Lifetime Allowance Planning

LadyGnome

I am 51 and I am trying to plan so I don't risk falling foul of the LTA by the time I retire.  I have a small DB pension from a job years ago which I am estimating will be between £2-5k pa (need to get an up to date forecast) so assume £100k for LTA purposes (£5k x20) plus a DC pot which is just under £500k from a previous employer.  I am a contractor and have a Nest pension via the umbrella co which I am making relatively small contributions (I am a high earner but  below the increased taper threshold). 

We have BTL income of c£20k pa and State Pension contributions for me and MrG are or will be full by SPA.  Our mortgage will be paid off in the next 7 years and both children should have finished school and Uni by then.  We have a reasonable amount of savings and plenty of equity so assume we are financially stable.

I will be in a position to ramp up pension saving in a few years but I am concerned that I might hit the LTA.  If the big DC pot grows at much over 5% a year then things may get interesting by the time I am 65 especially as it is not clear to me how much the LTA will increase each year.  Its difficult to assess the growth of the pot over the last couple of years due to the dip and bounce back from Covid (it's currently showing an 18% growth rate! but much of that is recovering losses).  

So although pension contributions make sense from a tax perspective that benefit is marginal if I reach the LTA.  Do people reduce or stop their pension contributions early in anticipation of the DC pot growing faster than the LTA?  I am thinking that I keep my contributions modest for the next couple of years whilst I finish paying school fees and uni costs and focus on reducing the mortgage.  I can then salary sacrifice (if possible) or contribute into the pot if it needs a top up.  If there is a risk I will hit the LTA at 65 is there anything I can do to mitigate that?   I am planning on taking the TFLS at 65 so that would be a crystallisation event if I understand things correctly.  Am I worrying unnecessarily?  Is there anything else I should be thinking about?

greatkingrat

Do you have to retire at 65? If you're 63 and getting close to the LTA then you can just retire earlier than planned.

LadyGnome

I will have to check when I can take the pensions.  I am hoping to reduce my work from 60 but need to decide how to bridge to the pensions. 

NoMore

Although its good to be aware of the LTA and plan around it if required, don't make the mistake of thinking it must be avoided at all costs. There's situations where it can still be good to contribute to a pension despite the LTA being exceeded, large employer contribution for example. 
The headline 55% charge always seems to scare people, but that's only for a lump sum withdrawal over the LTA allowance, its only 25% if taken as as income. Don't forget having a large amount of money which may be subject to tax is a nice problem to have than not having enough.

LadyGnome

NoMore 
You are right that it is a fortunate position to be in and perhaps I am worrying too much.  If I take the tfls I shouldn’t need anymore LS withdrawals.  I may focus on maxing MrG and my ISAs every year ahead of extra pension contributions and live with the 25% income hit if happens. 

Marcon

LadyGnome said:

NoMore 
You are right that it is a fortunate position to be in and perhaps I am worrying too much. 

Most people who worry about the LTA are probably doing just that, often because they've seen alarming headlines which are often misleading and equally often plain wrong.

Good explanation of the LTA, plus some sensible comments, here: https://www.jameshambro.com/insight/comment/should-i-worry-about-lifetime-allowance/

LadyGnome

Thanks Marcon- that article is very helpful. 

Albermarle

I think if you are going to be way over the LTA , it is different than being in your position ( and mine a little bit) where IF investments keep growing and IF you keep making large contributions and IF you do not retire until X years , then you may go over the limit .
Then think that you only pay the tax on the amount over the limit, and even that is effectively only paying back the tax relief you gained in the first place ( assuming it was at 40% ) . Then it only comes into play when you crystallise the whole/most of the pension or when you are 75. 
There are some strategies that can lessen the impact to some extent but most have their own negatives ie
Take money out of the pension as fast as possible - possibly incur 40% IHT instead.
Take the tax free cash and invest in non tax protected investments - a lot more admin and maybe CGT tax etc 
Use tax friendly investments like venture capital trusts - more for the experienced investor with strong nerves.
Utilise the three small pots rule ( can save £7500 in LTA tax )
Take DB pensions early .( reduced payment ) 
Or stop worrying about and just pay it as and when it comes due ( if it ever does ) 
Or a mixture of some of the above .

jamesd

If you take the whole tax free lump sum you won't have the option to take more lump sum withdrawals at 55% because you had to make that choice when you took the tax free lump sum. And the 25% option is usually best.

It's been announced that the lifetime allowance isn't going to increase for several years.

Tax free lump sum money is only allowed up to the lifetime allowance, none on money above that.

Taking DB early with an actuarial reduction can be a useful lifetime allowance charge mitigation approach because the allowance used is lump sum plus twenty times the income and taking it early reduces both. There's no lifetime allowance used for having the income for longer.

You can take the DC from age 55.

Venture Capital Trusts are the commonly used alternative for people who reach pension limits. The 30% of purchase cost tax relief and only five year holding time is quite good. They are a form of fund that invests in smaller and newer companies that are too small to go to the stock markets yet.

Marcon

Albermarle said:

Utilise the three small pots rule ( can save £7500 in LTA tax )

Expanded explanation:

You can effectively increase the LTA by up to £30,000 by having 3** 'small pots', each worth no more than £10K. You would need to encash the whole of each 'small pot' (needn't all be taken in the same tax year) and specify you are doing so under the small pots regime . Small pots use 0% of the LTA (and for the benefit of anyone else reading this thread, don't trigger the Money Purchase Annual Allowance).

**if they are personal pensions. In addition to 3 personal pensions, you can take unlimited 'small pots' arising from occupational schemes, at least in theory - in practice it's rare to have more than one.

LadyGnome

I think you are all right that this is not a major problem in that I can flex things now so I don't crash through the LTA and having to pay a bit of tax on income is not too onerous. 

The small pots could be useful as I am a contractor and each umbrella company seems to have its own preferred provider so I could see myself building up some small pots I was thinking of consolidating them into the main pension pot at some point but I may be better off leaving them as stand alone schemes to create 3 pots of the right size.

I would definitely think about taking the DB early as I don't want to be forced to work full time until 65  - I may choose to - but I want it to be a choice.

I am in two minds about VCT - I work in financial services - so understand the risk.  On the one hand they make sense from a tax perspective and have the possibility of strong growth and tax free dividends but I would only be prepared to invest money I could really live without so that might limit how much I am prepared to put in.

I think I will continue with my smaller contributions to my current contractor pension to create a small pot and leave the larger pot for now.  I will reassess each year and start pushing larger amounts into the main pot if needed depending on investment returns.