Should I go over the SIPP lifetime allowance?

Thrugelmir

Tinten said:

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?

By doing so you would be reducing the potential volatility of the portfolio.  If the value of your portfolio were to drop subsequently. You could continue to top up with higher risk assets such as equities. 

Tinten

Is this correct:

To avoid paying the additional tax rate the £1,073,000 LTA is the most that can be withdrawn to provide a source of income in retirement – cumulatively – over the whole period of withdrawals from the SIPP. The additional 25% tax rate is applied to any withdrawal amounts made from the point at which total withdrawals in aggregate have exceeded the LTA.

jamesd

Please read this post of mine which applies to your situation. You should change your plans and take the maximum tax free lump sum as early as possible to crystallise and get a lifetime allowance calculation at current values.

Doing this sort of tax planning doesn't reduce your safe withdrawal rate because you aren't spending the money, just moving it around. Actual value will increase because of the lower total tax cost.

Yes, this probably means unwrapped investments but you do have the possibility of buying VCTs to further improve your tax position. You can also do this in retirement and since you can sell and buy VCTs after five years holding time you can continually recycle the same chunk of money you used for the first five years if you like.

jamesd

Tinten said:

Is this correct:

To avoid paying the additional tax rate the £1,073,000 LTA is the most that can be withdrawn to provide a source of income in retirement – cumulatively – over the whole period of withdrawals from the SIPP. The additional 25% tax rate is applied to any withdrawal amounts made from the point at which total withdrawals in aggregate have exceeded the LTA.

That's right.

For any portions above the allowance you do not get 25% tax free and have to pay either 25% income lifetime allowance charge (if you buy annuity or place into flexi-access drawdown) then taxable when withdrawn by you or the 55% lump sum charge with no income tax to pay. These calculations are done for each portion at the time you take that portion.

In addition a lifetime allowance charge calculation is done at age 75 on any uncrystallised money and on actual growth in the numeric value of money still in any crystallised pots.

The way you minimise these lifetime allowance charges is by crystallising as soon as you can. Then the growth on money outside the pension isn't subject to the LTA charge and the money growth still inside a drawdown account can be withdrawn so that there is no growth.

A person who has a pension worth a million in retirement is likely to be able to safely withdraw in excess of 50k a year, depending on drawdown rules chosen. To help avoid the lifetime allowance charge on growth at 75 I normally suggest withdrawing at least the whole basic rate band in taxable money from the pension each year to avoid paying any higher rate income tax but that doesn't currently apply to your situation, I think, because you seem to have income above that already.

RoadToRiches

These are really good you tube videos I found
crystalisation explained very well https://youtu.be/Ygs8wkmLeCE
why pay in past LTA - https://youtu.be/7kErytIUmeo

hope they give you clarity as they have with me.

jamesd

Those videos are good and I noticed no mistakes in them.

Albermarle

The way you minimise these lifetime allowance charges is by crystallising as soon as you can.

Is it not better to wait until there is a fall in the markets/fall in the value of your pot , so the crystallised value will be less? 

Therefore with a lower % LTA contribution.

I suppose the issue is if the pot keeps growing instead, then you are in a worse position .

EdSwippet

Albermarle said:

The way you minimise these lifetime allowance charges is by crystallising as soon as you can.

Is it not better to wait until there is a fall in the markets/fall in the value of your pot , so the crystallised value will be less? 

Therefore with a lower % LTA contribution.

I suppose the issue is if the pot keeps growing instead, then you are in a worse position .

The OP hasn't yet reached the LTA. Currently, their LTA headroom is eroded by both growth of investments in the current pot and new contributions. Crystallising now removes investment growth in the current pot from that equation, preserving the remaining LTA headroom for the planned future contributions.

And yes, the required market fall may not occur. Or, it may not occur in the timeframe needed. Or, it may not be as deep as needed. Or, you could miss it by failing to call the bottom. Or ...

gm0

As @Tinten is finding out the rules are somewhat complex and interlock. 

If it is in the pension - then it is not in your estate for IHT calculation but the real and inflationary growth of the pension (below and above the limit) are subject to a 2nd test at 75 BCE5A and 5B.  (Any uncrystallised pension not taken + crystallised growth not drawn above original value x25% (income) or x55% (lump sum).  Example below.

If wish to not pay either the LTA 25% or the IHT 40% then you need to draw nominal growth or more and consume and/or gift away to family and charity any excess tax free cash or saved income which came into your estate.

The same investments as the SIPP in an ISA growing from age 55-75 (i.e. taking full tax free cash early to 100% LTA and then recycling excess of needs into S&S ISA) - the growth of this 25% is now not subject to LTA @ 75 but is now inside estate for IHT so 40% upon death above the line on overall assets if not consumed prior.  It is at risk of future legislation around ISAs, limits, wealth taxes but no longer susceptible to fiddling around with pensions rules.  This IHT issue is why you read a lot of generic advice "not to take TFC".  But it depends upon *your* overall consumption plan in retirement what is best

Taking income stops you adding any more contributions MPAA (Money Purchase Annual Allowance) to a pension this to avoid pension income tax relief recycling.  Taking the TFC alone does not.  As a pensioner with an LTA limit issue - once you start drawing there is a need to draw nominal growth anyway to get it "out" and clear of the 25% rake at age 75.  If you are still earning a significant employment income and adding to it - you may not wish to draw the pension.  So all this is very specific to circumstances and a more sophisticated cashflow model and some professional advise would seem prudent.

But here is a simple worked example to illustrate the rules.  Single DC  fund only at 130% LTA at early retirement.  Mid 50s.  Round numbers used £1m

Action: Crystallise up to LTA.  Take 25%.  75% (of LTA marked for drawdown income).  Start taking income at desired level. FAD

Part 1 - ~250k TFC

Investment growth on this is now LTA exempt outside SIPP but it is in your estate).  This can be cash SORR buffer, initial consumption, capital projects, or reinvested for self, spouse, children etc. as S&S ISA.  # people x 20k / year.  Or a Cancer Research or alumni donation.  Your choice. Don't die suddenly.

Part 2 - ~750k crystallised SIPP.  

Remains invested, rebalanced, income taken each year via FAD. 

25% will be due before income tax on each £1 above 750k (absolute number not inflation indexed) at age 75 - creative use of fiscal drag by the treasury there).  But this occurs only if it has not been drawn as income keeping the value at or below 750k over twenty years.  Implication: draw nominal growth and the level of capital depletion as suits you for around half the retirement.  Pay your income taxes.  Tilt income within Self Assessment Basic rate if you like (higher earlier) so that it can drop when SP arrives mid 60s or you can do something more complex per @jamesd suggestions on self assessment tax planning ideas. 

This assumes future contributions are no longer material once it starts mid-50s. Once income (not TFC only) is taken the MPAA (contributions limit drops to 4k maximum from the current 40k).  A bad thing if still directing company contributions in during your 50s.

Part 3 - 300k uncrystallised SIPP left invested

25% or otherwise per future legislation is due at 75 of the value then if this is not paid earlier by accessing the above LTA money).  This portion can be crystallised with the rest but no extra TFC is available.  The 25% is payable ahead of income tax.  so a 75k tax bill is deducted.  Once a % LTA is used it is gone.  So the wait for investment value dip approach can be used but the whole pot (bar small pot rules and some UFPLS income nibbles) has to wait for the dip so that the majority % allowance remains unused. 

So the 25% TFC growth management (LTA charge) strategy above can't be fully combined with "waiting for a dip".   If you wait with most LTA unused for a market correction of say 50% then our 130% example becomes 65% LTA consumed.  Very good.  But it depends on your cashflow and income needs and whether this wait is viable for you.  If you have other investments and assets to sustain you (perhaps with some 5% of LTA UFPLS pension nibbles) for an unknown period up to 10-20 years then this could work very well indeed.  Better than the base example with it's 75k (+25% growth deferred tax bill).
Not many people can do it but it's certainly a good option to think about for those that can manage the cashflow.

The biggest risk to all this is legislative change to LTA, TFC, IHT basis, wealth taxes etc. etc.
If you think the current pension and IHT rules will be stable for the next 40 years then I have a bridge to sell you.

jamesd

Albermarle said:

The way you minimise these lifetime allowance charges is by crystallising as soon as you can.

Is it not better to wait until there is a fall in the markets/fall in the value of your pot , so the crystallised value will be less? 

Therefore with a lower % LTA contribution.

I suppose the issue is if the pot keeps growing instead, then you are in a worse position .

If you're still well below, there's probably no need to risk waiting for a drop that might not happen or might happen but only to the extent that the growth covers it and there's no difference between now and what eventually happens.

If over or close then partial crystallising and partial waiting can make the difference if things do work out in your favour.

The covid crash in 2020 presented some people with a good opportunity. It came after lots of growth so it wouldn't have been enough for a wait strategy but for those not yet crystallised or doing gradual crystallising it was a chance to go back a bit and potentially save some lifetime allowance charge.

When evaluating this sort of thing it's also useful to remember that we've been in what has been a long bull market since 2008, with occasional blips. That's quite strongly disfavoured waiting strategies. Not them being a bad idea, just them having the undesired outcome much of the time. It's been an odd period from which I and others retiring in the last few years with lots of DC money have benefitted. Almost all of my equity investing has been in a mostly bull market.