Exceeded LTA, now what?

Croeso69

Over the last 2 years I have crystallised 100% LTA exactly.

I can get 3 x £10k out using Hargreaves Lansdown's small pot 'loophole'.

This leaves about £200k uncrystallised, now what do i do with this?

(1) Pay LTA tax of £50k now and move the remaining £150k into drawdown; or

(2) As (1) but only do it when I actually intend to drawdown; or

(3) Leave uncrystallised until 75 (or LTA abolishment, unlikely) if I can live without the funds in the meantime; or

(4) Something else, any suggestions?

The investments wont be changed on crystallisation so (1) and (2) are effectively tax neutral assuming no change in LTA tax.

First world problems, I admit.

I am 57 and will likely retire this year. The PCLS I have taken are earmarked for share ISAs in the next 3 tax years as well as the last 2.

Thanks!

TVAS

200k take as a lump sum and pay 55k if you take it in income you pay 25% on top of the income you take in the usual way. By taking benefits it will be in drawdown lump sum or income it just that you will be deducted the LTA tax charges. As for 4 leave the funds uncrystallised complete an expression of wish to nominate somebody or charity and if you die before 75 no tax on the fund and also outside of your estate. As the govt do not want to increase income tax, additional tax on pensions I believe are here to stay. If you are still working why are you worrying about it now? You don't need the income. It would make sense to take an income from the fun when you have no other income for that year such as a sabbatical, year off, cruise before you claim other pensions. Good luck.   

Dead_keen

There's no right answer. And none of these are bad answers.  I don't think that there is any need to make a decision yet either. 

The investments wont be changed on crystallisation so (1) and (2) are effectively tax neutral assuming no change in LTA tax

I'm not sure that is right if (a) you are a taxpayer, (b) income is paid on the investments, and (c) the amount you draw does not go into an ISA. In your pension scheme you get gross compounding.  In your own hands you'd only be able to compound net of tax amount.   So if a pension scheme gives a compounded annual return of 5% then a basic rate taxpayer might get a compounded return that is as low as 4% on the same investment.  After a while (like your 18 years), that can make quite a difference.  

So:

£y x (1 - 0.55) x (1 + 5% x (1 - effective tax rate))^18 is not equal to £y x (1 + 5%)^18 x (1 - 0.55)

The higher the annual return, the higher your effective tax rate on the returns and the longer the period, the more beneficial it will be to leave things in the pension scheme until you need it.

Your (3) has other interesting implications when thinking about paying tax at 55% (vs 25% plus your marginal on withdrawals) as it depends on your expected tax rate in the future (e.g. age 75 to 85+) and that may in part depend on how aggressive your withdrawal rate is now.  If you have a higher withdrawal rate now you may be less likely to be a higher rate taxpayer later on.  If you are less likely to be a higher rate taxpayer then it may be better to pay 25% and then withdraw at the basic rate over a number of years. 

Croeso69

Dead_keen said:

There's no right answer. And none of these are bad answers.  I don't think that there is any need to make a decision yet either. 

The investments wont be changed on crystallisation so (1) and (2) are effectively tax neutral assuming no change in LTA tax

I'm not sure that is right if (a) you are a taxpayer, (b) income is paid on the investments, and (c) the amount you draw does not go into an ISA. In your pension scheme you get gross compounding.  In your own hands you'd only be able to compound net of tax amount.   So if a pension scheme gives a compounded annual return of 5% then a basic rate taxpayer might get a compounded return that is as low as 4% on the same investment.  After a while (like your 18 years), that can make quite a difference.  

So:

£y x (1 - 0.55) x (1 + 5% x (1 - effective tax rate))^18 is not equal to £y x (1 + 5%)^18 x (1 - 0.55)

The higher the annual return, the higher your effective tax rate on the returns and the longer the period, the more beneficial it will be to leave things in the pension scheme until you need it.

Your (3) has other interesting implications when thinking about paying tax at 55% (vs 25% plus your marginal on withdrawals) as it depends on your expected tax rate in the future (e.g. age 75 to 85+) and that may in part depend on how aggressive your withdrawal rate is now.  If you have a higher withdrawal rate now you may be less likely to be a higher rate taxpayer later on.  If you are less likely to be a higher rate taxpayer then it may be better to pay 25% and then withdraw at the basic rate over a number of years. 

For (1), (2) and (3), the funds remain in drawdown until taken as income, I have no intention paying 55% LTA tax when it is only 40% for a basic rate taxpayer (1 - 0.75 x 0.80) when taken as income. Hence my comment on (1) and (2) being tax neutral apart from timing.

tiring33

On (3) i don't see that it makes a difference whether you immediately crystalise the amount of your pension that is over the LTA, or whether you wait until 75 - pay 25% now, or leave it to grow and pay 25% later and you end up with the same amount. As I understand LTA rules there is also no difference in the IHT protection as HMRC want their 25% even if you die before 75. The only benefit i can see may be to avoid changes/increases in the LTA tax rate between now and then. Of course those changes could be to your advantage, but somehow I doubt it. Given the current state of the UK's finances I can't see any chancellor handing out tax breaks to people with uncrystallised funds above the LTA.

Croeso69

The only reason i am hesitating paying LTA charge now is the hassle of having to fill in a tax return / do self assessment (*) when i dont have to do one presently.

(*) I understand it is mandatory in this circumstance.

jamesd

I've no great differentiating theory to help decide. Greater investment flexibility and the potential to use say VCTs to reduce net tax  cost is about it.

The beneficiaries get the pension money free of income tax if you die before 75 is true and after that at their own income tax rate. That's useful inheritance planning but gifting while alive could do them more good.

Self-assessment isn't horrendous and HMRC do take people out of it on request at times when it no longer seems worthwhile. I don't know of a way to avoid it in this situation but do it all at once and you might get away with one year.

Albermarle

Self-assessment isn't horrendous and HMRC do take people out of it on request at times when it no longer seems worthwhile

HMRC are reducing the number of people doing SA ( where appropriate ), whether you request it or not . In favour of encouraging people to use their on line personal tax account.

zagfles

tiring33 said:

On (3) i don't see that it makes a difference whether you immediately crystalise the amount of your pension that is over the LTA, or whether you wait until 75 - pay 25% now, or leave it to grow and pay 25% later and you end up with the same amount. As I understand LTA rules there is also no difference in the IHT protection as HMRC want their 25% even if you die before 75. The only benefit i can see may be to avoid changes/increases in the LTA tax rate between now and then. Of course those changes could be to your advantage, but somehow I doubt it. Given the current state of the UK's finances I can't see any chancellor handing out tax breaks to people with uncrystallised funds above the LTA.

If you die before 75 your beneficiaries can avoid any LTA test by leaving the uncrystallised amount untouched for 2 years, the downside is that drawdown will be taxable on the recipient. So it could be a good idea for a basic rate or non taxpayer.

Albermarle

If you die before 75 your beneficiaries can avoid any LTA test by leaving the uncrystallised amount untouched for 2 years, the downside is that drawdown will be taxable on the recipient. So it could be a good idea for a basic rate or non taxpayer.

To digress from the main topic a little . If I died before 75 , who would inform my beneficiaries of such rules/options  like the above , if I did not have a financial advisor. Would the provider lay out the options ? Or would it be down to me to leave instructions, assuming my beneficiaries were not pension experts?

Croeso69

Albermarle said:

If you die before 75 your beneficiaries can avoid any LTA test by leaving the uncrystallised amount untouched for 2 years, the downside is that drawdown will be taxable on the recipient. So it could be a good idea for a basic rate or non taxpayer.

To digress from the main topic a little . If I died before 75 , who would inform my beneficiaries of such rules/options  like the above , if I did not have a financial advisor. Would the provider lay out the options ? Or would it be down to me to leave instructions, assuming my beneficiaries were not pension experts?

And how would they know how much LTA you had left, if any? You can have more than one pension and some may have been drawn down completely a while ago, so they may not know how much LTA was used for those (or even that they existed).