Crystallisation query

sammyboy63

Hi, I have just transferred my deferred DB benefits to a Sipp, and would be grateful for others' views on crystallisation. I have a meeting with my adviser next month, but just wanted to sound out some opinions beforehand. I have read many posts regarding the subject, so apologies in advance if this may be old ground, and yes I realise I am in a lucky position. I'd really prefer no comments on the reasoning for transferring out if you don't mind, there were good reasons for it.

The sum is £1.26m and so LTA considerations come into play. I am 58, employed, higher-rate taxpayer, with no plans to retire for several years. I have a small DB pension currently valued at £3.5k due at 67 along with full state pension. My wife (53) has small LGPS pension and full state pension due at 67. I am making no pension contributions, my wife (earning £16k) just paying minimum contributions.

I require £125k from the TFLS for a property purchase, otherwise no immediate requirements. All ISA allowance used this year. My thoughts are to crystallise all of it up to LTA which would leave approx £138k to invest outside the Sipp prior to moving it gradually into ISAs. Also to increase my wife's contributions as much as possible. I wouldn't propose to draw down until retirement, which would probably be around 65 (I am in the lucky position of working for enjoyment and can retire whenever I wish). The Sipp would be relatively cautiously invested, with the hope that growth equals inflation after costs, with the possibility of using major downturns to make additional contributions. Otherwise any regular investment would be outside of the Sipp.

Is there anything obvious I am missing, and would others do it differently, i.e. phased crystallisation?

Meanwhile, many thanks to the likes of jamesd, dunston, albermarle, edswippet and many others for their invaluable insight.

jaybeetoo

If you are moving £138k to ISAs that it going to take a few years at £20k a year (or even £40k a year if you use your wife's allowance as well). Why not just crystallise enough each year to provide you with the £20k/£40k TFLS each year for the ISAs?

IanSt

Much easier to only crystallise as you need it, especially if you have other money already invested outside of ISAs or pensions.

Taking the money out in one go means you need to think about things such as capital gains tax and tax on dividends. There's also inheritance tax that might be a factor to keep in mind.

MarkCarnage

I am in a somewhat similar position, only somewhat as I retained my main DB as DB, but transferred two smaller ones to existing SIPP with quite compelling transfer values.

I would agree with comments above to stagger the crystallisation of the SIPP into drawdown. I am doing it over 4-5 years for the reasons outlined above.

Alexland

Have you considered gifting some of the money to children, nieces or nephews who may have their own isa and pension allowances?

sammyboy63

Thanks for the replies.

Is there any disadvantage to making maximum contributions to the Sipp regardless of LTA, getting 40% relief on the way in and drawing down on retirement within the basic rate band, thus paying 40% i.e. equivalent of using an ISA?

sammyboy63

Any thoughts?

caveman8006

The pound in (assuming higher rate tax relief) will cost you 60p. If it is above the LTA when you drawdown, then even as a basic rate tax payer you will pay 20% tax plus a 25% LTA penalty leaving 55p net...Not a good idea!

ffacoffipawb

caveman8006 wrote: »

The pound in (assuming higher rate tax relief) will cost you 60p. If it is above the LTA when you drawdown, then even as a basic rate tax payer you will pay 20% tax plus a 25% LTA penalty leaving 55p net...Not a good idea!

Leaves 60p not 55p....

0.75 x 0.80 = 0.60

Only 45p if a higher rate taxpayer in retirement.

cfw1994

IanSt wrote: »

Much easier to only crystallise as you need it, especially if you have other money already invested outside of ISAs or pensions.

Taking the money out in one go means you need to think about things such as capital gains tax and tax on dividends. There's also inheritance tax that might be a factor to keep in mind.

Probably in this case.....but for some I believe it can be better to get it out ASAP to avoid increasing gains above the LTA. The vehicle for the 75% left could potentially be the same, and could therefore continue to gain, but outside of the immediate LTA issue. (until 75, where the next check occurs, of course!)

In this case the LTA is hit, so the challenge is yet more potential tax if some is left in - assuming it grows!

Albermarle

In this case the LTA is hit, so the challenge is yet more potential tax if some is left in - assuming it grows!

By changing the investment profile to a low risk one in the SIPP , you could restrict the growth .. This would have the added benefit making the SIPP less vulnerable to a big market downturn .
You might want to think about doing this whether you take the full 25% TFLS or not.