Should I go over the SIPP lifetime allowance?

MallyGirl

yes - you should certainly be considering the investments as a whole and putting the higher risk/equity choices in the ISAs, where growth is tax free, and the lower stuff in the SIPP where income is taxable.

gravlax

Can you crystallise a pension pot without actually withdrawing any of it? If the OP had a £1 million pot could they protect it all against the lifetime allowance while leaving it all invested?

jamesd

Tinten said:

I'm still not clear how you avoid the LTA if you cannot withdraw more than £1.073m in total, ever, or have a total SIPP value of more than £1.073m at age 75, or (I assume) the sum of all you have withdrawn prior to age 75 plus the remaining value of your SIPP these values combined cannot exceed £1.073m at the test age 75. So:

"If you start at a million, best usually to crystallise. Then you immediately use a million of lifetime allowance but as long as the 75% taxable is still not more than £750k at 75 there's no more lifetime allowance to pay because you already did the LTA calculation on that 75% and it's associated 25% and you've made sure there's no growth."

£750,000 compounded by 6% p.a. for 20 years becomes £2.4m so mostly invested in equities there will likely be a lot of growth over 20 years. If the way to ensure there's no growth on the £750,000 is to take it out, surely that means over 20 years you'll have taken out an amount exceeding the LTA, plus there's the £250,000 already taken? On total you end either taking out more than £1.073m, or being left with remaining value of investments + withdrawals taken over £1.073m?

Or am I just not getting this?

You weren't getting it. The lifetime allowance isn't a cap on how much you can withdraw and you can withdraw a hundred million if you accumulate that much. Or more.

Like the top of the income tax personal allowance the lifetime allowance is a threshold above which you start to pay a tax.

The lifetime allowance used by crystallisation is calculated exactly once, when that crystallisation happens. So in the 250k/750k it happened when the 250k was taken. Growth on the 750k and withdrawing any amount of the 750k uses no more lifetime allowance until age 75, when any remaining growth above the 750k it was crystallised at gets a second lifetime allowance calculation. If the 750k grew to 2.4 million and nothing was withdrawn then that'd be a calculation of 2.4 million minus 750k that's using the lifetime allowance, and exceeding it, so a lifetime allowance charge is payable. Start with the same 750k and withdraw the 2.4 million less 750k and there is no lifetime allowance use at 75 because the value inside the pension is still 750k That't you've withdrawn one, two ten or a hundred million in the intervening years makes no difference because that isn't a  crystallisation event, that already happened to get the 750k.

Say you do have that 2.4 million at 75 and no lifetime allowance remains. 2.4 million - 750k = 1.65 million. You now have a choice. You can either pay a 55% lifetime allowance charge and get out 45% of the 1.65 million, so paying 907.5k lifetime allowance charge, with no income tax to pay on the 742.5k that ends up in your bank account. In this case the 750k is still inside the pension and you can withdraw that as you like subject to income tax still. Or you can pay the 25% lifetime allowance income charge of 412.5k and the remaining 1,237.5k is added to the 750k to give you 1,987.5k in the flexi-access drawdown account that you can withdraw as you like subject to income tax.

Alternatively, you can arrange to withdraw the 1.65 million between crystallising and reaching 75. You pay income tax as you withdraw but then there's no growth in the value at 75, it's still 750k (or less is fine as well). So no lifetime allowance charge is due.

pip895

gravlax said:

Can you crystallise a pension pot without actually withdrawing any of it? If the OP had a £1 million pot could they protect it all against the lifetime allowance while leaving it all invested?

25% would drop out of the SIPP - you could re invest it in a GIA and gradually move it into ISAs but you would need to be careful about CGT and might end up paying a bit in tax.  

jamesd

Tinten said:

If the LTA is £1.073m and you have withdrawn £250,000 then that leaves £823,000 possible to withdraw within the LTA.

If you withdraw 250k as a UFPLS payment (25% taxable, 75% tax free) then yes, 823,000 remains within the lifetime allowance for future use. This is because the amount crystallised is 250k.

If you instead take 250k as a 25% tax free lump sum, all tax free, it leaves 0.073 million to crystallise. Not withdraw, crystallise. The lifetime allowance use is the value of the pot which was crystallised and if you're taking a 25% tax free lump sum of 250k it follows that the 100% on which that is 25% is a million and that million is the lifetime allowance used. The remaining 750k goes into a flexi-access drawdown account and no lifetime allowance is used by withdrawing any portion of the 750k, nor ten million of future growth on it. Until age 75 when the amount of growth still inside the pension is checked.

Tinten said:

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.

No, because you already had the lifetime allowance calculation on the million done that got you to the 750k left in the pension and there is no more lifetime allowance calculation on that and its growth however much it is and however much you withdraw from it until the check on growth still inside the pension at age 75. What you've grown by and what you've withdrawn is totally irrelevant and ignored. All that matters at 75 is current value inside the pension minus the 750k value at crystallisation.

You simply stay invested as you like and withdraw all growth on the 750k before age 75 and there is no further lifetime allowance bill to pay because at 75 there is no growth left inside the pension.

jamesd

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.    

All correct.

And that's why we tell you to crystallise soon and withdraw the growth. At crystallisation today's value is used and if you're not over the lifetime allowance yet that leaves you room for more pension contributions, without going over.

Also note that in simplified but useful terms, lifetime allowance is calculated as today's value as a percentage of the lifetime allowance today and this percentage is what is carried forward. If the lifetime allowance was to double and you had 10% left originally it's still be ten percent left but it'd allow you to crystallise twice as much.

jamesd

gravlax said:

Can you crystallise a pension pot without actually withdrawing any of it? If the OP had a £1 million pot could they protect it all against the lifetime allowance while leaving it all invested?

Yes but it's a bad idea. The tax free percentage has to be between 0% and 25% and you are allowed to choose 0% tax free. In that case the whole million would be crystallised and all of it would go into flexi-access drawdown and be subject to income tax on the way out. This is almost always a very bad idea and anyone trying it should expect to be questioned by their pension provider to ensure that they are in one of the very few situations where it'd be the sensible thing to do. In most cases it just means paying avoidable income tax on 250k.

Limited cases where it's sensible could include trying to leave lifetime allowance available for later use by a DB pension. Or perhaps a desire to maximise the amount inside the pension for inheritance.

jamesd

pip895 said:

gravlax said:

Can you crystallise a pension pot without actually withdrawing any of it? If the OP had a £1 million pot could they protect it all against the lifetime allowance while leaving it all invested?

25% would drop out of the SIPP - you could re invest it in a GIA and gradually move it into ISAs but you would need to be careful about CGT and might end up paying a bit in tax.  

Not so. Nothing drops out of the pension if nil tax free lump sum is taken. It just all goes into flexi-access drawdown (or annuity purchase if desired).

Tinten

jamesd 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.    

All correct.

And that's why we tell you to crystallise soon and withdraw the growth. At crystallisation today's value is used and if you're not over the lifetime allowance yet that leaves you room for more pension contributions, without going over.

Also note that in simplified but useful terms, lifetime allowance is calculated as today's value as a percentage of the lifetime allowance today and this percentage is what is carried forward. If the lifetime allowance was to double and you had 10% left originally it's still be ten percent left but it'd allow you to crystallise twice as much.

Thanks for this and the previous replies.

You explained earlier that the £4,000 limit on new pension contributions only happens after some taxable income is withdrawn from the SIPP. If a 25% lump sum is taken, it's tax free, therefore the annual £40,000 contributions limit - and any carry forward options - remains.

The current SIPP value is £600,000. Is it advantageous to crystallise the full £600,000 now taking £150,000 cash lump sum tax free, leaving £450,000 remaining invested in the SIPP, but then continue to make company director contributions? If so what is the "target" value held within the SIPP at which to stop contributing and only withdraw?

Or starting with the £600,000 SIPP is it better to use all my available carry forward and contribute until the SIPP value is close to the LTA, around £1m, then crystallise it all at that point (£250k lump sum / £750k SIPP invested)? 

The second approach looks more straight-forward, but are there other pros and cons? 

Albermarle

Tinten said:

jamesd 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.    

All correct.

And that's why we tell you to crystallise soon and withdraw the growth. At crystallisation today's value is used and if you're not over the lifetime allowance yet that leaves you room for more pension contributions, without going over.

Also note that in simplified but useful terms, lifetime allowance is calculated as today's value as a percentage of the lifetime allowance today and this percentage is what is carried forward. If the lifetime allowance was to double and you had 10% left originally it's still be ten percent left but it'd allow you to crystallise twice as much.

Thanks for this and the previous replies.

You explained earlier that the £4,000 limit on new pension contributions only happens after some taxable income is withdrawn from the SIPP. If a 25% lump sum is taken, it's tax free, therefore the annual £40,000 contributions limit - and any carry forward options - remains.

The current SIPP value is £600,000. Is it advantageous to crystallise the full £600,000 now taking £150,000 cash lump sum tax free, leaving £450,000 remaining invested in the SIPP, but then continue to make company director contributions? If so what is the "target" value held within the SIPP at which to stop contributing and only withdraw?

Or starting with the £600,000 SIPP is it better to use all my available carry forward and contribute until the SIPP value is close to the LTA, around £1m, then crystallise it all at that point (£250k lump sum / £750k SIPP invested)? 

The second approach looks more straight-forward, but are there other pros and cons? 

For either approach , remain aware that if you crystallise and take the tax free 25% , then this 25% will be counted in your estate when you die. As will all the income you take from the SIPP after that , if you do not spend it all or give it away. I think we can presume that you will be wealthy enough to be hit by Inheritance tax when you die at 40% .
If you do not crystallise , it stays in the pension and is not subject to IHT , but maybe will be to  LTA .

It is not easy to completely escape the taxman when you have significant assets . In the end can be easier just to accept that some taxes have to be paid but hopefully not too much.