Life time allowance - what do you do when you approach this?

Scrudgy

Hello all

My DC pot currently sitting in my employer occupational scheme has just hit £900k for the first time, it’s fully invested in global equities and I am happy with the risk level. I am 55 soon, but still unsure when I will retire. Other pots are a small SIPP my wife has of £80k in HSBC global strategy balanced and VLS60 split equally between the two. I also have about £30k in a S&S ISA. I am holding £45k in cash which will be spent this year on house projects to get rid of large cost items while I am still working before I get to retirement point. There are no debts other than council tax, utilities, living etc. My wife has no current income.

I would like to build an emergency cash fund and put more into ISAs. However I have been putting in £40k per year into the pension via salary sacrifice to benefit from the tax relief. Salary is £100k. Saving for the house projects and paying into the pension has caused me to neglect saving into a retirement cash fund and ISA investments.

The pension pot needs 20% growth from here to hit the lifetime allowance, which could happen in the next twelve months just with natural growth based on historical fund performance over the last 10 years, of course can go the other way too, but happy to take my chances and see where it goes. Whether it is one year or two or three is ok with me.

So eventually to my question:-
Option 1
Would others consider stopping paying the AVCs into the pension and divert this cash to my ISA and emergency cash fund plan? Yes I will lose good tax relief, but it is also taking me possibly too quickly to the LTA and different tax issues to deal with. The AVC I am current paying is £28k. I was thinking that if I leave the standard pension contributions at £6k to ensure I collect the employers matched £6k, but stop the £28k AVC I will obviously pay a good chunk more of 40% tax, but will at least be putting it into a tax free environment.
Or
Option 2
Should I keep piling in the AVC, benefit from that tax relief and then use the 25% to fund my emergency cash reserves and ISA money?

My preference is to not take a 25% lump sum but rather drawdown as I go, paying less annual tax, drawing down set values based on my lifestyle or more if the pot appears to get close to the LTA, any surplus would go to an ISA or cash fund. Our current lifestyle spend is £36k after tax, and this includes running a car and holidays and gifts. I am more than happy to listen to wise words on the pros and cons of any option. My gut is telling me to go for option 1 above, but I am wondering if this is the smart move?

Both myself and my wife have max state pensions benefits payable from age 67 which will reduce the drawdown number if required later in life.

Appreciate all comments and suggestions. Thank you all.

Dazed_and_C0nfused

Have you checked your State Pension forecast carefully and read past the likely headline of £175.20 to see what you have both accrued so far, usually shown to 5 April 2020.

Is your wife contributing £2,880 (net) per year to her SIPP?

Do you have any other taxable income which might reduction of your Personal Allowance becomes a factor if you stop sacrificing such a large part of your salary?

zagfles

If you're getting 40% tax relief on your contributions then going over the LTA is pretty much neutral provided you'll be a basic rate tax payer in retirement. LTA charge combined with tax at basic rate is 40% on withdrawal. It could be worth crystallising when you get close to the LTA, assuming you're over 55 at the time, if your scheme allows it and you think you'll be drawing enough before 75 to avoid the second test.

Scrudgy

Dazed_and_C0nfused said:

Have you checked your State Pension forecast carefully and read past the likely headline of £175.20 to see what you have both accrued so far, usually shown to 5 April 2020.

Is your wife contributing £2,880 (net) per year to her SIPP?

Do you have any other taxable income which might reduction of your Personal Allowance becomes a factor if you stop sacrificing such a large part of your salary?

Hi thanks, yes we both have full state pensions, mine was full already and I paid for my wife’s to be topped up to achieve the full pension when in payment. 

We also do contribute the £2,880 to my wife’s SIPP, nice little trick I only discovered on here. No one tells you this stuff unless you find it out through resources such as this forum.

Finally, I have no other taxable income, and expect there to be none in later life.

Thanks

1980ds

Hi, interesting thread even though I’m not knowledgable enough to give any sound advice!  Could someone explain the funds to wife’s SIPP ‘trick’ please?
thanks 

zagfles

1980ds said:

Hi, interesting thread even though I’m not knowledgable enough to give any sound advice!  Could someone explain the funds to wife’s SIPP ‘trick’ please?
thanks 

There a 100 page thread on it! https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired/p1

It's not really a trick or a loophole, it's just the way pensions work.

1980ds

Thanks, I’ll get reading

Albermarle

Having read various items about LTA , there seems to be no one solution that applies to everybody . One body of thought is not to worry about it too much, and if you have to pay some extra tax then such is life . If you have over a Million in your Sipp , helped by large doses of tax relief , then paying some back is probably not going to break the bank . As Zagfles says it might well be tax neutral anyway.
Personally I would consider changing the pension investment strategy. With a 100% equities you have high risk of a large drop and of potential high growth . Neither of which is a good outcome as you are taking risk without the corresponding upside, as high growth will be penalised by the LTA.
If you crystallised early , you could put the Tax free cash into aggressive investments outside the pension ( if you wanted to) whilst leaving the crystallised pension invested in more defensive investments. However as you want to keep the TFC in the pension , then this shows that quite nicely that there are a lot of competing options to think about.

cfw1994

Zagflies is spot on.
I would (did!) cash some in as TFLS....if you are still working (which it sounds like), I would NOT touch the non-tax-free element - if you did, that would mean you could only put £4k in pa from that point.
The bits you cash in can then go into ISAs - so if you do some before April and some after, and have a partner, you could pop £40k each into ISAs 
No point cashing in for the sake of it, but if you have uses, then go ahead.  
If you also get company matching (we get 6%), then that helps balance any future extra tax.  

The other thing to consider is how you then use up any growth within your crystallised part of the pot.    I recommend you careful take note of this - I started crystallising pieces only 15 months ago, and just the GROWTH in the pot left has gone up by almost 3x my 'hoped for' drawdown annual allowance.   Yes, 2020 has been an exceptional year for many reasons, but for my funds it has done surprisingly well
I would like to withdraw the growth by the age of 75, when there is another LTA test on the growth (& non-crystallised pieces).   
Overall....the LTA is a lovely problem to have, but can also act as a disincentive to continue working!!

shinytop

OP, when I was in your situation I piled as much as I could into the pension and growth took it right to the LTA limit.  Because I have DB pensions, all income from my DC pension will be taxable.  I crystallised everything (just scraped under the LTA) and will take income each year up to the BR threshold, putting any surplus into ISAs.  If I can't withdraw all the growth under the BR limit then I'll be in a good position and content to cough up some LTA or HR tax.

I agree with cfw1994; it definitely made my decision on when to pull the plug easier.  

Thrugelmir

Scrudgy said:

The pension pot needs 20% growth from here to hit the lifetime allowance, which could happen in the next twelve months just with natural growth based on historical fund performance over the last 10 years, 

Might, might not.   There's no natural growth when it comes to investments. Just speculation.