Advice please: LTA and IHT

bsf22

I’m a long term ‘lurker’ on the forum and have learned lots about managing pensions etc.  I’m in a very fortunate financial position and now need to make some decisions about the future.  I’m preparing to get IFA advice as I’ve done periodically in the past but would really appreciate the wise folks on this forum looking over my figures, checking my understanding thus far and making sure I’m clear about what questions I want the IFA to address for me.

Background

Age 58, divorced, one son – still at home, just starting work having completed uni (no debt).

Mortgage free – house worth circa £400k

‘Retired’ exhausted in 2019 having toiled for 35+ years in professional role. 

Have always been very careful with money.  Some would say frugal!  I don’t mind paying if I think something is worth it but have never felt the need to spend for the sake of it.  Paid mortgage off very early before prices rocketed, didn’t move house ‘just because’, have never had a brand new car, was lucky to have good state schools locally so no large bills for school fees.  Generous to family and charity but find it very hard to spend money. Have done a lot of travelling in the past and will restart this when Covid allows – will consider upgrading amount spent on this!  Have kept careful track of spending over the last 4 years - £20k is very comfortable for my son and I for basic living (not including major expenses such as new car, big house repairs or holidays).  Will likely replace bathroom and kitchen in the next few years.

 

Pension situation

DB from NPA of 60 with lump sum of £133k and annual pension of £44k (could take bigger lump sum but commutation rate of 12:1 not very generous)

DC of approx. £318k

SP – a few years short of max but will pay up before SPA of 67

I have LTA protection under IP2016 of £1,165,000

 

Current Savings

Cash (PBs, NS&I, cash ISA, other savings accounts)  £200k approx.

S&S ISA £488k

 

Inheritance Tax

I know I’ll be hammered for this having only one ‘allowance’ ie not being married.  I intend to help my son buy a property and will continue to help family and charities.  I might also eventually need some sort of private medical input or an expensive care home.  I won’t be too worried about the 7 year rule for gifts – if I die earlier than expected /hoped, then the estate will just need to pay it.

 

Thoughts

I need to decide about taking my DB pension:

-if I take it earlier than 60, there’ll be a bit of actuarial reduction but this might be helpful in mitigating some of the LTA issues.

-I’m thinking I should take the max tax-free allowance as this would definitely cut the LTA charge (calculated at 20 x annual pension + tax-free sum).

 

I think I’m right in not touching the DC pension at all.  This would leave it outside my estate entirely from IHT point of view.  However (with assumed growth) at the age of 75 when it’s tested against the LTA, there’d be a big tax bill at that stage (although the LTA threshold may be a lot more then?)

 

I know I’ll be paying a lot of tax one way or the other, which is ok, I just don’t want to pay any more than I need to!  I’ve been fortunate in the job I’ve had, property prices rising hugely after I’d bought and the rise of the Stock Market.  Very grateful for everyone’s thoughts on here, so I can get the best value from my IFA!   Thanks!

 

Albermarle

You seem to be on top of the issues generally .

Taking a DB pension early is normally recommended in these circumstances. The actuarial reduction is normally balanced out ( or nearly so )  by the fact that it is paid for longer . However the LTA impact is less.

 

ukdw

Based on your £44k DB, Looks like you could end up paying 40% tax on at least part of your SP - so another reason to consider taking your DB early.

Prior to SP age I would consider drawing down a bit of the DC too on top of the DB to use up the 20% tax band - either spending it or gifting it to avoid making your IHT situation worse.

Helping son to maximise pension and ISA/LISA contributions could help mitigate some of the IHT problem.

If you don't decide to take the DB early, then I guess having to pay 40% tax after SP age would make your net lump sum commutation rate closer to 20x based on 12x  gross.

Despite the risk of 40% tax - paying the additional NI contributions probably still a good deal. I wouldn't think deferring SP worth doing though as it will only increase the 40% tax liability once you eventually start taking it.