Looming LTA

pip895

A few years back I thought LT was a problem for other people and I would never be impacted.  However after a few very good years for investments it has dawned on me that if things were to continue at the average growth rate I have experienced over the last 10 years My uncrystallised SIPP will exceed the LTA in only a few years. The LTA rate being frozen has clearly added to the issue but in all honesty not by that many years. 

My gut instinct is that we are unlikely to have more good years and I won't have a problem (at least with the LTA) but then I have been telling myself that for a while.   Perhaps I do need to take steps now to reduce the risk - Having never benefited from the generous tax breaks on the way in (I have always been a basic rate tax payer) It would be pretty annoying to get clobbered by 55% tax on part of my SIPP.  

I am trying to work out how best to reduce this risk.  The measures I am taking/considering are these:-

1.  Start drawing down from my SIPP up to the top of my basic rate band.  Initially I have done this by dropping 1 years cash requirement into drawdown and drawing cash from it in monthly installments.  The crystallised pot is currently sitting in cash earning nothing and tax free portion in premium bonds as I have used this years ISA allowance.  I did this partly because I like the idea of having a regular income and partly as a stopgap whilst considering option 2.

2.  Put the whole SIPP into drawdown and remove the 25% - invest this in a combination of more PB for both myself and OH and two GIAs these would be transferred over the next few years into our S&S ISAs.  The income from these GIAs should use up the allowances and the capital growth would be unlikely to exceed the CGT allowance as it will be sold down in batches.

3.  Stop adding to the SIPP - as I am retired this is only £2880/annum so not a big issue and I have until March 2023 to decide as this years went in in April.

4.  De risk the portfolio - I don't need the growth so why take the risk??  I currently have about 70% equity - my issue is that I struggle with the non equity part of the portfolio - I really don't like bonds that much.  I could transfer the riskier parts of my overall portfolio from my SIPP to my ISA but as I am mainly in IT's and etfs it would be expensive..  I also don't really want to up the risk that much in my ISA - I intend principally living of that once I am past the 75 year check (IHT issues mean I would really like to leave as much as I can in the SIPP). Perhaps I could go to 60% in the SIPP and 80% in the ISA...

5. Delay taking my state pension which will increase the amount I can draw out of the SIPP - not a decision I need to take for a few years yet but it is there in the mix.

What are your thoughts - I am sure I am not alone in having this sort of issue.  It is the uncertainty of it all that gets me.  I would frankly be amazed if the rules that under pin these decisions don't change in the next few years and the markets could of course deal a blow tomorrow that would make the whole matter academic.

Albermarle

Firstly the 55% is only if you take a lump sum . If  you are  basic rate taxpayer  and you take it as income it is 40%.including the normal income tax. 

Personally I have partly gone down the route of Point 4). ISA is 100% equity ( although it is only about 15% of the size of pension) and pensions are in the 45% area ( depending on how certain investments are classified ) . Due to pessimism about bonds , I am also invested in infrastructure funds, property funds , wealth preservation funds ( of course they include equity and bonds ) and thinking about precious metals.

For Point 2) I think the theory is to wait to do this until we hit a downturn , then the LTA% contribution will be lower. However like you say if we hit a big enough downturn LTA might not be an issue anyway.

ex-pat_scot

Derisk is the oversimple approach. Derisk the SIPP and take greater risk in your ISA.
However - derisking is not simple at the moment, as there are no safe fair priced bonds at present (in my opinion) - bonds seem to have the risk characteristics of equities.
There's no return on cash within a SIPP - you can't pop any money into Premium Bonds from within a pension wrapper.

I think my approach will be to take income up to the top of the BR tax band each year, once I am able. Any unspent money will be then parked into ISAs.
Deferring state pension seems a good idea too, at least until 75 (when the LTA test kicks in).

Don't forget the "small pots" - 3 x £10,000 can be withdrawn, so your effective LTA is £1.073m + £30,000 ie £1,103m.

I think quite a few (I was going to type "many" but that's too much!) will have found themselves staring at large DC balances if they have been fully invested in good equity trackers, and have had the benefit of a couple of decades already in the market.
I know that if I had really started in earnest with my focus on pension a few years earlier, then I would have been a long way through LTA as a result of the sustained growth since 2011 or so.

pip895

Albermarle said:

For Point 2) I think the theory is to wait to do this until we hit a downturn , then the LTA% contribution will be lower. However like you say if we hit a big enough downturn LTA might not be an issue anyway.

Good point - best to sit on my hands and wait then.  Though I guess that de risking to some extent so that at least 25% is in liquid and relatively safe assets would be sensible too.

Re the 55% tax rate - does that relate just to UFPLS? If you were to put a lump into drawdown and then withdraw most of it a few weeks later would that avoid the 55% tax??

zagfles

Why do you think you need to predict what will happen to your investments and decide now? I would be looking at doing 2 if and when the uncrystallised SIPP reaches (or approaches) your remaining LTA. It may be sensible to drawdown up to basic rate band to avoid getting hit by the second LTA charge at 75 for crystallised growth.

Deferring the state pension for a few years could be beneficial but until 75 is likely to be negative before tax is considered, but it's an option depending on how your investments are doing, also could be a way to secure income when you get to an age where you don't want to be bothered with managing investments.

pip895

ex-pat_scot
Thanks for that - I share your concerns about non equity.  I could always use unwrapped cash to buy equity in a GIA at the same time I sell down equity in the SIPP to prepare for crystallisation.  

I need to do more maths on delaying the state pension - so far I have only done the analysis ignoring the LTA but that suggests 3-4 years max before statistically you are likely to loose money.. 

pip895

zagfles
You are right of course all this may be academic although leaving things until the LTA is reached might make it difficult to avoid.
I think putting into drawdown enough so that I can fill my and my OH's ISA  could be worthwhile, although the fees on the SIPPs on my platform would go up by £200 as on HL I would end up with two SIPPs rather than one.    In the scheme of things £200 is neither here nor there but it seems messy. 

zagfles

pip895 said:

zagfles
You are right of course all this may be academic although leaving things until the LTA is reached might make it difficult to avoid.
I think putting into drawdown enough so that I can fill my and my OH's ISA  could be worthwhile, although the fees on the SIPPs on my platform would go up by £200 as on HL I would end up with two SIPPs rather than one.    In the scheme of things £200 is neither here nor there but it seems messy. 

You could always derisk if you start approching the LTA to avoid too much fluctuation, and even if you go slightly above you'll only pay a little LTA charge.

Cus

Of course maximise any tax allowances, take out income up to the BR limit, Isa's etc etc, however I don't see why a de-risk is required if you were already comfortable with that risk. Paying tax on something over LTA is better than not being over LTA.  To me it's a little bit like avoiding a higher rate salary job as it pays more tax than a basic rate salary job.

Albermarle

Cus said:

Of course maximise any tax allowances, take out income up to the BR limit, Isa's etc etc, however I don't see why a de-risk is required if you were already comfortable with that risk. Paying tax on something over LTA is better than not being over LTA.  To me it's a little bit like avoiding a higher rate salary job as it pays more tax than a basic rate salary job.

I think it depends on the interpretation of what derisk means . In this context I would see it as just not gunning for growth, with the risk that entails , as you are taking a risk for no reason .
If the high risk strategy succeeds you pay more LTA . If there is a slump you lose big time . So a lose /lose situation .
If you have a balanced mix and then you pay a bit of LTA in the good times, but protect the downside to some extent , then that would seem a good idea?

Cus

I see your point that with higher risk, there is a reduced upside due to the tax hit.  Need a modelling tool to compare levels of risk versus potential payoff taking into account the tax hit.

Might be worth converting the whole pot into cash...