Crystallise or not if already crystallised LTA

garmeg

Leaving aside any uncrystallised funds set aside for 3 small pots.

If you have already crystallised exactly the LTA, whether by DB, DC or a combo.

If you had any uncrystallised funds left, which is the optimal use of these ...

(1) Leave uncrystallised until you need the funds and pay the LTA charge at that point, or
(2) Crystallise now and pay the LTA charge and moving rest to drawdown until needed.

Option (1) may be optimal in the hope (wishful) that the LTA may be abolished at some point.

Anyone got any thoughts on this?

ukdw

With option 1 the only real disadvantage I can think of is the fact that your pension appears to be larger than it really is - due to the 25% charge that will always have to be paid. By the time you hit 75 the 25% could end up being quite a substantial amount to remember to subtract.

With option 2 you will a) I think need to keep drawing down crystallised growth in order to avoid a 2nd LTA charge at age 75.  b) lose the 55% chargeable lump sum option - which is actually slightly cheaper for large drawdowns than - 25% then 60% ( due to loss of personal allowance) or 25% then 45%.

gm0

I looked at this and concluded option 1.  It needs modelling for your LTA (protected or not, indexed or not) and mix of DB and DC and a range of assumptions on how you will mix employment income, db, dc pension 55-75 and pay appropriate income tax levels due without leaving undrawn growth subject to the penalty or indeed paying the top rates due to optional income stacking in the early years.  Make use all of that BRB for all of the 20 years.

Example - If it is all DC then you are already committed to drawdown of all growth to the cash value of the 75% of LTA value (the after PCLS/TFC value) which was crystallised. And crystallisation of that was probably done in part to take 25% of the 55-75 growth off the LTA table anyway by S&S ISA recycling. So your IHT exposure is increased and carried until spent or gifted but your age 75 LTA problems are now smaller.

The over LTA amount is a bit more painful and with investment returns and higher inflation could run up a stonking bill over 20 years but I still don't see a reason to do anything other than keep your 75% and Rish's 25% invested still based on your overall asset allocation which could be low risk assets or all equities according to your overall needed income and guranteed income SP + DB situation.

If this portion of DC pension is on its own, spouse sorted, then it may be best to leave well alone and nominate next generation heirs on it so they have income alongside lump sum options.  I understand this must be done pre-death.  Lump sum rule doesn't get a deed of variation retcon option.

jamesd

An option is to wait for a big market drop then do it. You'll pay the charge on the reduced amount. A decent place for your most volatile equities.

Mutton_Geoff

garmeg said:

Leaving aside any uncrystallised funds set aside for 3 small pots.

If you have already crystallised exactly the LTA, whether by DB, DC or a combo.

If you had any uncrystallised funds left, which is the optimal use of these ...

(1) Leave uncrystallised until you need the funds and pay the LTA charge at that point, or
(2) Crystallise now and pay the LTA charge and moving rest to drawdown until needed.

Option (1) may be optimal in the hope (wishful) that the LTA may be abolished at some point.

Anyone got any thoughts on this?

I have exactly the same question, thanks for asking it. My SIPP platform is currently accepting both crystallised and uncrystallised funds into the same account meaning some of my fund purchases are made up of a mix. I was wondering whether to pay the tax charge on the uncrystallised amounts at the same time I start drawdown next year for neatness and clarity.

garmeg

Just to put a bit more information out here.

DB is £11,000 per annum and a SIPP was fully crystallised. A further SIPP at another provider was part crystallised to use up exactly 100% LTA.

The main crystallised SIPP is about 10% lower than it was when I crystallised it. This is why I asked the following question in another thread but nobody 'bit' as it where ...

https://forums.moneysavingexpert.com/discussion/comment/77769470#Comment_77769470

"I thought one crystallised fund that is "under water" at age 75 could not be used to reduce the LTA exposure of a crystallised fund that has grown since it was crystallised. 

e.g. Assuming LTA is £1m now
Pot 1 with provider 1: Crystallise £600,000 taking PCLS of £150,000 and move £450,000 into drawdown
Pot 2 with provider 2:  Crystallise £400,000 taking PCLS of £100,000 and move £300,000 into drawdown
Any change in LTA is now irrelevant as there is no LTA left to use.

At age 75:
Pot 1 has grown to £550,000 so £100,000 is liable to LTA charge.
Pot 2 has reduced to £200,000 so no LTA charge due

If Pot 1 is transferred from provider 1 to provider 2 we would have
Provider 2 Pot of £750,000 at age 75. No growth and no LTA charge.

Whilst you can transfer crystallised pots (in their entirety only) does combining them when one pot has done well and one has done badly reduce your LTA75 charge despite the regulations saying each pot is considered separately?

And with several part crystallisations being possible there are theoretically hundreds of Pots within one crystallised arrangement and I really cannot see how the systems can cope with this?

Of course you could manage the withdrawals from each pot to reduce the LTA75 charge of both to zero so why the rules don't allow combining to do this more easily is a good question I guess."

cfw1994

A good question.
I suspect the likelihood of one pot growing by a chunk and the other dropping by a chunk is relatively low.....
.....but in theory, I imagine IF your pension provider is happy to take the transfer, it would be nigh on impossible for HMRC to charge against it: I don’t think such a transfer triggers a BCE event to measure it?

EdSwippet

garmeg said:

Whilst you can transfer crystallised pots (in their entirety only) does combining them when one pot has done well and one has done badly reduce your LTA75 charge despite the regulations saying each pot is considered separately?

Are you sure crystallised pots can be combined? In theory it seems like they could be, but in practice perhaps not. At least, maybe not in a way that will achieve your goal.

https://www.atebconsulting.co.uk/news/merging-flexi-access-drawdown-plans/

There is no corresponding legislation comparable to Paragraph 8(4) of Schedule 28 to the Finance Act 2004 applying to flexi-access drawdown that precludes arrangements being merged. However, HMRC have confirmed to me that whilst it is therefore possible for two or more flexi-access arrangements to be merged scheme administrators should be aware “that all related factors such as transfer timing and LTA requirements have to be considered in their own right for each particular merger.”

Verbally, HMRC have admitted to me that because of the requirement to be able to undertake the BCE 5A at age 75 (or the earlier BCE 4 if an annuity is secured from the drawdown funds) as if the two or more drawdown arrangements were still held separately, merging arrangements is likely to cause significant administration issues. HMRC can therefore see no reason a scheme administrator would seek to merge funds.

caveman8006

https://forums.moneysavingexpert.com/discussion/6079468/testing-growth-in-multiple-drawdown-accounts-at-second-lta-test-at-75#latest
See above thread for more on this issue: bottom line, I think there is no advantage in combining multiple drawdown accounts to benefit from "netting" of investment growth at Age 75 BCE as the revenue insists on all pots being measured separately against individual starting values (even when brought together with same administrator) 

EdSwippet

jamesd said:

An option is to wait for a big market drop then do it. You'll pay the charge on the reduced amount.

Useful if you still have uncrystallised funds and LTA headroom, since this can reduce or even eliminate the LTA penalty. However, I cannot see how it helps you once you have already crystallised up to the full LTA.

For example, suppose you have £200 uncrystallised and 0% LTA remaining. If you crystallise now, you get £150 into drawdown and pay £50 LTA penalty. Or, suppose stocks drop 50% and then recover completely. If you crystallise right at the bottom, you get £75 into drawdown and pay £25 LTA penalty on crystallising, but on recovery your £75 grows to £150, the exact same as if you had crystallised before the drop, or if it had not occurred at all.

garmeg

caveman8006 said:

https://forums.moneysavingexpert.com/discussion/6079468/testing-growth-in-multiple-drawdown-accounts-at-second-lta-test-at-75#latest
See above thread for more on this issue: bottom line, I think there is no advantage in combining multiple drawdown accounts to benefit from "netting" of investment growth at Age 75 BCE as the revenue insists on all pots being measured separately against individual starting values (even when brought together with same administrator) 

I am aware of this issue. If you do multiple flexible crystallisations with the same provider how do they keep all crystallisations separate when they are all in one account?

e.g. I have crystallised my small SIPP twice with the same provider. I have only one drawdown account with them so how do they do the age 75 test when the two transactions should be kept separate (ie two pots really)?