentiment of this (the LTA is an abomination IMHO)...

.....but just on that last comment: do you think my figures are wrong?
They show that even going over the LTA, you are still better off, surely?

I don’t see how you can be better off paying an extra 25%.
Only 10% on my contribution is matched, most of it isn’t.

ffacoffipawb

cfw1994 wrote: »

I agree with the sentiment of this (the LTA is an abomination IMHO)...

.....but just on that last comment: do you think my figures are wrong?
They show that even going over the LTA, you are still better off, surely?

Basic rate pre and post retirement.

£1000 in costs you £800

£1000 out costs you 25% LTA tax and 20% income tax.

£1000 x 0.75 x 0.80 = £600 so only £600 out at a cost of £800.

Bad deal.

Of course if the £1000 in gains you tax credits of £410 then the net cost is £390 and not £800 so tax credits can distort the figures.