The LTA in Practice

cfw1994

jim8888 said:

Thanks for all your feedback. Just for info, I did try a year's "early retirement" at 50 when I was made redundant. I could have made it to 55 on my savings and then taken my pensions. In that year, I did all the things you read about in retirement - played golf, lived healthily, took holidays, did some voluntary work, read loads of books and generally just kicked back. But, as winter rolled back around I realised I was really missing the fulfilment and social contact of the workplace. So I went out and got a job. Haven't regretted it 

Yup, good for you!   The LTA issue is slap bang in the middle of "first world problems" to have....

Out of curiosity....the new job you got: was it in the same industry you worked in before?
I ask, because I am on a countdown to exiting my 'day job'....but cannot imagine ever wanting to 're-enter' the industry!
Oh, & what type of voluntary work did you try (if you don't mind sharing!)

tiring33

Good to hear you have no regrets on re-joining the workforce, it just goes to show everyone is different, while there are lots of alternative paths you just need to work out one that suits you and there is nothing wrong in a little trial and readjustment.

Hopefully the LTA guides linked by previous posters above have been helpful to you. As with retirement itself there are so many different options it can be difficult to know which is right for you and only an understanding of your personal circumstances can identify the best path.

However, below is just one example of how it could work for you 'in practice' when you decide to start taking your DB pension:

Retirement Year 1 - Let's say the LTA by this time is £1.200,000 (due to CPI increases) and your pension is £19k p.a. with a cash free amount of £140k. You decide to take your DB pension. Taking your DB pension you will use up 43% of the prevailing LTA (19*20 +140 = 520 then 520/1,200,000 = 43%). So you have 57% of the LTA left. You decide not to touch the DC lump sum of £800k. Your income for the year is £19k, the first £12.5k is tax free, the remaining £6.5k is taxed at 20%.

Retirement Year 2 - Let's say the LTA is now £1,250,000 (due to CPI increase), your pension is still £19k and your DC pot is still £800k. You decide to take the remaining Pension Commencement Lump Sum (PCLS) from your DC pot. You have 57% of the LTA left which, when measured against the prevailing LTA is equal to £712,500 (57% x £1,250,000). You move £712,500 into drawdown (called crystallising) and take the PCLS of £178,125 (25% x £712,500) leaving £534,375 in drawdown. You now have two 'buckets' in your pension, the amount crystallised/in drawdown of £534,375 and the amount un-crystallised £87,500. You have also used up 100% of the LTA. Your income for the year is £19k, the first £12.5k is tax free, the remaining £6.5k is taxed at 20%.

Retirement Year 3 - Your DB pension is £19k, the crystallised/drawdown pot is £534,375, the un-crystallised pot is £87,500. The value of the LTA is no longer relevant as you don't have any, you've used it all up. Fearing that the LTA tax charge may increase, you decide to tidy things up by crystallising the final £87,500. You crystallise this final amount by moving it into drawdown. You cannot take a PCLS from this sum as you no longer have any LTA left. You pay a 25% LTA tax charge of £21,875 (£25% x £87,500)  to crystallise the final amount, leaving you with £65,625 which is added to your drawdown pot leaving you with £600,000 in drawdown (£534,375 + £65,625). You decide to take £50k of your drawdown pot as income. Your income for the year is £69k (£19k +£50k). The first £12.5k is tax free, £37.5k is taxed at 20%, £19k is taxed at 40%.

Year 4 onwards - you drawdown as much as you need each year and pay the tax on the income at prevailing rates. At 75 if your drawdown pot has grown to be larger than the original amount you crystallised (and you have no LTA left - which in this scenario you don't), then you will have to pay an LTA charge of 25% on any growth. In this scenario you would just make sure you were drawing sufficient income each year to keep the drawdown pot below the original amount you crystallised.

Obviously the above isn't a recommended course of action, just an example scenario to illustrate who the LTA would be applied given assumed numbers and choices, but I hope it helps to paint a picture of how it could work in practice, although in truth, all of the above is going to change.  Tax rates, LTA growth, investment growth etc. etc. The LTA may be abolished, it may be increased, the PCLS may be abolished, there may be a wealth tax (!) , the market my crash so your DC pot is no longer above the LTA etc. etc. etc. who knows. The only thing you can do is decide on a plan for now, stay flexible, watch the budget for changes and (as with retirement itself) readjust if required.

jim8888

Hi, I returned to work in the same type of job I had which was basically in FMCG account management. However, I took a role several ranks below the one I had left, which had been at Board level. I'd had enough of that, the politics and pressures at that type of job, not to mention being away from home for much of it. I just wanted to go back to helping to win and develop business for my employer. I thought about starting up for myself, but that felt like even more sleepless nights and long hours, never mind risking the savings that I'd built. Partly why I didn't stick with voluntary work was my frustration at the very slow pace of it, the laissez fare attitude that seemed to be part of the package. I wanted to be part of a team that really got things done (and were paid for their efforts.) There's something about paid employment that brought me a fulfilment that I missed and couldn't easily replace. At the moment I'm thinking about retiring again in two years, but I still worry a bit about the loss of that structure, team approach and satisfaction that work seems to deliver on (for me).

mark55man

At least you know what to prepare for.  Maybe choose a more active voluntary assignment, or maybe expect less from it - or become more zen