Advice for large pension pot

[Deleted User]

stranex said:

ZingPowZing said:

You had to hire a financial adviser to get out of your DB pension, stranex. 
Is he/she not advising you now?

I did, I have and they are. Problem being I’m paying them a sizeable fee which I’m pretty sure I don’t need to be. They’ve done well this year but most of the investments we’ve made together rather than them advising. I’m keen to take some control myself 

Yes, that is bound to be significant money you are paying your adviser. 
However, the adviser fee may be a smaller ongoing cost than the opportunity cost involved with your adviser keeping your portfolio within expectations (opting for low volatility, rebalancing for the sake of smoothing the overall figure, etc). 

You have (hopefully) a solid set of investments. You can use that as a basis and re-hire an adviser when you feel the need of one.

ukdw

Personally I would find paying a tax rate above 50% very hard to stomach - so I wouldn't plan on taking any lump sums from the above LTA part of the pot. 

I would instead go completely the opposite way and ideally use your around £270k in real terms tax free lump sum to pay for the boat as soon as you can access your pension (10 years below state pension age).

Your income requirement if £3.5k should just about keep you with the 20% tax band, which if you eventually need to drawdown from the above LTA portion of your pension would still only cost you a total of 40% tax after the LTA 25% payment.

Unless you have substantial other expected lump sum requirements I suspect your £1.65m would comfortably sustain you without going too adventurous - especially when you take into account one or two lots of state pension - so I would also target 5% (or 2.5% real terms) for the pension.

I would focus my attention more on how you quickly you can boost your non pension funds to allow you to be financially independent as early as possible before retirement age.  Whilst being slightly counter intuitive,  this may be a better place to focus your some of your more adventurous investment plans on. Plus you could possibly also consider lower than £3.5k per month expenditure during the pre-pension period, backed up perhaps even with a small amount of borrowing that could be paid back out of any parts of the tax free lump sum you don't need for the boat.

longwalks1

Just out of curiosity, a couple on here have said 'steps should of been taken a while ago not to let it grow so big'

Is having too big a pension pot/value an issue?  I know of the £1.073m LTA, but anything over that is taxed at 55%?   Am I right?  So if you had a 2m pension pot, up to £1.073m will be taxed as everyone else, and the remaining £927k will be taxed at 55% - (yes painful), but thats still £417k after tax that you've got.  Or have I completely missed it?

cfw1994

britishboy said:

Just out of curiosity, a couple on here have said 'steps should of been taken a while ago not to let it grow so big'

Is having too big a pension pot/value an issue?  I know of the £1.073m LTA, but anything over that is taxed at 55%?   Am I right?  So if you had a 2m pension pot, up to £1.073m will be taxed as everyone else, and the remaining £927k will be taxed at 55% - (yes painful), but thats still £417k after tax that you've got.  Or have I completely missed it?

It might be that years of £20k ISA opportunities were left on the table.....or maybe other tax-friendly (JISA/SEIS stuff) missed out.
Yes, tax would have been paid on the sums invested there....but they can also later be withdrawn tax-free, to fill gaps.

Lovely problem to have, can't even imagine the sort of role that filled that up so young, unless it was Narcos-style.....but well done!

ratechaser

cfw1994 said:

britishboy said:

Just out of curiosity, a couple on here have said 'steps should of been taken a while ago not to let it grow so big'

Is having too big a pension pot/value an issue?  I know of the £1.073m LTA, but anything over that is taxed at 55%?   Am I right?  So if you had a 2m pension pot, up to £1.073m will be taxed as everyone else, and the remaining £927k will be taxed at 55% - (yes painful), but thats still £417k after tax that you've got.  Or have I completely missed it?

It might be that years of £20k ISA opportunities were left on the table.....or maybe other tax-friendly (JISA/SEIS stuff) missed out.
Yes, tax would have been paid on the sums invested there....but they can also later be withdrawn tax-free, to fill gaps.

Lovely problem to have, can't even imagine the sort of role that filled that up so young, unless it was Narcos-style.....but well done!

Financial services for certain as one example, and not even the most senior MD level positions. I've only been using my full annual allowance for the last 8 years or so, as when I was younger I was rather less bothered about pensions, and money was for spending...

But if I'd taken it more seriously from the start then I'd probably be at about the same level by now. And I'm in what might be considered a middle management role, not a millions-a-year trader...

gm0

britishboy - the LTA rules above LTA are punitive and the threshold is now set *ridiculously* low even before rishi comes around again to punish savers.  This when you compare what 1m buys as a joint life indexed annuity for a couple with pretty much any indexed DB.  i.e ~28k. Wow - what a fat cat.  So it's drawdown and carry your own longevity risk and sequence of returns etc.  And yet at the same time the ONS data shows that very few people have saved anything like this amount DC (because salaries and housing costs primarily).  Biggest risk to this "large DC or converted DB pot" group is regulation change.  Followed by sequence of return.  Small in number, politically unpopular.  Easy to demonise as fat cats (even though they are not necessarily the FTSE directors and pensions freedom lambo buyers of legend.   It's all very sad - as rule stability over the long haul is critical to savings incentives and politicians are short term creatures and generally in want of a clue.

Rules - above LTA there is no 25% TFC.  So for all of it crystallisation for income sets up a 25% charge then income tax at marginal rate.  A lump sum 55%.  The additional hidden killer is the tax on any crystallised growth whether inflationary (for an indexed LTA (standard one is CPI indexed but not all are - specifically the higher stopped savings protections). Or real growth in the cash value from when crystallised (which could be at 55 currently) to 75. All this growth is caught by the 25% levy at 75 unless drawn.

This combination of rules drives two behaviours 1) taking max TFC to 25% early to take the growth outside and recycle to ISA S&S (or indeed speedboats as per OP).  This reduces the sizes of the problem at 75. 

2) And then drawing the income along the way so that the 25% at 75 is not due - making use of 20 years tax allowances in the basic rate band. 

These behaviours are not optimal for IHT as money in speedboats or S&S ISAs is *inside* your IHT estate where pensions aren't.  So any plan needs to allow for this and your plan for when to shuffle off. 

On the plus side for OP boats will happily deal with any excess of disposable income you may think you have.  It is the core proposition of yachting.  Tearing up £50 notes stood under a cold saltwater shower. 

stranex

Thanks all!
Too many comments to respond individually but hopefully I can help answer some of the questions in the last few posts

I exceeded the LTA not because of nay poor planning but simply because I was in DB scheme which at the time didn’t allow transfers out (or at least was never worth because of lower CETV and no uplift in pay at the time ) Remember, LTA was slashed pretty quickly as just the same time my CETV approached the £1M mark. It grew a lot around 2015-2017 due to marked increase in my salary due promotion and the rates pushing my CETV up. A lot of people “jumped boat” around this time and took advantage of an offer of uplift which I have protected and which I’m funnelling into my SS ISA. I left the scheme in 2017 and have since grown the pot by 21% after charges...not bad? I recently got divorced and have a pension share which will leave me with about £1.65M at today’s valuation.

So my circumstances couldn’t really have been avoided and as I alluded to earlier, I hate the prospect of paying 55% tax on anything but I’d much rather have 45% of a larger fund than 100% of nothing! 

As for taking the £265k lump sum for a boat, yes, if I don’t grow over the next 12 years thats fine. But I’m hoping (!) I’ll get to place where I’ll have £1-2M excess over what I require for income so plan on buying something a little more substantial

Absolutely it’s my intention to go bold on the SS ISA to give myself a pot at 54/55 that I can use for early retirement/uni fees/mortgage or hopefully a combination of all 3!

As for how I accumulated so early in life...no Narcos im afraid! Just a mixture of luck and passion for a job I love and pays extremely well and had one of the best DB schemes going. I joined at 19 so built up from a very early age. Didn’t really appreciate it till 10 or so years ago when I realised just how lucky and fortunate I was to be in the position I now find myself 

[Deleted User]

I'd hazard that total fees payable to your financial adviser would pass into six figures soon after your fiftieth birthday, stranex. 
Unfortunately, that would be merely the thin end of the wedge if you retain the adviser through your financial journey; at some point it would likely cost you more than a house.

And for what? Performance so far just about correlates with that of Vanguard60. Nor should you imagine your adviser will be able to insulate you against a sharp downtown. For sure, your adviser would rather you prosper but that would very much depend on the markets.

There looks to be a prudent case for seeking out a tax-accountant every so often but if the question is when not if you release your financial adviser, there are a bunch of reasons to suggest now would be a good time. Fortune favours the brave.

jamesd

El_Torro said:The crash we had earlier this year was a small blip in the grand scheme of things, I think we were all taken by surprise at how quickly the markets recovered from that one.

The lesson from that is not to underestimate the power of central banks and governments working together. Pandemic, recession, huge borrowing ... and many booming markets.

jamesd

stranex said:

Am I right to think that whatever I have above my requirements for income, I can take as a lump sum (minus the 55% tax) and do with as I please? 

You can and it could be a mistake.

Say you pay the 55% lifetime allowance charge. No income tax to pay and no mitigation strategies. Clean, simple and expensive.

Say you pay the 25% and put the money into drawdown. Within the basic rate band you're ahead, higher rate is break even before income tax mitigation. But you can reduce the tax cost by investing with VCT, EIS or SEIS funds. Say you were to take 100k taxed at 40%, income tax due is 40k. If you were to buy 133k of VCTs you'd get 39.9k of tax relief back from HMRC. You have to hold for 5 years, then you can sell. Dividends are tax exempt and how a lot of the investment returns are normally delivered. Think of it as deferring access to much of the money for five years to get it free of tax, plus whatever the VCT returns are. Boat and property finance are normally cheap enough for this to save a lot of money compared to the 55% charge option.

You don't have to wait until retirement to use these investments.