Can I /you get hit by LTA twice ?

Mick70

jamesd wrote: »

Each time you take benefits from the pension money the percentage of the allowance in effect at that time is calculated and added to the percentage already used. So take 66.6k a year and

1. year 1 LTA 1000000, 6.6% used.
2. year 2 LTA 1000000, another 6.6% used 13.2% total used
3. continue 10 more years, another 66% used, 99.2% total, 0.8% of the allowance at the last year still available.

The allowance when you reach 75 is unlikely to matter because 100% is likely to have been used already. So all of any value increase in the drawdown part would be subject to the charge. That increase isn't calculated with percentages.

hi james,
but in your example wouldnt the LTA amount have changed ?( LTA goes up with inflation each year?)
so
yr 1 LTA £1M say , £50k taken out = 5% used
yr 2 LTA say £1.1m , £50k taken out = 4.5% used , so at this point 9.5% used OR is it £100k now used of £1.1m = 9.1% used now.

If my example makes sense anyway ? i.e do we use the latest inflated LTA figure to calculate what % you have used and also for any tax payment calculation ?

thanks again
mick

jamesd

jimi_man wrote: »

when you take into account that RPI over the last 30 years is around 3.5% average, applied to £26700 over 36 years (50 to average life expectancy age of 86) then with the £79K it comes to around £1.9 million in total payments. Suddenly £1.7 million isn’t quite such a good deal. When you add in £153K of LTA tax payments, plus 36 years of fees and there could be £1/2 million in extra costs.
...
When you add all that together then personally, I wouldn’t touch it with a bargepole.

Perhaps you might find it more attractive if you didn't pretend that the 1.7 million was in a cash account paying 0% while taking costs on the full 1.7 million as if it was invested even as you drained it to nothing?

He's going to pay more in taxes and costs. It's a natural consequence of having more money and few people would grumble that their pay raise from 26k to 50k a year is a bad deal because of the extra 156k of income tax to pay over the next 30 years. Yet you do seem to think that paying that extra 156k of tax makes it best to turn down the raise ... and lose the extra 624k of after tax money.

Long term UK equity returns have been about 5% plus inflation. To match the DB and also leave the capital untouched he needs 1.6% plus inflation and costs. That's a very unambitious objective. Even doubling the DB takes little more than the dividends.

jamesd

Mick70 wrote: »

but in your example wouldnt the LTA amount have changed ?( LTA goes up with inflation each year?)
so
yr 1 LTA £1M say , £50k taken out = 5% used
yr 2 LTA say £1.1m , £50k taken out = 4.5% used , so at this point 9.5% used OR is it £100k now used of £1.1m = 9.1% used now.

If my example makes sense anyway ? i.e do we use the latest inflated LTA figure to calculate what % you have used and also for any tax payment calculation ?

Yes. I just kept it the same to keep the arithmetic easy while illustrating that it's the percentage used that is added each year.

zagfles

jamesd wrote: »

No. No need to when just 2.5% assumed natural yield from £1,546,250 comes to £38,656 a year before income tax and it's easy enough to leave money in cash to cover a few years of that.

That's the problem with your analysis. You're assuming past performance means future performance. You're assuming you know better than the market for "safe" investments (ie index linked gilts). Why do you think the yields on index linked gilts are negative?

I would agree there's a strong likelyhood of the OP being better off taking the CETV. But please don't make it sound like it's a no-brainer. It isn't.

zagfles

Mick70 wrote: »

hi james,
but in your example wouldnt the LTA amount have changed ?( LTA goes up with inflation each year?)
so
yr 1 LTA £1M say , £50k taken out = 5% used
yr 2 LTA say £1.1m , £50k taken out = 4.5% used , so at this point 9.5% used OR is it £100k now used of £1.1m = 9.1% used now.

Firstly you need to replace "taken out" with "crystallised". They are not the same thing. You can crystallise the entire pension, but only take out the 25% TFLS, and the entire pension is then crystallised, while 75% of it still remains inside the pension.

The % LTA used is that at the time of crystallisation, so it'd be 5% plus 4.54545% in your example. Note the % quoted is rounded down on statements but exact figures are used in the calculation.

If my example makes sense anyway ? i.e do we use the latest inflated LTA figure to calculate what % you have used and also for any tax payment calculation ?


thanks again
mick

Google LTA BCE and read the articles - most are aimed at financial advisers but are as good an explaination as you'd get here or anywhere.

zagfles

jamesd wrote: »

Perhaps you might find it more attractive if you didn't pretend that the 1.7 million was in a cash account paying 0% while taking costs on the full 1.7 million as if it was invested even as you drained it to nothing?

He's going to pay more in taxes and costs. It's a natural consequence of having more money and few people would grumble that their pay raise from 26k to 50k a year is a bad deal because of the extra 156k of income tax to pay over the next 30 years. Yet you do seem to think that paying that extra 156k of tax makes it best to turn down the raise ... and lose the extra 624k of after tax money.

Long term UK equity returns have been about 5% plus inflation. To match the DB and also leave the capital untouched he needs 1.6% plus inflation and costs. That's a very unambitious objective. Even doubling the DB takes little more than the dividends.

Perhaps you might try comparing risk levels as well as likely returns. You are comparing a very low risk DB pension with an equity based investment. We all know that historically over a long period equities outperform safer investments like cash and gilts. There's a "risk premium". When the OP finds a decent IFA they'll establish his attitude to risk.

jimi_man

jamesd wrote: »

Perhaps you might find it more attractive if you didn't pretend that the 1.7 million was in a cash account paying 0% while taking costs on the full 1.7 million as if it was invested even as you drained it to nothing?

He's going to pay more in taxes and costs. It's a natural consequence of having more money and few people would grumble that their pay raise from 26k to 50k a year is a bad deal because of the extra 156k of income tax to pay over the next 30 years. Yet you do seem to think that paying that extra 156k of tax makes it best to turn down the raise ... and lose the extra 624k of after tax money.

Long term UK equity returns have been about 5% plus inflation. To match the DB and also leave the capital untouched he needs 1.6% plus inflation and costs. That's a very unambitious objective. Even doubling the DB takes little more than the dividends.

No, not at all. I made it clear in my post that as part of everything else; lack of other DB pensions, spouse protection, inexperienced investor and most importantly - a cautious attitude to risk, with a negative IFA recommendation, then I wouldn’t do it. It’s not just about the costs.

Also, and please don’t think I’m being rude, I’d probably be more likely to heed the advice of an IFA who is instructed to go through my personal and financial circumstances and ask questions to determine my attitude to the various facets involved, than take the advice of an anonymous Internet forum.

He may well be better off and if he does it, I hope he is. But if it goes wrong then I don’t think anyone on here will be jumping up and down to help.

Mick70

zagfles wrote: »

The % LTA used is that at the time of crystallisation, so it'd be 5% plus 4.54545% in your example. Note the % quoted is rounded down on statements but exact figures are used in the calculation. Google LTA BCE and read the articles - most are aimed at financial advisers but are as good an explaination as you'd get here or anywhere.

Thank you, I think I Know now how to work out how much of the LTA % I would be using each year , now realise using a different LTA figure each time there is a crystallisation event , and add the percentages together to get cumulative % to see what % is left .

But , going back to being hit at 75.
If original pot is £1.7m. By taking say 55k pa as pension (plus inflation ) - this leaves no growth in any drawdown . And IF I had used say 95% of LTA and reach age 75. At 75 the uncrystallised pot say stands at £1.5M. The LTA allowance amount (say it has grown from £1.05m to £1.4m) is now irrelevant . The charge is solely on the uncrystallised pot of £1.5M , so if still using annual drawdown the chg then would be 25% of 1.5m = £375k reducing the pot going forward to £1.125m . Just need to check I have this bit right , thanks

zagfles

Mick70 wrote: »

Thank you, I think I Know now how to work out how much of the LTA % I would be using each year , now realise using a different LTA figure each time there is a crystallisation event , and add the percentages together to get cumulative % to see what % is left .

But , going back to being hit at 75.
If original pot is £1.7m. By taking say 55k pa as pension (plus inflation ) - this leaves no growth in any drawdown

You mean taking £55k pa as UFPLS or phased drawdown presumably?

And IF I had used say 95% of LTA and reach age 75. At 75 the uncrystallised pot say stands at £1.5M. The LTA allowance amount (say it has grown from £1.05m to £1.4m) is now irrelevant .

Not quite as you have 5% of it left.

The charge is solely on the uncrystallised pot of £1.5M , so if still using annual drawdown the chg then would be 25% of 1.5m = £375k reducing the pot going forward to £1.125m . Just need to check I have this bit right , thanks

A bit less as you still have 5% LTA allowance to use.

But why would you do it that way rather than crystallise up to the LTA as soon as you can, as Aegis mentioned earlier?

Mick70

zagfles wrote: »

You mean taking £55k pa as UFPLS or phased drawdown presumably?Not quite as you have 5% of it left. A bit less as you still have 5% LTA allowance to use.

But why would you do it that way rather than crystallise up to the LTA as soon as you can, as Aegis mentioned earlier?

By 55k pa I mean annual drawdown amount , I’m unsure what UFPLS means .
If trigger the LTA far earlier does that mean I get hit twice though , when it triggers and then again at 75? Obviously I’m not fully understanding this issue.
Thanks for taking time out to reply by way