When to "Crystalise" my pension

PeterBalham

Excuse me if crystlalise is not the correct term.
I have 950k in a SIPP  with Fidelity that comes from a final salary scheme that I converted to a SIPP 5 years ago,  I  realise I am now limited to 1073.1k .  
I had intended to contribute about 20k per annum for another 5 years.     I have my money invested in three trackers and Fidelity let me know I have been achieved 7.8% per annum it occurs to me if that continues with a £20k contribution this year and thge next and if the return continues to be 7.8% I will hit the life time allowance in less than two years.    I suspect I should crystalise my pension when the funds reach a value of 971.k so that I can make another 5 years contributions into my pension.  I appreciate I should really cary out some kind of actuarial calcualtion to be sure but my gut feel is the benefit of getting tax relief on my contributions for 5 years not two is worth more than the loss of the tax wrapper on the tax free lump sum that I would have to take out of the SIPP.

jamesd

If you're 55 already, now is the time to start crystallising. You can do that by taking the 25% tax free lump sum from some portion of the pension and placing the 75% of that portion into Flexi-access drawdown to be left until retirement.

This way you have moved some of the the growth that would be subject to the initial lifetime allowance test out of the pension, so you end up using less allowance.

A reason not to do it all is that there could be a market drop that you could exploit to get more on out with less allowance use. Or it might not happen.

When crystallised it's useful to know that different global equity tracker brands are different so you can bed and breakfast (sell one, buy the other) to use your capital gains allowance each year.

Robert_McGeddon

jamesd said:

When crystallised it's useful to know that different global equity tracker brands are different so you can bed and breakfast (sell one, buy the other) to use your capital gains allowance each year.

Is this in respect of the tax free element, the drawdown element or both?

Robert_McGeddon

If you're not already putting money into a S&S ISA your £20K pa could go there.

Malthusian

I suspect I should crystalise my pension when the funds reach a value of 971.k so that I can make another 5 years contributions into my pension.

If you did you would probably end up paying voluntary tax. If you crystallised £971,000 then you would be left with (assuming the LTA stays the same) £102,100 in unused lifetime allowance. So if you paid another £100k in, virtually all income and growth on that £100k would eventually be subject to a tax charge of either 55%, or 25% plus income tax. This may well leave you worse off than if you just kept the net payment in your own hands. (Assuming that the £20k is coming from your own hands and does not represent "free money" from an employer pension scheme or similar.)

In addition, you have another lifetime allowance test on growth within the drawdown fund at 75. So by making further contributions you would reduce the wiggle room for growth on the drawdown fund. That age 75 test can potentially be mitigated by drawing income, but you need to make sure you don't cut your nose off to spite your face by paying income tax unnecessarily.

Lifetime allowance charge planning is complex and it would be very advisable to see an FCA-regulated Independent Financial Adviser.

PeterBalham

jamesd said:

If you're 55 already, now is the time to start crystallising. You can do that by taking the 25% tax free lump sum from some portion of the pension and placing the 75% of that portion into Flexi-access drawdown to be left until retirement.

This way you have moved some of the the growth that would be subject to the initial lifetime allowance test out of the pension, so you end up using less allowance.

A reason not to do it all is that there could be a market drop that you could exploit to get more on out with less allowance use. Or it might not happen.

When crystallised it's useful to know that different global equity tracker brands are different so you can bed and breakfast (sell one, buy the other) to use your capital gains allowance each year.

Hi James quite a long time ago I chose a number of trackers to gain wide exposure including a FTSE 250 tracker, I alwyas use my maximum ISA contribution.   but still end up making more than my annual allowance so I used ttracker with the FTSE 250 tracker so as to crystalise an amount just under my annual allowance and then buy a FTSE 250 treacker form another provider.  I am an accountant so have some tax knowledge and checked that the revue treat trackers issued by different companies as seperate and they do .  As I believe in strong market therory I decided on the varous percentages of trackers that I wish and keep to them.

Thrugelmir

PeterBalham said:

 I have my money invested in three trackers and Fidelity let me know I have been achieved 7.8% per annum it occurs to me if that continues with a £20k contribution this year and thge next and if the return continues to be 7.8% I will hit the life time allowance in less than two years.    

And if there's a 15% market correction in the next two years you'll be considerably short of the allowance.  Many newer investors have yet to experience a bear market nor the length of time it takes markets to fully recover. 

Albermarle

PeterBalham said:

jamesd said:

If you're 55 already, now is the time to start crystallising. You can do that by taking the 25% tax free lump sum from some portion of the pension and placing the 75% of that portion into Flexi-access drawdown to be left until retirement.

This way you have moved some of the the growth that would be subject to the initial lifetime allowance test out of the pension, so you end up using less allowance.

A reason not to do it all is that there could be a market drop that you could exploit to get more on out with less allowance use. Or it might not happen.

When crystallised it's useful to know that different global equity tracker brands are different so you can bed and breakfast (sell one, buy the other) to use your capital gains allowance each year.

Hi James quite a long time ago I chose a number of trackers to gain wide exposure including a FTSE 250 tracker, I alwyas use my maximum ISA contribution.   but still end up making more than my annual allowance so I used ttracker with the FTSE 250 tracker so as to crystalise an amount just under my annual allowance and then buy a FTSE 250 treacker form another provider.  I am an accountant so have some tax knowledge and checked that the revue treat trackers issued by different companies as seperate and they do .  As I believe in strong market therory I decided on the varous percentages of trackers that I wish and keep to them.

Not sure if it is just me , but I can not really understand what you are trying to explain here . Especially this bit 
 I am an accountant so have some tax knowledge and checked that the revue treat trackers issued by different companies as seperate and they do 
Otherwise it can be worth continuing with contributions to your pension , even if you are approaching the LTA, if you are getting 40% tax relief and or employer contributions.

PeterBalham

Albermarle said:

PeterBalham said:

jamesd said:

If you're 55 already, now is the time to start crystallising. You can do that by taking the 25% tax free lump sum from some portion of the pension and placing the 75% of that portion into Flexi-access drawdown to be left until retirement.

This way you have moved some of the the growth that would be subject to the initial lifetime allowance test out of the pension, so you end up using less allowance.

A reason not to do it all is that there could be a market drop that you could exploit to get more on out with less allowance use. Or it might not happen.

When crystallised it's useful to know that different global equity tracker brands are different so you can bed and breakfast (sell one, buy the other) to use your capital gains allowance each year.

Hi James quite a long time ago I chose a number of trackers to gain wide exposure including a FTSE 250 tracker, I alwyas use my maximum ISA contribution.   but still end up making more than my annual allowance so I used ttracker with the FTSE 250 tracker so as to crystalise an amount just under my annual allowance and then buy a FTSE 250 treacker form another provider.  I am an accountant so have some tax knowledge and checked that the revue treat trackers issued by different companies as seperate and they do .  As I believe in strong market therory I decided on the varous percentages of trackers that I wish and keep to them.

Not sure if it is just me , but I can not really understand what you are trying to explain here . Especially this bit 
 I am an accountant so have some tax knowledge and checked that the revue treat trackers issued by different companies as seperate and they do 
Otherwise it can be worth continuing with contributions to your pension , even if you are approaching the LTA, if you are getting 40% tax relief and or employer contributions.

Hi I jusr wanted to thnks the chap who replied to me I have kpet roughly 25% of my portfolio in the FTSE I keep about 25% of my porfolio in the FTSE 250 if I were to crstalise  a gain up to the annual CGT allowance by selling say a vanguard ftse 250 tracker and then then buying back within 30days I would not achieve my goal of crystlalising a gain but if I were to buy the next day a FTSE 250 tracker with anothter provided  say HSBC I wold keep to the 25% I chose as exposure to the FTSE250 and be out of the market for a short time.    I will not reply indivicually to all the message here I am aware that there a whole batch of issues that need to be considerd for example being 74 chnages the argument from someone in thier late 50's I have not even started to look at IHT   My main point was  lot of financail advisora know the rules but so farthe ones I have met do not understand how to calculated the benefit of a fund growing tax free as compared to facing a LTA charge at 75.        

PeterBalham

Malthusian said:

I suspect I should crystalise my pension when the funds reach a value of 971.k so that I can make another 5 years contributions into my pension.

If you did you would probably end up paying voluntary tax. If you crystallised £971,000 then you would be left with (assuming the LTA stays the same) £102,100 in unused lifetime allowance. So if you paid another £100k in, virtually all income and growth on that £100k would eventually be subject to a tax charge of either 55%, or 25% plus income tax. This may well leave you worse off than if you just kept the net payment in your own hands. (Assuming that the £20k is coming from your own hands and does not represent "free money" from an employer pension scheme or similar.)

In addition, you have another lifetime allowance test on growth within the drawdown fund at 75. So by making further contributions you would reduce the wiggle room for growth on the drawdown fund. That age 75 test can potentially be mitigated by drawing income, but you need to make sure you don't cut your nose off to spite your face by paying income tax unnecessarily.

Lifetime allowance charge planning is complex and it would be very advisable to see an FCA-regulated Independent Financial Adviser.

I know that the tax rules to do with pension are such I need specialist advice I had to use the professional advisor that the company that held my Final salary pension and though he made some reasonable points he did not really understand the maths behind pension and some of the tax rules. He knew the rules well and explained ,amy to me but could not do the relevant sums that would apply to me /

My forced experience on financial advisors is less than positive as my employer made me use one.

For example my portfolio in my SIPP shows a return of 8% which is off course not taxed until I start draw down and then 25% is tax free with the balance taxed at my marginal rate 45%.

It is quite difficult for me to calculated what return I would make if it was not sheltered very simplistically as I always exceed my annual allowance at the moment the capital gain element would be taxed at 20% and the oncome at 38.1%.

Off course the CGT rate could change on the future.

Roughly  with these numbers I would result in a return of 5.5% outside a SIPP not 8%.

So if I were to continue saving into a SIPP after I hit my LTA I think it would depend on a number of factors.

Take a 45% marginal tax payer a £100 conribution to a SIPP will cost them £55 at the age of 57 and assume  18 years of tax free growth at 8% when they are 75.

Assuming this grows at 8% a and the investor is 57 and has used  all his lifetime allowance.  So the entire fund will be taxed at either 55% if taken as a lump sum at 75 or 25% if kept in a SIPP and then as the money is taken out it will be taxed at thh marginal rate of the tax payer at 75.

Just consider the lump sum option

So 18 years late the the £55 net of tax relief in the SIP would be 1.08^18*100= 342.59

If that were taken as a lump sum the investor would receive (1-55%)*342.59 = 154.16

So that would be a return of    (154.16/55) ^ (1/18) -1   = 6.8%

If the sum was outside a SIPP the return would be the post tax return in this example I have taken 5.5%.ish.

I do not know so many rules for example how would inheritance tax effect this.

I agree it is not a simple question but the financial advisors I have talked to do not understand the maths , for example how to value the benefit of growing the money in  SIPP tax free for say 18 years.

 

zagfles

Yes we've seen loads of examples here of financial advisers not understanding mathematical fundamentals. It's worth having a look at all the LTA related articles aimed at advisers, if you understand the basics and the fundamentals of maths you just need to understand the rules in depth, which are explained well on sites aimed at advisers. Also the HMRC pension tax manual. If you struggle with them then maybe find a good adviser who understands the LTA inside out (good luck!)