Should I go over the SIPP lifetime allowance?

Tinten

Albermarle said:

The LTA does not apply to withdrawals but when you crystallise.
So the £750K is crystallised and you can now withdraw from it without any effect on LTA ( although you will pay income tax )
So if it grows by 6% and you withdraw 6%pa , then in 20 years it will still be £750K so no problem.
If it grows by more than you withdraw and the pot gets bigger , then at at age 75 that growth is subject to LTA.

OK, so in the example £1m was crystallised, and the LTA £1.073m applies to this £1m.
£250,000 was withdrawn as a lump sum, £750,000 left to grow in the SIPP.
If the LTA is £1.073m and you have withdrawn £250,000 then that leaves £823,000 possible to withdraw within the LTA.
If the cumulative withdrawals of growth on the £750,000 over 20 years exceed £823,000 doesn't that also breach the LTA?
And even if you don't withdraw £823,000 by 75, if you breach this amount at any time in the future, doesn't the LTA tax kick in at that point?
If I am right in my above assumptions, then it would appear that if you start with a pot of £800k-£1m then there's no way to avoid breaching the LTA if you continue to get (historically typical) long-term growth on your equity investments. The only option would seem to be to move out of equities and mostly into bonds or cash and try to suppress returns, although that means inflation will dramatically erode your pot value in real terms and therefore your relative income levels by about half in later years. Not a great solution.

NoMore

You appear to want to hamper your growth just to avoid paying tax! Once you've exhausted all your options, at that point you have had a little over a million quid relatively tax efficiently, just accept you have to pay some tax beyond that, instead of trying to avoid the tax altogether and hampering your income.

MallyGirl

Tinten said:

Albermarle said:

The LTA does not apply to withdrawals but when you crystallise.
So the £750K is crystallised and you can now withdraw from it without any effect on LTA ( although you will pay income tax )
So if it grows by 6% and you withdraw 6%pa , then in 20 years it will still be £750K so no problem.
If it grows by more than you withdraw and the pot gets bigger , then at at age 75 that growth is subject to LTA.

OK, so in the example £1m was crystallised, and the LTA £1.073m applies to this £1m.
£250,000 was withdrawn as a lump sum, £750,000 left to grow in the SIPP.
If the LTA is £1.073m and you have withdrawn £250,000 then that leaves £823,000 possible to withdraw within the LTA.
If the cumulative withdrawals of growth on the £750,000 over 20 years exceed £823,000 doesn't that also breach the LTA?
And even if you don't withdraw £823,000 by 75, if you breach this amount at any time in the future, doesn't the LTA tax kick in at that point?
If I am right in my above assumptions, then it would appear that if you start with a pot of £800k-£1m then there's no way to avoid breaching the LTA if you continue to get (historically typical) long-term growth on your equity investments. The only option would seem to be to move out of equities and mostly into bonds or cash and try to suppress returns, although that means inflation will dramatically erode your pot value in real terms and therefore your relative income levels by about half in later years. Not a great solution.

you don't need to withdraw 823k you just need to withdraw enough that there is only £823k in the pot at 75. Withdrawals from that original £750k do not contribute again to LTA calculations as they already have been factored in.

tiring33

If the cumulative withdrawals of growth on the £750,000 over 20 years exceed £823,000 doesn't that also breach the LTA?

No it doesn't. When you move the £750,000 into drawdown  you can withdraw as much as you want - subject to paying income tax when you do. It doesn't matter how much the fund grows, or how much you withdraw, there is no further LTA tax to pay until 75 when there is a check to see whether the value of the fund is greater than the £750,000 you originally crystallised. If it is greater (and you have used up 100% of your LTA*) then you pay a lifetime allowance charge of 25% on the growth. Just withdraw the growth and you won't have an LTA charge at 75.

*In the example you give you assumed the LTA was £1,073,000 and you crystallised £1,000,000, so this would have used up 93.20% (£1,000,000/£1,073,000) of your LTA, leaving 6.8% of your LTA still available.

And even if you don't withdraw £823,000 by 75, if you breach this amount at any time in the future, doesn't the LTA tax kick in at that point?

Once you've passed the LTA checks at 75 you're done, there are no further LTA tests 

Albermarle

NoMore said:

You appear to want to hamper your growth just to avoid paying tax! Once you've exhausted all your options, at that point you have had a little over a million quid relatively tax efficiently, just accept you have to pay some tax beyond that, instead of trying to avoid the tax altogether and hampering your income.

I agree . The OP has benefitted hugely from very generous 40% tax relief, so needs to accept that some of it will probably have to be paid back in the form of a LTA  and this should not define future strategy .
In their position with so many variables and a business to run and maybe sell at some point , I am sure some paid for advice would help . Not for investments but tax planning .

pip895

tiring33 said:

Once you've passed the LTA checks at 75 you're done, there are no further LTA tests 

All we can do is plan around the legislation/tax as we find it.  I am concerned though that once lots of people are making use of these provisions, it would be so easy for a future chancellor to tweak the regulations and hay presto a new test appears on death at any age.  Its not the sort of change that would cause outrage amongst the general population.  

Tinten

MallyGirl said:

you don't need to withdraw 823k you just need to withdraw enough that there is only £823k in the pot at 75. Withdrawals from that original £750k do not contribute again to LTA calculations as they already have been factored in.

tiring33 said:

If the cumulative withdrawals of growth on the £750,000 over 20 years exceed £823,000 doesn't that also breach the LTA?

No it doesn't. When you move the £750,000 into drawdown  you can withdraw as much as you want - subject to paying income tax when you do. It doesn't matter how much the fund grows, or how much you withdraw, there is no further LTA tax to pay until 75 when there is a check to see whether the value of the fund is greater than the £750,000 you originally crystallised. If it is greater (and you have used up 100% of your LTA*) then you pay a lifetime allowance charge of 25% on the growth. Just withdraw the growth and you won't have an LTA charge at 75.

*In the example you give you assumed the LTA was £1,073,000 and you crystallised £1,000,000, so this would have used up 93.20% (£1,000,000/£1,073,000) of your LTA, leaving 6.8% of your LTA still available.

And even if you don't withdraw £823,000 by 75, if you breach this amount at any time in the future, doesn't the LTA tax kick in at that point?

Once you've passed the LTA checks at 75 you're done, there are no further LTA tests 

Thanks! I had previously understood that the £1.073m LTA was a hard cap on the maximum that can be withdraw from a SIPP in aggregate, ever, but it sounds like this is not the case.  

If you have a £1m SIPP, and at age 55 withdraw £250,000 tax free lump sum and leave £750,000 invested, the whole £1m has been crystallised and subjected to the LTA test. The £750,000 can remain invested in the SIPP and investments grow. If over the next 20 years the £750,000 investments average (hypothetically) 10% growth p.a. so that over 20 years you average withdrawals of £75,000 p.a. before age 75, in total you have withdrawn a further £1.5m with no LTA tax penalty. In total you've withdrawn £1.75m (£250k + £1.5m) so have withdrawn more than the £1.073m LTA, but are not penalised.

After age 75 it gets better, as you no longer have to keep withdrawing to keep the pot at £750,000 or less. It can be allowed to grow as much as you wish, or you can withdraw from it as much as you wish, without any further LTA penalties.    

tiring33

Tinten said:

Thanks! I had previously understood that the £1.073m LTA was a hard cap on the maximum that can be withdraw from a SIPP in aggregate, ever, but it sounds like this is not the case.  

If you have a £1m SIPP, and at age 55 withdraw £250,000 tax free lump sum and leave £750,000 invested, the whole £1m has been crystallised and subjected to the LTA test. The £750,000 can remain invested in the SIPP and investments grow. If over the next 20 years the £750,000 investments average (hypothetically) 10% growth p.a. so that over 20 years you average withdrawals of £75,000 p.a. before age 75, in total you have withdrawn a further £1.5m with no LTA tax penalty. In total you've withdrawn £1.75m (£250k + £1.5m) so have withdrawn more than the £1.073m LTA, but are not penalised.

After age 75 it gets better, as you no longer have to keep withdrawing to keep the pot at £750,000 or less. It can be allowed to grow as much as you wish, or you can withdraw from it as much as you wish, without any further LTA penalties.    

Correct. Of course if your fund does grow at 10% per annum and you end up having to withdraw £75,000 per annum to remove the growth, you'll pay a fair bit in higher rate tax but that's a nice problem to have!

Thrugelmir

pip895 said:

tiring33 said:

Once you've passed the LTA checks at 75 you're done, there are no further LTA tests 

All we can do is plan around the legislation/tax as we find it.  I am concerned though that once lots of people are making use of these provisions, it would be so easy for a future chancellor to tweak the regulations and hay presto a new test appears on death at any age.  Its not the sort of change that would cause outrage amongst the general population.  

Inflation is quietly eroding all the benefits. Whether it's LTA, athe nnual contibution allowance or the money purchase annual allowance. Far easier to pick someones pocket by stealth than stamp around lie an elephant.  Given the bull market we've had be gratefull for the gains. As unlikely to be repeated anytime soon. 

Albermarle

tiring33 said:

Tinten said:

Thanks! I had previously understood that the £1.073m LTA was a hard cap on the maximum that can be withdraw from a SIPP in aggregate, ever, but it sounds like this is not the case.  

If you have a £1m SIPP, and at age 55 withdraw £250,000 tax free lump sum and leave £750,000 invested, the whole £1m has been crystallised and subjected to the LTA test. The £750,000 can remain invested in the SIPP and investments grow. If over the next 20 years the £750,000 investments average (hypothetically) 10% growth p.a. so that over 20 years you average withdrawals of £75,000 p.a. before age 75, in total you have withdrawn a further £1.5m with no LTA tax penalty. In total you've withdrawn £1.75m (£250k + £1.5m) so have withdrawn more than the £1.073m LTA, but are not penalised.

After age 75 it gets better, as you no longer have to keep withdrawing to keep the pot at £750,000 or less. It can be allowed to grow as much as you wish, or you can withdraw from it as much as you wish, without any further LTA penalties.    

Correct. Of course if your fund does grow at 10% per annum and you end up having to withdraw £75,000 per annum to remove the growth, you'll pay a fair bit in higher rate tax but that's a nice problem to have!

A possible part solution is to move the investments in the drawdown pot to lower growth /lower risk investments . So you will only need to drawdown at basic rate tax ( assuming no other income sources like state pension etc ) 
This has the added benefit of protecting the pot against a prolonged downturn in equity markets .

It is worth noting that a lot of people worrying about LTA , might find a big drop in the markets removes that worry, but for the wrong reasons !