Tax - pay now or LTA penalties later?

TEC6245

Wish I had found all you sages earlier, but better late than never.  I am getting professional advice, but previous negative experience has left me feeling more comfortable if I have an idea of the questions to ask....
I have started taking a DB pension which will leave me just under the higher rate tax band if I stop work until I reach state pension age in 9 years time.  As fund was over LTA/IP I already had to pay some tax from the fund so no LTA allowance left.  I will take voluntary redundancy in the next tax year which will push my taxable income into the additional rate level and I have been looking to how to best manage this. Advisor is suggesting I place a proportion into the company SIPP (based on previous years unused allowances) to avoid tax at source now, and then leave it invested (which I should be able to do for minimum10 years), in the belief (hope?) that growth over this time would give me a better return than taking the hit on tax now and investing it which would be outside of an ISA for quite a time as would be funneling rest of the VR into my/spouses ISAs for a few years.  I can see the advantage if anything happened to me that the money in the pension would be outside of the IHT pot.  I need to clarify the maths behind this which I gather depend partly on level of assumed growth, but are there other considerations / risks I should be factoring in or asking  about?  I am also not sure of what happens if it is untouched when I reach 75?  I realise this is a very fortunate position as the VR has left me able to consider finishing work early with backup of a decent pension, but having been hit by a tax bill on the pension  I am hoping to be better informed for this decision.

TVAS

Why did you start taking the DB pension? Why couldn't you have deferred it until the scheme normal retirement age and used the VR money to live on? Too late to do it this way around. If you received advice. COMPLAIN.

Investing in a SIPP a good idea especially if you do not plan to touch it you can live it to spouse kids anybody. Complete an expression of wish form. Company SIPP I do not understand. SIPPs are personal pension do you mean the employer group personal pension which happens to be a SIPP.

If you want to invest in a SIPP of your choice you can do the work yourself you do not need an IFA. You have not mentioned their fees so we cannot tell if what they are charging is reasonable nor do we know the amount you are investing. I assume you still have unused annual contribution allowance in the next tax year for that you need income and the max you can do is 40k.
ISAs for spouse is a good idea what about £2,880 if she is a non tax payer every year i.e. not in paid employment?

If you’ve money left in flexi-access drawdown

https://www.scottishwidows.co.uk/retirement/retirement-explained/basics/death-and-pensions/#:~:text=If you die age 75,no inheritance tax to pay.
There will be not LTA available so further tax is due on the whole of the fund.
The following below then applies check this with the adviser:

If you die before age 75 with your money in flexi-access drawdown your spouse, partner, dependant or nominated beneficiary can:

1. stay in the flexi-access drawdown plan and take income tax-free
2. take the remaining value as a lump sum tax-free
3. buy an annuity, where income will be paid tax-free.

If you die after age 75 with your money in flexi-access drawdown your beneficiary can:

1. stay in the flexi-access drawdown plan and take income subject to tax at their marginal rate
2. take the pension as a lump sum which will be subject to income tax at their marginal rate
3. buy an annuity, where income will be subject to tax at their marginal rate.

TEC6245

Thank you for the pointers.  The DB scheme was wound up 2 years ago and had significant benefits for long service members so has minimal reduction for taking early.  By SIPP I do mean company DC pension scheme which replaced the DB scheme .I can put some of the VR money in there directly so avoid the income tax on way in.  However, I am unsure if having to rely on growth to make the penalties on taking it out when above LTA is a better option than taking it now and investing outside an ISA.  Spose is employed and making use of his own ISA allowances already.

Albermarle

The calculation is as follows for a higher rate taxpayer now and a lower rate tax payer in retirement taking income and above the LTA( this may not fit you exactly of course but gives you an idea)
£1000 in pension only costs you £600 . 
£1000 minus 25% LTA = £750 minus 20% income tax = £600 
So no gain or loss . Investment growth will also be taxed the same but no CGT or dividends tax when it is in  a pension ( or ISA) 
In the pension stays out of any IHT calculations .

Gary1984

Someone will be along to tell me if my understanding or maths is wrong, but:

For every £100 you could either take £55 now after paying additional rate tax or £45 if you put it into the pension and take the LTA penalty then pay higher rate tax (100 * (1 - 25%) * 60%). 

The investment returns are irrelevant assuming you would invest in the same thing whether inside our outside of a pension wrapper. 

So just take the money now. You could consider some VCT investments if you're looking to reduce your tax bill (may also be inheritance tax friendly but not sure. Also look at EIS). 

TVAS

There is a BCE on uncrystallised funds on death under 75, but it can be avoided if your beneficiaries wait 2 years before designating the funds to drawdown. But the catch is the income is then taxable (normally is tax free on death under 75).

So the beneficiaries have the choice, pay the LTA charge and draw the pot tax free, or wait 2 years, avoid the LTA charge, but pay income tax on the drawdown.

So the best option will depend on the tax status of the beneficiary and whether they're happy to wait 2 years for the money.

ManMadeWays

Albermarle said:

The calculation is as follows for a higher rate taxpayer now and a lower rate tax payer in retirement taking income and above the LTA( this may not fit you exactly of course but gives you an idea)
£1000 in pension only costs you £600 . 
£1000 minus 25% LTA = £750 minus 20% income tax = £600 
So no gain or loss . Investment growth will also be taxed the same but no CGT or dividends tax when it is in  a pension ( or ISA) 
In the pension stays out of any IHT calculations .

If the Company is also making any contribution then that is pure bonus as well. An additional consideration is that Life Insurance is sometimes offered to DC members as part of the package and that is very valuable, especially as you get older.

I am well over LTA and on retirement in 2 years or so at 60 plan to live off the 25% TFC and the taxable 75% element (taking just the Personal allowance) as long as possible then pay the LTA penalty at 75.

Albermarle

So just take the money now. You could consider some VCT investments if you're looking to reduce your tax bill (may also be inheritance tax friendly but not sure. Also look at EIS). 

Just be aware that VCTs and EIS investments are more for the experienced investor and can be quite risky.

Like the poster above , it can be safer to keep the money in the pension and just pay the LTA later . Better to pay LTA than having to reduce income as the pot got too small ( in my opinion ) 

TEC6245

Thank you all for your advice, I feel much better prepared for my next conversation with advisor.  As I understand it my specific circumstances are as per Gary1984 calc - for every £100 you could either take £55 now after paying additional rate tax or £45 if you put it into the pension and take the LTA penalty then pay higher rate tax (100 * (1 - 25%) * 60%).  There is a 3% match on pension payments, though I am not sure if this would apply to the termination payment and possibly another 2% saving on NI  but these do not improve it to parity.  I will ask why he thinks this is the way to go (albeit with advantages re CGT and for beneficiaries on any residual money)