Can I /you get hit by LTA twice ?

zagfles

Mick70 wrote: »

By 55k pa I mean annual drawdown amount , I’m unsure what UFPLS means .

Google "pension UFPLS". Don't take this the wrong way - but you really need to understand basics like this before asking technical questions about the LTA etc - by saying "annual drawdown amount" it seems you've not thought about or understood that there are several different ways of drawing down £55k pa (eg UFPLS, full drawdown, phased drawdown, frequency of phasing) which will make a big difference to how and when the LTA is used and when it's triggered.

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

In general if you expect your investments to grow faster than the LTA, then you're better off crystallising earlier, since the LTA as a proportion of your pot will reduce over time.

Yes there's an additional test at 75 on the increase of crystallised funds, but you can avoid that by drawing down enough to avoid it being higher. In general, if you can't do that without avoiding higher rates of tax because your investments have done well, then the phased approach would have likely meant even more LTA charge as your uncrystallised funds are probably growing far faster than the LTA.

An exception might be in a high inflation environment (no inflation protection on the increase of crystallised funds), or if the govt decided on higher than inflation increases in the LTA.

Disadvantages of early crystallisation would be that you have a big lump sum outside a tax wrapper. But you could "ISA up" over time (ie feed max into ISAs each year, yours and wifes), or use CGT allowances, dividend allowances carefully to reduce or even eliminate tax.

Situation re inheritance tax, death benefits, possibility of having to claim benefits, care fees etc need considering too and in light of other savings, income etc you have.

You might not want to think about it but with a massive amount over the LTA, it's really important you and your wife understand the situation if you die. For instance, the LTA would usually apply to uncrystallised funds but it can be avoided entirely on death under 75 by delaying crystallisation for 2 years, at the expense of the income being taxable. Whether this is a good idea or not depends on the tax status of the beneficiary(ies). It might be a reason to crystallise up to the LTA but not over.

This is all a highly complex area with all sorts of interactions between pension and non pension tax rules, inheritance, benefits etc and you either need to take the time to understand it all or find a really good IFA, one who understands LTA issues inside out. IME most are rubbish and regular posters here know more, but we can't do a full fact find or provide any indemnity guarantees etc.

Mick70

Again thanks for taking time to reply , much appreciated

jamesd

jimi_man wrote: »

a cautious attitude to risk, with a negative IFA recommendation, then I wouldn’t do it.

He's described how the previous IFA assessed attitude to risk: by using questions where most sensible people, including me, would choose the lower risk of the pairs of choices. Things like is guaranteed income better than not guaranteed, but without reference to the different levels of income or inheritance. With the same income, guaranteed is clearly preferable. The IFA didn't seem interested in establishing an actual attitude to the various risks and benefits.

jamesd

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.

zagfles wrote: »

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.

Inflation-linked gilt yields are negative because it's a seller's market. Annuity providers have regulatory requirements to hold them and some DB schemes, quite possibly this one, choose to. There was such a lack of supply last year that insurance companies asked for more to be sold than the government wanted.

It's never a no-brainer but if you're suggesting that the safe withdrawal rate (3.2% with 1.5% costs using 4% rule) and that the even lower natural yield will also fail so badly that capital runs out then you're imagining worse events than two world wars, rampant inflation or the great depression. And that there will be no escape by investing and/or moving outside the UK.

It's entirely possible that something worse could happen, it's just very unlikely and requires combinations that are likely to see some DB schemes and annuity firms failing.

For example, a financial crisis so great that the UK government defaults on some gilt payments. While that hasn't happened yet since gilts started the UK has defaulted on loans twice:

1. In 1932 during the great depression Britain defaulted on WW1 loan repayments to the US.

2. 92% of investors holding 5% 1917 war bonds acceded to strong pressure to have their interest rate cut to 3.5% in 1932. An immediate loss of capital because that's linked to the rate.

I typically suggest lots of state pension deferral (the Greek government cut pensions a few years ago) and at times, as here, suggest considering regular annuity buying, as much as half a million Pounds worth over time in this case.

In this case it's also interesting to notice that the lifetime allowance charge reduces risk. In good times it has to be paid at 45% or 25%. In bad times a very big drop may take the investment value below the remaining allowance and eliminate the charge. Very crudely, for dire cases the charge almost doubles the value of the money that is subject to it as the tax is eliminated.

GunJack

When the LTA charge is made (by HMRC?), does it come straight out of the pension pot? Not really considered this before, but Mick70's threads have been interesting and lead to questions for the less-informed of us

zagfles

jamesd wrote: »

Inflation-linked gilt yields are negative because it's a seller's market. Annuity providers have regulatory requirements to hold them and some DB schemes, quite possibly this one, choose to. There was such a lack of supply last year that insurance companies asked for more to be sold than the government wanted.

It's not just gilts - try getting returns on cash investments that keep pace with inflation. Interest rates are lower than inflation. Safe investments lose money. You have to take a risk just to avoid the real value of investments falling.

It's never a no-brainer but if you're suggesting that the safe withdrawal rate (3.2% with 1.5% costs using 4% rule) and that the even lower natural yield will also fail so badly that capital runs out then you're imagining worse events than two world wars, rampant inflation or the great depression. And that there will be no escape by investing and/or moving outside the UK.

Really? So what was the massive catastrophy that hit Japan that made it's stock market halve in value over the last 30 years then? Not wars, not a depression, not rampant inflation, not a loony extreme govt. The stockmarket of one of the richest, most successful and innovative countries in the world has halved over the period of a typical retirement. It could happen to the UK, the US, Europe, anywhere. Or even everywhere with such a globalised world. Where would that leave your "safe withdrawal rate"?

NB I don't predict this or even think it's very likely, but discounting it as some armageddon scenario is ludicrous.

It's entirely possible that something worse could happen, it's just very unlikely and requires combinations that are likely to see some DB schemes and annuity firms failing.

For example, a financial crisis so great that the UK government defaults on some gilt payments. While that hasn't happened yet since gilts started the UK has defaulted on loans twice:

Eh? You're assuming the OP invests in equities and possibly bonds, not gilts. If he invests in gilts, then he'll likely be worse off than using his DB scheme! It's why the CETV is so high!
Obviously if the govt defaulted on gilts then that would affect everything, annuities, DB pensions, and supposedly ultra-safe investments. But the OP won't be getting a better deal from his CETV if he uses it to buy gilts or annuities will he?!
The Japanese govt hasn't defaulted on any gilts since 1989 AFAIK. But their stock market has halved in value.

zagfles

GunJack wrote: »

When the LTA charge is made (by HMRC?), does it come straight out of the pension pot? Not really considered this before, but Mick70's threads have been interesting and lead to questions for the less-informed of us

I think you can pay it from outside or inside the pot, but obviously makes more sense to pay from the pot.

jamesd

GunJack wrote: »

When the LTA charge is made (by HMRC?), does it come straight out of the pension pot?

If you're alive you and the scheme are jointly liable and in practice the scheme will pay it if they know it's due.

If you're dead the recipient is liable, though there are some quirks.

GunJack

jamesd wrote: »

If you're alive you and the scheme are jointly liable and in practice the scheme will pay it if they know it's due.

If you're dead the recipient is liable, though there are some quirks.

which scheme? whichever pension fund it's in at the time(so deducted from the pot?), or whichever scheme it was originally built up in?

Again, if the recipient is liable after death, does it come out of whichever scheme it's currently held in, i.e. out of the pot?

jamesd

When alive, out of each pot where the money is and the charge is due, with the age 75 growth test done for each crystallised pot individually.

When dead it's more fiddly depending on what is done.

To provide for possible death within two years of transferring it may well be desirable to "direct" the pension trustees to pay the wife instead of the usual discretion. The money wold then be part of the estate and exempt from inheritance tax. Die within the first two years otherwise and HMRC may decide it's an ordinary trust subject to inheritance tax with no exemption because trusts don't get one. If still alive after two years then swapping to "discretion" is likely to be best.