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

Albermarle

I could move £900k to drawdown to crystallise that amount.  I don't need any lump sum now,

When you crystallise , it will generate 25% tax free and 75% into crystallised drawdown account .

If you do not take the 25% tax free ,  you will lose its tax free status . Not even sure the provider could deal with you not taking it as it is such a rare event. 

It is one of the problems with crystallising a large sum as a potential way of avoiding LTA- you then have to find a home for this large tax free sum . Probably most of it will have to go to an unwrapped investment account where you will find yourself with CGT and dividend tax to pay.

sausage_time

Albermarle said:

I could move £900k to drawdown to crystallise that amount.  I don't need any lump sum now,

When you crystallise , it will generate 25% tax free and 75% into crystallised drawdown account .

...

It is one of the problems with crystallising a large sum as a potential way of avoiding LTA- you then have to find a home for this large tax free sum . Probably most of it will have to go to an unwrapped investment account where you will find yourself with CGT and dividend tax to pay.

Ah, that's the catch that I was missing - thanks.  £225k is a large amount to spread around, and given my other investments will almost certainly imply CGT and dividend tax.  So, for £900k I'd need to take a £225k tax free lump sum.  But my other assumptions are correct?  Namely the £675k crystallised balance can continue to grow free of CGT (income tax on drawing of course), and employer and myself can pay in more than £4k from salary to original pension.  Do I need to do anything about recycling?   I'd be paying the same percentage as before (or perhaps less to keep below LTA) - so that in itself should be a defence?

Albermarle

Otherwise everything else you say looks OK . Recycling should not be an issue if you just continue similar payments to before.
The only long term issue is that at age 75 the LTA situation is forcibly reassessed. So for example if your crystallised pension had grown a lot, and you had not taken sufficient income from it , the excess would be tested against LTA again.
Plus of course the uncrystallised part and the new contributions added to it would count towards LTA , either when crystallised or when you reach 75.

zagfles

sausage_time said:

Albermarle said:

I could move £900k to drawdown to crystallise that amount.  I don't need any lump sum now,

When you crystallise , it will generate 25% tax free and 75% into crystallised drawdown account .

...

It is one of the problems with crystallising a large sum as a potential way of avoiding LTA- you then have to find a home for this large tax free sum . Probably most of it will have to go to an unwrapped investment account where you will find yourself with CGT and dividend tax to pay.

Ah, that's the catch that I was missing - thanks.  £225k is a large amount to spread around, and given my other investments will almost certainly imply CGT and dividend tax.  So, for £900k I'd need to take a £225k tax free lump sum.  But my other assumptions are correct?  Namely the £675k crystallised balance can continue to grow free of CGT (income tax on drawing of course), and employer and myself can pay in more than £4k from salary to original pension.  Do I need to do anything about recycling?   I'd be paying the same percentage as before (or perhaps less to keep below LTA) - so that in itself should be a defence?

If £900k is your total inc any other pensions (apart from state) then it might be worth waiting till you're closer to the LTA, you're still almost 20% away from the LTA. If/when you approach it you can consider crystallising. Normally you'd end up paying more tax by exceeding the LTA than you would in tax on growth/dividends on the unwrapped 25%, particularly if you make good use of allowances and "ISA up" as fast as you can (eg using spouse's allowances too).

The crystallised amount can continue to grow free of CGT & dividend tax etc, it's still in a pension, but bear in mind the second LTA test at 75, if the drawdown pension is greater than it was at crystallisation the excess is subject to another LTA test. Can be avoided by drawing down enough so that the value is less than at crystallisation, but keep an eye on this otherwise you might be forced into higher rate tax.

Re future conts, if your pension conts don't change after crystallisation compared to a few years before and after then you should be OK, google "HMRC recycling rules" for helpful articles. Taking tax free tax doesn't trigger the MPAA but any taxable income does. Google "MPAA triggers".

Albermarle

Another tactic that is sometimes mentioned is to crystallise after a market slump . Although if you then just left it to recover and grow for 25 years without taking much income then you have only pushed the problem to a later stage.

zagfles

Albermarle said:

Another tactic that is sometimes mentioned is to crystallise after a market slump . Although if you then just left it to recover and grow for 25 years without taking much income then you have only pushed the problem to a later stage.

Yes but it's a dubious tactic. It's trying to time the market. It's based on the assumption that at some point in the future, your investments will be worth less than they are today. If you believe that to be true, you may as well be in cash and wait till that time and buy!

Thrugelmir

zagfles said:

Albermarle said:

Another tactic that is sometimes mentioned is to crystallise after a market slump . Although if you then just left it to recover and grow for 25 years without taking much income then you have only pushed the problem to a later stage.

Yes but it's a dubious tactic. It's trying to time the market. It's based on the assumption that at some point in the future, your investments will be worth less than they are today. If you believe that to be true, you may as well be in cash and wait till that time and buy!

This coming year may play out very differently to the recent past. Seems premature to worry about the LTA until one actually needs too. 

cfw1994

Thrugelmir said:

zagfles said:

Albermarle said:

Another tactic that is sometimes mentioned is to crystallise after a market slump . Although if you then just left it to recover and grow for 25 years without taking much income then you have only pushed the problem to a later stage.

Yes but it's a dubious tactic. It's trying to time the market. It's based on the assumption that at some point in the future, your investments will be worth less than they are today. If you believe that to be true, you may as well be in cash and wait till that time and buy!

This coming year may play out very differently to the recent past. Seems premature to worry about the LTA until one actually needs too. 

Another optimistic, cheery post from the Thrugel!
Of course, you may be right.....but I would counter that now we (the royal 'we' - The World!) has something of an end in sight for the 'rona.... much like the Roaring Twenties after the 1918-19 Spanish Flu epidemic, we *could* see markets continue their upward trajectory, perhaps dramatically so.
There will be a lot of pent-up demand for travel, items, as this year pans out & turns to next....
Of course the next 6 months may be key to that - could bumble or dip along the way.

I would agree it is worth getting closer to the LTA before taking action.....you can always take baby steps - crystallise some of it to check the process, perhaps with a view to re-investing into ISAs.....

Albermarle

Thrugelmir said:

zagfles said:

Albermarle said:

Another tactic that is sometimes mentioned is to crystallise after a market slump . Although if you then just left it to recover and grow for 25 years without taking much income then you have only pushed the problem to a later stage.

Yes but it's a dubious tactic. It's trying to time the market. It's based on the assumption that at some point in the future, your investments will be worth less than they are today. If you believe that to be true, you may as well be in cash and wait till that time and buy!

This coming year may play out very differently to the recent past. Seems premature to worry about the LTA until one actually needs too. 

Yes it had crossed my mind if markets slump, that LTA worries might become a non issue.
Plus if you have to pay some LTA tax after all that tax relief benefit then not the end of the world anyway.

gm0

The point zagfles has made on drawing growth 55-75 is key

At the point you take tax free cash this needs to be consumed. gifted, or rewrapped in ISAs over a couple of (few) years. 
The growth on this is now irrelevant to LTA as it is gone or in Stocks and Shares ISAs which don't have one.  So the "risky" - high potential parts of the portfolio might as well be where the penalty tax isn't i.e. the ISAs.  (This is the point above on strategies for growth in the crystallised pot).  If you are still earning then the need to draw growth as income in the early part of early retirement 55-65 will become problematic as your marginal rate of income tax will go up to pension+employment level with the various claw back implications to consider.  If you are using the basic rate band for employment and don't take drawdown for just a few years this likely does not matter as you have 20 years until the 2nd test happens - but will need to monitor and draw growth ideally at sub 50k (bottom of HRB) for *enough* years to get back (or close) to the original 75% crystallised for drawdown value. Wasting annual income tax allowance is the thing to avoid.  This 2nd test is just a simple number comparison. The cash value 20 years later less the original value of the 75% (of LTA) at crystallisation.  This excess then to be penalised at 25%.  Being taxed on the 20 years of inflationary currency debasement as well as the returns for risk taken.  A slow handclap for the treasury on that one.

Absent needs for the income/tfc - most consider just leaving it where it is as a *good* solution to preserve the IHT protection (40%) but the amount subject to the 25% levy grows and grows from 55-75 which is why people in this specific "at LTA" situation look at ways to reduce the growth income penalty problem by 25% by taking the TFC and working out a dispersal solution and then not dying before it has been implemented.   But if you don't use/gift it and stack it in ISAs then you are increasing the IHT bill for later. Holistic plan required.

Regulation change is the biggest elephant in the room.  We are likely to see further pension reform and a redesign of IHT.  Initial political kite flying and consultations have already been out on it alongside the wealth tax consultation (which has some of the reform ideas replayed in it).   That wealth tax one was a corker. 

One aspect to consider for dispersal is that somewhere in your design you may need some "sleep at night" buffer in the form of bonds or cash or gold or whatever it is that is not equities correlated that you fancy.  This targeted at mitigating Sequence of Return risk and pausing income during a correction cycle which supports a variable income and lower risk drawdown strategy.  If you are still using employment as the "buffer" then you may choose to hold a more aggressive portfolio.  Horses for courses.

If dispersal is challenging for the full LTA amount 250k (or per protection level) then you can of course take a couple of bites a few years apart.  500k crystallised 125k TFC.   Across a tax year end.  With a spouse that's 80k to ISAs. Perhaps 40k to a car getting refreshed as electric, And 5k to a post pandemic retirement holiday.  And then do the other half a couple of years on.  Phased FAD