Why plan to build too large a pension pot? LTA

coyrls

I think you may have misunderstood how the LTA is assessed.  It does not add up all withdrawals.  In the simple case, the LTA is checked at crystallisation and again at 75.  There is no account taken of any money removed from the pension between crystallisation and 75.

jamesd

Adyinvestment said:

If my calculations are correct if you reached a pot of £750k and plan on drawing down the expected sustainable (pension making at least this) 4% per year, then in around 7 years you will with your pension pot exceed the LTA? ...perhaps sooner if the pension does well.

You're mixing two different things:

1. your safe spending level
2. the rate at which you withdraw from the pension

You withdraw fast enough to avoid the LTA, putting the excess into a S&S ISA.

Adyinvestment

Mickey666 said:

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.
Tax efficiency is one thing but in my book pension planning is all about securing a desired standard of living, not trying to minimise tax as a priority.

As someone who has been extremely inefficient regarding tax all my life I am just trying to plan correctly for the future - I have left it very late to be starting so want to make the correct choices.

Adyinvestment

coyrls said:

I think you may have misunderstood how the LTA is assessed.  It does not add up all withdrawals.  In the simple case, the LTA is checked at crystallisation and again at 75.  There is no account taken of any money removed from the pension between crystallisation and 75.

Thankyou - Yes, I was thinking it was any and all withdrawals for the whole lifetime of the pension.

Marcon

Adyinvestment said:

Mickey666 said:

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.
Tax efficiency is one thing but in my book pension planning is all about securing a desired standard of living, not trying to minimise tax as a priority.

As someone who has been extremely inefficient regarding tax all my life I am just trying to plan correctly for the future - I have left it very late to be starting so want to make the correct choices.

Maybe now would be a good time to get some professional advice rather than relying on strangers who know next to nothing about you and your aspirations, objectives, attitude to risk etc?

Mutton_Geoff

Albermarle said:

If you are getting 40% tax relief on your contributions then the LTA basically just takes that back again. If you are getting employer contributions as well then you are still ahead.
All capital and dividend growth remains sheltered in a pension . It does in an ISA as well but you can only add £20K pa max to it.
Pension pots are not subject to 40% inheritance tax ,, whilst ISA would be if you left enough for your estate to pay IHT.
Basically pension vs ISA depends on your personal circumstances and fear of paying LTA should not be the only issue to think about .
As mentioned paying tax also helps make the world go round. 

Some people save even more tax. If you currently earn between £100,000 and £125,000 you lose your personal tax allowance which, together with being in the 40% tax band, hikes it to an effective tax rate of 60% plus 2% NI leaving you with 38%. If you divert that band of salary into a pension to keep taxed earnings at or below £100k, even if you have or will exceed the LTA, then the worst case is 25% LTA tax and 40% income tax (ie 55% vs 62% so you are still better off). If you draw less than £50k in retirement then you'll pay standard rate tax of 20% so 25% LTA then 20% is effectively 40% tax, much less than the 62% saved on the way in).

If you trigger a BCE on your pot (eg PCLS or tax free cash) then you can crystallise it and it could then grow to an excess of the LTA without being troubled by the LTA tax. If you didn't use up all your LTA at that BCE, there would still be a % of that as headroom for future BCE events.

coyrls

Adyinvestment said:

coyrls said:

I think you may have misunderstood how the LTA is assessed.  It does not add up all withdrawals.  In the simple case, the LTA is checked at crystallisation and again at 75.  There is no account taken of any money removed from the pension between crystallisation and 75.

Thankyou - Yes, I was thinking it was any and all withdrawals for the whole lifetime of the pension.

No, it is the value of the pension at the time of a "Benefit Crystallisation Event" (BCE).

eskbanker

Analysis like this depends on a number of moving parts - as well as those identified above, such as withdrawal/drawdown and growth rates, the LTA itself continues to increase too, having bottomed out a few years ago: https://www.gov.uk/government/publications/rates-and-allowances-pension-schemes/pension-schemes-rates#standard-lifetime-allowance

zagfles

Mutton_Geoff said:

Albermarle said:

If you are getting 40% tax relief on your contributions then the LTA basically just takes that back again. If you are getting employer contributions as well then you are still ahead.
All capital and dividend growth remains sheltered in a pension . It does in an ISA as well but you can only add £20K pa max to it.
Pension pots are not subject to 40% inheritance tax ,, whilst ISA would be if you left enough for your estate to pay IHT.
Basically pension vs ISA depends on your personal circumstances and fear of paying LTA should not be the only issue to think about .
As mentioned paying tax also helps make the world go round. 

Some people save even more tax. If you currently earn between £100,000 and £125,000 you lose your personal tax allowance which, together with being in the 40% tax band, hikes it to an effective tax rate of 60% plus 2% NI leaving you with 38%. If you divert that band of salary into a pension to keep taxed earnings at or below £100k, even if you have or will exceed the LTA, then the worst case is 25% LTA tax and 40% income tax (ie 55% vs 62% so you are still better off). If you draw less than £50k in retirement then you'll pay standard rate tax of 20% so 25% LTA then 20% is effectively 40% tax, much less than the 62% saved on the way in).

If you trigger a BCE on your pot (eg PCLS or tax free cash) then you can crystallise it and it could then grow to an excess of the LTA without being troubled by the LTA tax. If you didn't use up all your LTA at that BCE, there would still be a % of that as headroom for future BCE events.

Not if that happens before age 75. There's a second test at 75 on growth in crystallised funds. Can be avoided by drawing down enough so that you pension doesn't grow by more than your spare LTA.

zagfles

Marcon said:

Adyinvestment said:

Mickey666 said:

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.
Tax efficiency is one thing but in my book pension planning is all about securing a desired standard of living, not trying to minimise tax as a priority.

As someone who has been extremely inefficient regarding tax all my life I am just trying to plan correctly for the future - I have left it very late to be starting so want to make the correct choices.

Maybe now would be a good time to get some professional advice rather than relying on strangers who know next to nothing about you and your aspirations, objectives, attitude to risk etc?

Or OP could use this forum and loads of other internet resouces to understand it him/herself.

OP - google LTA BCE for loads of helpful articles.