Should I go over the SIPP lifetime allowance?

Tinten

I’m 55 and run my own company and no plans to stop or access my SIPP pension in the near future. 

The company pays the maximum allowed directors pension contribution every year, saving the company corporation tax and increasing my SIPP pension pot. But if I carry on contributing I think I could exceed the lifetime allowance in about 5 years (with modest asset returns). 

Should I stop making further contributions to avoid getting close to the limit? If stock markets fall I could always use carry-forward to catch up contributions later. If I approach the limit, should I sell some equities and hold more bonds or cash to make sure I never go through the limit?

My concerns are:

1. I do Self Assessment tax returns and after drawdown I don’t want the hassle of obtaining more information from my SIPP provider or having to do additional calculations every year just because my SIPP was over the limit when I started drawdown! When I do start taking any income from the SIPP I want any resulting Self Assessment figures and tax to be as simple as possible.

2. I want to avoid the extra tax charge for breaching the limit. What I read suggests that if I go over the limit when I draw income it will be taxed at my marginal tax rate PLUS a further 25%! I don’t want any lump sums as I’d only invest it back into unsheltered investments and would rather have more in the pot for a larger ongoing annual income. 

My wife and I use our full ISA and SIPP allowance every year, so if I withdraw more income from the company as dividend (instead of making the company SIPP contribution) then the additional income would be invested in unsheltered investments so until now I have contributed to the SIPP because it grows tax sheltered, and offers some benefits for inheritance tax. But these alone don’t appear to make it worth breaching the lifetime limit. Should I take the actions I suggest above to ensure I remain within the limit?

MallyGirl

I got a lot of good suggestions on my LTA thread:

https://forums.moneysavingexpert.com/discussion/6294316/lta-basics/p1

Albermarle

There are a few intertwining issues with LTA - current tax relief gained on contributions - inheritance tax implications - possible use of more specialised tax friendly investments like Venture Capital Trusts etc etc.

It is an area where you may benefit from professional advice , especially as you also have your own company and may want to sell it, pass it on etc. so could get complicated.

In essence you only pay LTA , once you have crystallised your pension up to the current limit . You could have two million in your pensions and pay no LTA , if you keep all or part of them uncrystallised. However the snag is that only works until you are 75.
If you take the excess as income , you effectively pay 40% if you are a basic rate taxpayer in retirement . 25% charge and the 20% from the 75% . If you are gaining 40% on the way in then it is  equal. However money in a pension is protected from inheritance tax at 40%, if that is likely to be an issue.

Your overall financial strategy should not be too focused on avoiding the LTA charge as this can distort priorities , although minimising it is obviously sensible. 

ex-pat_scot

A cojuple of specific suggestions also, for investigation:

1. spouse SIPP.
Your spouse may be a shareholder and / or employee of your LtdCo. You may be able to make pension contributions to her as an employee (if she is gainfully active in any role) as well as or instead of contributing to your own SIPP. This might be something to investigate if she has greater LTA capacity than you.

2. Entrepreneur's relief
When you wind down your company, you can claim ER. This is complicated but can mean an effective low rate of tax on retained funds in your business. It is possibly a more tax efficient approach than automatically taking £40,000 SIPP contributions each year (which then might be subject to LTA issues when crystallised). Definitely one to investigate and obtain professional help upon.

3. SIPP tracking
If you have a simple low-cost global equity tracker (and if not, why are you doing something more complicated?), then working out your overall pot value and comparing to LTA is a simple look-up exercise.
If you have multiple separate pensions and this is causing valuation admin, then have you investigated consolidating into fewer / one SIPP with lowest cost and still offering access to your required funds?
If you are having problems forecasting current value + future contributions + future growth vs future LTA, then you can readily model this in a fairly basic spreadsheet. It's really not complicated.

Tinten

Albermarle said:

There are a few intertwining issues with LTA - current tax relief gained on contributions - inheritance tax implications - possible use of more specialised tax friendly investments like Venture Capital Trusts etc etc.

It is an area where you may benefit from professional advice , especially as you also have your own company and may want to sell it, pass it on etc. so could get complicated.

In essence you only pay LTA , once you have crystallised your pension up to the current limit . You could have two million in your pensions and pay no LTA , if you keep all or part of them uncrystallised. However the snag is that only works until you are 75.
If you take the excess as income , you effectively pay 40% if you are a basic rate taxpayer in retirement . 25% charge and the 20% from the 75% . If you are gaining 40% on the way in then it is  equal. However money in a pension is protected from inheritance tax at 40%, if that is likely to be an issue.

Your overall financial strategy should not be too focused on avoiding the LTA charge as this can distort priorities , although minimising it is obviously sensible. 

"you only pay LTA , once you have crystallised your pension up to the current limit ." 

What's "crystallised" up to the limit mean? 

"You could have two million in your pensions and pay no LTA , if you keep all or part of them uncrystallised."

So if I have £2m and the LTA is £1.073m how you keep part of "uncrystallised" to avoid paying the LTA excess tax on your withdrawals? (Bear in mind I don't want to take a lump sum, but have a bigger pot to support a larger ongoing annual income.

"If you take the excess as income , you effectively pay 40% if you are a basic rate taxpayer in retirement . 25% charge and the 20% from the 75% ."

If I am over the LTA and take £100 as income and am paying 40% rate of income tax that's £40, then PLUS 25% tax for being over the LTA - £25, that's £65 / 65%. Is that not how the tax is calculated?

Albermarle

What's "crystallised" up to the limit mean? 

I think you need to do some more background research on the basics of how pensions work , otherwise you are going to get confused as you get into the detail . 

What is a crystallised pension? | PensionBee

You are talking about a lot of money with significant tax implications and as suggested some professional help maybe the route to go .

As a first step you can even get a free one hour telephone discussion with Pension Wise .

Taking your pension | Help with taking your pension | MoneyHelper

If I am over the LTA and take £100 as income and am paying 40% rate of income tax that's £40, then PLUS 25% tax for being over the LTA - £25, that's £65 / 65%. Is that not how the tax is calculated?

The 25% would be taken first and then 40 % from £75 , so you lose £55/£55 %

Not many people pay 40% tax in retirement, and  this makes the LTA more punitive.

Tinten

I've read that link to PensionBee and it says that a "crystallised" SIPP is one where you've started to withdraw some of it. So if I have a SIPP value £1m and start to withdraw then I have a "crystallised" SIPP of £1m. If the SIPP was £2m and I start to withdraw cash from it then I have a "crystallised" SIPP of £2m.  

I can't see how this fits with this - how can you have a SIPP which is part crystallised?
"In essence you only pay LTA , once you have crystallised your pension up to the current limit . You could have two million in your pensions and pay no LTA , if you keep all or part of them uncrystallised."

MallyGirl

If you have a SIPP value £1m you can crystallise £400k withdrawing £100k tax free and leaving the other £300k crystallised but still invested. The other £600k would not be crystallised.
This would leave you having used 400/1073 x LTA allowance which is near on 40%.

Tinten

MallyGirl said:

If you have a SIPP value £1m you can crystallise £400k withdrawing £100k tax free and leaving the other £300k crystallised but still invested. The other £600k would not be crystallised.
This would leave you having used 400/1073 x LTA allowance which is near on 40%.

I am not planning to take any lump sums for the reasons I gave in the opening post. My plan is to withdraw amounts annually using a safe withdrawal rate linked to inflation, so for example if the SIPP is £1m when I start withdrawals, I may withdraw 3% p.a. £30,000 in year 1, then £30,000 + inflation (e.g. 2%) £30,600 year 2 etc. 

If I have a SIPP of £1m and in year 1 I take out £30,000, have I now "crystallised" all my £1m SIPP? Or have I only "crystallised" £120,000 and the other £880,000 is "uncrystallised"? For simplicity I'd like to avoid the LTA as it seems to mean too many unnecessary complications, so can I do that by "crystallising" the whole £1m SIPP and then making sure the investments don't grow in value faster than any increases in the LTA?

QrizB

Tinten said:

MallyGirl said:

If you have a SIPP value £1m you can crystallise £400k withdrawing £100k tax free and leaving the other £300k crystallised but still invested. The other £600k would not be crystallised.
This would leave you having used 400/1073 x LTA allowance which is near on 40%.

I am not planning to take any lump sums for the reasons I gave in the opening post. My plan is to withdraw amounts annually using a safe withdrawal rate linked to inflation, so for example if the SIPP is £1m when I start withdrawals, I may withdraw 3% p.a. £30,000 in year 1, then £30,000 + inflation (e.g. 2%) £30,600 year 2 etc.

It sounds as though you intend to take a series of UFPLS withdrawals.

Tinten said:

If I have a SIPP of £1m and in year 1 I take out £30,000, have I now "crystallised" all my £1m SIPP? Or have I only "crystallised" £120,000 and the other £880,000 is "uncrystallised"? For simplicity I'd like to avoid the LTA as it seems to mean too many unnecessary complications, so can I do that by "crystallising" the whole £1m SIPP and then making sure the investments don't grow in value faster than any increases in the LTA?

In year 1, you will crystallize and withdraw £30k. Of that sum, £7.5k will be tax-free and the remaining £22.5k will be taxable. The remaining £970k will remain uncrystallised.

MallyGirl

Tinten said:

If I have a SIPP of £1m and in year 1 I take out £30,000, have I now "crystallised" all my £1m SIPP? Or have I only "crystallised" £120,000 and the other £880,000 is "uncrystallised"? For simplicity I'd like to avoid the LTA as it seems to mean too many unnecessary complications, so can I do that by "crystallising" the whole £1m SIPP and then making sure the investments don't grow in value faster than any increases in the LTA?

If you flick through the thread I started you will see that my plan (for OH) is to crystallise all that is in the SIPP when he turns 55 - it will be around £650k so will use just over 60% of the LTA. He has an active workplace pension as well that is likely to tip him over the LTA so as soon as that one gets near to using the remaining 40% of LTA he will cut back on pension contributions and put the money elsewhere. Crystallising some of his pensions early 'fixes' that value as a percentage of the LTA (working on the principle that it will likely keep growing ). If the LTA has increased by the next time he crystallises any (or turns 75) then he has 40% of whatever that new figure is. If he waited to crystallise it all at retirement then growth could put him over the threshold straight away.