Pensions already exceed LTA - How do BCEs and Taxation apply

EdSwippet

jamesd said:

You're using absolute win everything or no benefit analysis in your statistics and also ignoring market conditions at the starting point. I'll be entirely happy to save 10% of the lifetime allowance charge bill and even 1% is an improvement.

Taking opportunistic advantage of any dips that come along seems to encapsulate the idea, and that seems fine in theory. I think the main question here is how to make it actionable while minimising regret at missing later and better opportunities.

Would you be entirely happy to have saved 10% of the LTA charge if you had pulled the trigger early on a market drop that, had you waited, could have saved you 50%, 75%, or even the entire LTA charge? Without resorting to attempting market timing (or worse, voodoo charting), how would someone set the trigger points here?

Dead_keen

I think it's helpful to compare how much smaller the OP's DB pension would be over a range of investment returns for the SIPP (up to the date that the SIPP is crystallised - which on the OP's current plan would seem to be immediately before the DB is taken).

As jamesd says, in a very narrow range of circumstances (i.e. a substantial fall in value of the SIPP) there will be no reduction in the DB pension because it will suffer no LTA charge.  But in all other circumstances there may be a reduction in the DB pension.

So for me, the key issues would be:

1. To quantify the likely reduction in the DB scheme over a range of outcomes and decide what is acceptable.  If a high probability of a large reduction in the DB scheme is unacceptable then something may need to be done.  That might be crystallising the SIPP now or it might be something else.  If the likely range of reduction in the DB pension is acceptable (e.g. it is pretty much rounding on all OP's other sources of income) then there is no need to do anything.  

2. If it is unacceptable then there is a question of what could be done.  This could be drawing the DB pension early, crystallising the SIPP later, transferring the DB to a DC scheme or something else.  Some of these might help other things (e.g. what's available for the OP's spouse on death) and some might not. 
 
3. How to manage the OP's effective income tax rate going forward vs the age 75 BCE on the SIPP.  But we don't have enough information to comment on that as we don't know why the OP expects to be a higher rate / additional tate taxpayer "for the foreseeable future".

zagfles

jamesd said:

Have you never looked at the excellent inverse correlation between cyclically adjusted prjce/earnings ratios of markets and their ten year returns? It's very high and much of what I write below is informed by it so if you haven't, let me know and I'll provide some links.

Reading Interpreting Monte Carlo Analyses and the Wrong Side of Maybe Fallacy and the more generic The Wrong-Side-of-Maybe Fallacy would also be useful because your arguments at their heart seem to largely largely rely on that fallacy. I'm entirely happy to seek to exploit possible but uncertain outcomes, should they happen, and to explain their potential to others.

Sorry but that's rubbish. I'm perfectly happy to accept that an unlikely event could occur even if a different outcome was forecast based on probability. That's why I posted the spreadsheet analyses. Some of the time your strategy would have worked in the past. Most of the time it wouldn't.

If there were no negative consequences of waiting for a possible unlikely event I'd agree with you. However as far as the LTA goes, there are negative consequences, ie significantly higher LTA charge should the unlikely event not occur. Using your method, based on historical probabilities going back 20-35 years, you are far more likely to pay more not less tax. Your only answer to that seems to be based around market timing.

Even if there is a link between P/E ratios and returns, which I don't dispute, after all it's pretty obvious that if you're getting less returns (in the form of dividends) then obviously the ten year returns are going to be lower just because of lower dividends!

But how does it identify a dip is coming (rather than a plateau for a while while returns catch up with capital, or lower growth than would otherwise have occurred?) And the size of the dip? And you've still not explained how you identify the bottom of a dip, as per Ed's post.

zagfles

Dead_keen said:

I think it's helpful to compare how much smaller the OP's DB pension would be over a range of investment returns for the SIPP (up to the date that the SIPP is crystallised - which on the OP's current plan would seem to be immediately before the DB is taken).

As jamesd says, in a very narrow range of circumstances (i.e. a substantial fall in value of the SIPP) there will be no reduction in the DB pension because it will suffer no LTA charge.  But in all other circumstances there may be a reduction in the DB pension.

So for me, the key issues would be:

1. To quantify the likely reduction in the DB scheme over a range of outcomes and decide what is acceptable.  If a high probability of a large reduction in the DB scheme is unacceptable then something may need to be done.  That might be crystallising the SIPP now or it might be something else.  If the likely range of reduction in the DB pension is acceptable (e.g. it is pretty much rounding on all OP's other sources of income) then there is no need to do anything.  

2. If it is unacceptable then there is a question of what could be done.  This could be drawing the DB pension early, crystallising the SIPP later, transferring the DB to a DC scheme or something else.  Some of these might help other things (e.g. what's available for the OP's spouse on death) and some might not. 
 
3. How to manage the OP's effective income tax rate going forward vs the age 75 BCE on the SIPP.  But we don't have enough information to comment on that as we don't know why the OP expects to be a higher rate / additional tate taxpayer "for the foreseeable future".

That would likely increase the LTA charge massively!! The LTA rules are very favourable to DB, 20x pension instead of probably 35x or so with a transfer.

Dead_keen

zagfles said:

Dead_keen said:

...

2. If it is unacceptable then there is a question of what could be done.  This could be drawing the DB pension early, crystallising the SIPP later, transferring the DB to a DC scheme or something else.  Some of these might help other things (e.g. what's available for the OP's spouse on death) and some might not. 
...

That would likely increase the LTA charge massively!! The LTA rules are very favourable to DB, 20x pension instead of probably 35x or so with a transfer.

That's right.  But it's a away of dealing with one point that the OP mentioned: "My rationale for letting the DB pension take the tax hit is because I expect the SIPP to grow substantially and because it can be passed on to my wife and children in full whereas the DB scheme has a 50% reduced widow's pension"

Albermarle

Dead_keen said:

zagfles said:

Dead_keen said:

...

2. If it is unacceptable then there is a question of what could be done.  This could be drawing the DB pension early, crystallising the SIPP later, transferring the DB to a DC scheme or something else.  Some of these might help other things (e.g. what's available for the OP's spouse on death) and some might not. 
...

That would likely increase the LTA charge massively!! The LTA rules are very favourable to DB, 20x pension instead of probably 35x or so with a transfer.

That's right.  But it's a away of dealing with one point that the OP mentioned: "My rationale for letting the DB pension take the tax hit is because I expect the SIPP to grow substantially and because it can be passed on to my wife and children in full whereas the DB scheme has a 50% reduced widow's pension"

Although as we see from numerous other threads on the subject , transferring out of a DB scheme is easier said then done.  

rayzjay

The thought exercise is interesting but the FTSE 100 index is not a useful metric. The performance of that index for the entirety of this century has been extremely poor.
I started investing in 1999 when UKX was around 6400 and it is only 11% higher today after 22 years so it would not have been a good investment over that time.

My investments are mostly in smaller cap companies so they far exceed the FTSE 100 performance year on year.
FTSE All Share or All Small might be a better index but the indices all perform as if the investor makes no choice of buying and selling so individual company gains are offset by falls.

Apart from the 2007 financial crisis and the Covid one, I've not seen portfolio value drops sufficient to suit a "sell low to beat LTA" strategy, so once-a-decade events, and my investing strategy is to ride out those sort of crashes as I don't believe I can call the bottom of the market or whether any short term rise is the start of a full recovery or a pause in the fall which will resume.

To crystallise in a market drop I would have to sell at the bottom to release the lump sum.

rayzjay

Dead_keen said:

But we don't have enough information to comment on that as we don't know why the OP expects to be a higher rate / additional tate taxpayer "for the foreseeable future".

I have rental income from a residential property business

Albermarle

To crystallise in a market drop I would have to sell at the bottom to release the lump sum.

Yes but then the idea is to then invest the lump sum outside the pension, maybe even in exactly the same investments.

Then in theory you are still invested at the same level ( you haven't cashed out your investments in effect), but you have reduced the impact on the LTA, assuming that at some point the markets recover again .

A fly in the ointment could be some significant market movement in the few days you might be out of the market during the transfer .

jamesd

zagfles said:

jamesd said:

Have you never looked at the excellent inverse correlation between cyclically adjusted prjce/earnings ratios of markets and their ten year returns? It's very high and much of what I write below is informed by it so if you haven't, let me know and I'll provide some links.

Reading Interpreting Monte Carlo Analyses and the Wrong Side of Maybe Fallacy and the more generic The Wrong-Side-of-Maybe Fallacy would also be useful because your arguments at their heart seem to largely largely rely on that fallacy. I'm entirely happy to seek to exploit possible but uncertain outcomes, should they happen, and to explain their potential to others.

Sorry but that's rubbish. 

Unfortunately for you, you're wrong about that and it's been checked and found true for every significant equity market in the world.

And since it is true, it's entirely sensible to use it to narrow down the use of the approach to only relatively favourable starting times, including now for many major markets.

To get started you might usefully read this post and the pages it links to, then move on to the more academic paper referenced by Guyton: https://forums.moneysavingexpert.com/discussion/comment/70696736/#Comment_70696736  .