Looming LTA

cfw1994

pip895 said:

On a slightly separate point as I am accused of being an optimist, what growth scenarios do you use for testing your plans?  Mine are optimistic 7% above inflation (~average of 10 years). Basic 2% above inflation and pessimistic 0% above inflation.  Do you consider losses against inflation too? 

I consider myself an optimist, but I wouldn't go that far 😳
I plot for an average 4% growth, but against that I also plot an 'average' inflation of 2.1% - so growth above inflation of 1.9% 🤞

That said, I expect to do much better - those were numbers I chose a few years back when plotting my escape 👀
I also model a 2nd year dip for laughs every now & then.  -20% to -40%, with a return to the 4%.   
Of course it is faintly possible we could have a multi-year dip, but one can only go so far.


In other news: this week, I started my drawdown paperwork....MPAA triggered, no going back now 🍻
Aviva estimate I could run out by the age of 83 😱
Given their more pessimistic numbers, plus the fact we have a 3 other pensions between us kicking in from 1 to 9 years from now, plus fully funded State Pensions, we feel we have taken a reasonable approach 👍

Besides, we all have the Grey Wedge of Death to consider ☠️⚰️😉

Albermarle

I plot for an average 4% growth, but against that I also plot an 'average' inflation of 2.1% - so growth above inflation of 1.9% 🤞

Considering the outlook for bonds, cash interest rates and US equity at all time highs , I think this is as good an estimate as any . If one has benefitted from the last ten years of growth then it would not be so bad if you could just keep ahead of inflation for the next ten. 

Between the doom mongers and the optimists , I would not be surprised at markets moving sideways for some time , with a few bumps here and there and dividends etc providing some support to returns . Total guess though !

Thrugelmir

pip895 said:

On a slightly separate point as I am accused of being an optimist, what growth scenarios do you use for testing your plans?  Mine are optimistic 7% above inflation (~average of 10 years). Basic 2% above inflation and pessimistic 0% above inflation.  Do you consider losses against inflation too? 

Long term objective a net 2% above inflation. Formulated this idea some decades ago when I first started reading the Credit Suisse Yearbook (previously published by Barclays). Ultimately markets are living breathing companies not just numbers on a screen. Collectively growth cannot deviate far away from the rate of growth in GDP over the medium term.

As of yesterday, 25% of the Companies in the S&P 500 now have market values in excess of 10 times annual revenues.  Only on a previous occcasion in history has there been more. The Dot Com Boom era.  To justify these companies, as an example, growing 7%+ in market capitalisation terms would be extremely challenging.  Makes the possibility of them not hitting market expectations greater and greater. When companies fail to deliver share prices can instanteously slide.

Of course you could run a concentrated portfolio of 20 -30 individual shares and exceed all expectations. If you managed to make the right calls. Which few people achieve on a consistant basis. 

ex-pat_scot

My long run planning assumptions are:

- 7% gross / 5% net of inflation, for 100% equity.

I do run scenarios from 0% to 12% returns, and I've been running at 11% rate since my tracking began in 2014.
I also cut the output several ways:
- forecasting total pot value by month, assuming the long run 7% return and maintaining current contributions 
- tracking how the returns would change if contribution levels moved
- comparing the pot value vs LTA
- modelling phased withdrawal rates for various starting points

pip895

There seems to be quite a few people assuming 1.9/2% above inflation medium/long term.   If it happens I will be absolutely fine but I do worry over people still early in the accumulation phase..

I put a few scenarios through my basic model - if I don't touch the pension at all, only a 1.6% increase above inflation will put me well over the LTA by age 75.

If I take the pension now up to the basic rate limit that increases a bit, but only to ~2%.  Taking the full 25% tax free out now makes more impact and increases the growth limit above which I hit the LTA to ~5%.  Delaying the state pension to 75 isn't particularly effective adding less than 0.1%.

I think not doing anything until I am in LTA territory doesn't sit well with me so I will probably be putting the pension into drawdown in the next year or two.



 

Thrugelmir

pip895 said:

There seems to be quite a few people assuming 1.9/2% above inflation medium/long term.   If it happens I will be absolutely fine but I do worry over people still early in the accumulation phase..




 

Using the long term historical averages for the established developed global markets. Returns average 4%-5% above inflation before fees and income is reinvested. 2% is simply a conservative objective. As there's no guarantees that the perfect portfolio will be held. Prior to the pandemic, global growth was already on a downward trajectory with forecasts for 2020 set at around 3%.  The 12 year bull market has clouded new investors perceptions. 

pip895

Having spent some time working with my admittedly rather crude spreadsheet model I made the decision on Tuesday to crystallise my SIPP.   My reasons were as follows:-

1. High/or Med-High inflation in the next 4 years will effectively reduce the LTA substantially so any delay is likely to reduce the headroom.
2. The push for keeping the maximum cash in the SIPP is to reduce taxation mainly by keeping monies outside the estate - this though relies on the rules not changing radically in the next 20-30 years.  Any bets on that?   
3. The alternative option of putting into drawdown only enough so that I can stash the tax free cash in ISAs would leave me with a split SIPP for quite a few years, which is more complex and adds to costs.
4. OH is quite a bit older than me and has had a couple of health scares, so freeing up funds now will allow us to have some fun whilst we are both fit enough to enjoy it.
5. If not now when?  On Tuesday my portfolio was at an all time high.  I know for minimising LTA use I should pick a point at which the value is low but that would mean selling at a discount and ending up with a lower tax free sum. 

I also find leaving things in the "wait and see/will probably do it in the next few years" category ends up giving me sleepless nights. So on Tuesday I sold out of sufficient funds to yield just a bit over 25% in cash. On Wednesday I filled in the forms and put everything bar £50 into drawdown.  The £50 keeping the SIPP open for the £2880 addition I can make in April provided the worries of the LTA have receded enough.

Albermarle

 The push for keeping the maximum cash in the SIPP is to reduce taxation mainly by keeping monies outside the estate - this though relies on the rules not changing radically in the next 20-30 years.  Any bets on that?   

The ability to perfectly legally  use pensions to avoid IHT seems illogical to me ( even though it will probably benefit me) , so you might think it will change at some point , in some way . Although as seen this week this government ( and previous ones ) tend to shy away from increased tax on wealth, capital etc and prefer to tax working people .

The alternative option of putting into drawdown only enough so that I can stash the tax free cash in ISAs would leave me with a split SIPP for quite a few years, which is more complex and adds to costs.

Are you sure it will cost more ? Will HL charge you for two SIPPs somehow? 

I always assumed it would not cost more to have a pension part crystallised, but I could be wrong.

zagfles

Albermarle said:

 The push for keeping the maximum cash in the SIPP is to reduce taxation mainly by keeping monies outside the estate - this though relies on the rules not changing radically in the next 20-30 years.  Any bets on that?   

The ability to perfectly legally  use pensions to avoid IHT seems illogical to me ( even though it will probably benefit me) , so you might think it will change at some point , in some way . Although as seen this week this government ( and previous ones ) tend to shy away from increased tax on wealth, capital etc and prefer to tax working people .

What they've done this week goes against the trend. LTA (obviously a capital tax) threshold was at £1.8 million a decade ago, personal tax allowance was about £6k. Basic rate income tax was 22% 15 years ago.

LTA has been massively cut, and now frozen. Personal allowances have risen massively. Tax rates have been cut.

Tax on earned income has been falling (in general) this century. Tax on wealth has been increasing.

The announced NI increase counters the trend.

pip895

Albermarle said:

 The push for keeping the maximum cash in the SIPP is to reduce taxation mainly by keeping monies outside the estate - this though relies on the rules not changing radically in the next 20-30 years.  Any bets on that?   

The ability to perfectly legally  use pensions to avoid IHT seems illogical to me ( even though it will probably benefit me) , so you might think it will change at some point , in some way . Although as seen this week this government ( and previous ones ) tend to shy away from increased tax on wealth, capital etc and prefer to tax working people .

The alternative option of putting into drawdown only enough so that I can stash the tax free cash in ISAs would leave me with a split SIPP for quite a few years, which is more complex and adds to costs.

Are you sure it will cost more ? Will HL charge you for two SIPPs somehow? 

I always assumed it would not cost more to have a pension part crystallised, but I could be wrong.

I agree that the IHT saving seems slightly illogical and I can definitely see some future government seeing it as an easy target. Taxing wealth may be much less taboo to the next government we get..

Re the charges on HL - OH has both a small SIPP and a much larger drawdown account with mainly etfs & ITs- I recently purchased an etf in the small SIPP and was surprised to see a charge for it at 0.45% (I get funds at 0.25%) .  I will probably be transferring that one to drawdown soon to!