Lifetime allowance - covert SIPP to cash?

roger8989

Hello, I have a part private SIPP and part public sector final salary pension. If I reach the lifetime allowance around the age of 50 do you think that it would be sensible to move the equity SIPP into a cash-only state in order to bank the gains and insure against any market falls for the private pension portion? I guess if there was further capital growth then it would be subject to the 55% lifetime allowance charge but it would not have required any additional payments into the SIPP. However, there is a risk of capital reduction if I leave it in equities and moving to a safer investment would fix this growth. 

Would anyone have any words of advice? Thanks very much in advance.

NottinghamKnight

Might be best if you post some actual numbers. If you are anticipating the lta at an early age then maybe best to consider future contributions, are you maxing your isa allowance annually for example? Moving to cash in your pension would mean it losing money in real terms of course, so difficult to say without knowing more about your wider situation, do you have a spouse or partner whose pension could be built up for example. 

roger8989

Yes, thank you- am using full ISA allowance yearly so an maximising that. You are right that moving to cash would mean a real terms decrease but I guess it would then be shielded from any drops (or gains). Yes, I could look at adding to spouse pension which could be built up.
I guess I was just considering whether exceeding the lifetime allowance via pension growth (not additional) payments was something to prevent happening..

garmeg

roger8989 said:

Hello, I have a part private SIPP and part public sector final salary pension. If I reach the lifetime allowance around the age of 50 do you think that it would be sensible to move the equity SIPP into a cash-only state in order to bank the gains and insure against any market falls for the private pension portion? I guess if there was further capital growth then it would be subject to the 55% lifetime allowance charge but it would not have required any additional payments into the SIPP. However, there is a risk of capital reduction if I leave it in equities and moving to a safer investment would fix this growth. 

Would anyone have any words of advice? Thanks very much in advance.

I could argue that 45% of something is better than 100% of nothing.
No reason not to maybe rein in the risk level of the pension by a notch or two though, if it looks like you have won the game.

roger8989

Yes- that's the argument that 45% of something is better than 100% of nothing- exactly the words I was searching for...
I guess reducing the risk level in the equity pension seems sensible as that would limit gains (and losses)..helpful advice- thank you. 

Albermarle

Cash in pension normally means zero interest , so if inflation started going up then in 10 years you may be down 30% in real terms .
So probably best to invest low/medium risk level aiming to at least beat inflation . Some of us on here in similar positions use wealth preservation investment trusts as one part of the portfolio - see Personal Assets or Capital Gearing . Or even just a simple 40% equity multi asset fund .

Then if you have to pay some LTA tax , well could be worse .
In fact if you add to the SIPP and get 40% tax relief+ employers contribution it is worth still contributing, despite the LTA.

roger8989

Albermarle said:

Cash in pension normally means zero interest , so if inflation started going up then in 10 years you may be down 30% in real terms .
So probably best to invest low/medium risk level aiming to at least beat inflation . Some of us on here in similar positions use wealth preservation investment trusts as one part of the portfolio - see Personal Assets or Capital Gearing . Or even just a simple 40% equity multi asset fund .

Then if you have to pay some LTA tax , well could be worse .
In fact if you add to the SIPP and get 40% tax relief+ employers contribution it is worth still contributing, despite the LTA.

Yes, good point about tax relief. Thank you. I don't get employers contribution but I would get tax relief so that would be advantageous. 
I will look at wealth preservation trusts as I don't know what they are. 

Albermarle

If you get 40% tax relief but no employer contribution, and you have to pay LTA on income then its no benefit or loss.
£60 contribution gets you £100 in your pension . £100 minus 25% LTA tax minus 20 % income tax = £60 

roger8989

Albermarle said:

If you get 40% tax relief but no employer contribution, and you have to pay LTA on income then its no benefit or loss.
£60 contribution gets you £100 in your pension . £100 minus 25% LTA tax minus 20 % income tax = £60 

Ah- that is a very helpful equation! Thank you. I guess the £100 could grow though which would then make it a better investment but I suppose I might as well just invest the 60 in the first place.
For a final salary scheme I think it is better to come out and just take the money I was paying into the scheme- will pay tax on it but at least it is in my account and not lost if I drop down dead a year after drawing my pension..

Albermarle

roger8989 said:

Albermarle said:

If you get 40% tax relief but no employer contribution, and you have to pay LTA on income then its no benefit or loss.
£60 contribution gets you £100 in your pension . £100 minus 25% LTA tax minus 20 % income tax = £60 

Ah- that is a very helpful equation! Thank you. I guess the £100 could grow though which would then make it a better investment but I suppose I might as well just invest the 60 in the first place.
For a final salary scheme I think it is better to come out and just take the money I was paying into the scheme- will pay tax on it but at least it is in my account and not lost if I drop down dead a year after drawing my pension..

Coming out of final salary scheme is a big decision because you are giving up on guaranteed income.
In any case some public schemes do not let you transfer. If you are really thinking about this there are numerous threads on this forum on this subject , especially about the problems involved even just getting the transfer to happen .
By the way the average life expectancy for a middle aged person is around 85. That means 50% will live longer , and if you have a desk job , don't smoke, no money worries  etc then you are likely to be in that 50%.

gm0

I find the best way to think about this is to try and be clear on overall asset allocation - cash, bonds, equities across everything - ISA, unwrapped, pension, emergency cash.  Your amount of DB (SP and DB schemes) may well inform your risk appetite for the DC and other investments. 

Once the allocation is known (likely in a 40-70% equities range for most but outliers exist) then where the assets are kept - ISA, DC pension etc can be chosen. In which case LTA tax planning would suggest lower risk items in the pension fulfilling part of the  chosen mix.  And say high risk equities without the 25% drag in the ISA).  

But without thinking through your consumption plans, health and IHT it is impossible to say what would make more sense overall in terms of risk assets in the pension (LTA but IHT exemption) or outside (LTA exempt but IHT included).

This is the approach I am using to think about it.