Should I go over the SIPP lifetime allowance?

EdSwippet

Tinten said:

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?

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 best time to crystallise what you have may lie somewhere between these extremes. Assuming, that is, you want to maximise your spending power, as opposed to, say, using pensions as a pure inheritance tax bypass.

How many more years do you plan to work? How much do you plan in pension contributions over those years. Use compounding to project the cumulative value of these contributions at the point of actual retirement. Estimate inflation. You will also need to make some assumptions about future law changes, for example, will the promised LTA inflation uplift ever resume, what to do if the LTA is again cut, what if the annually allowance is again cut, what if there's a move to 'flat rate' tax relief, might you face the annual allowance taper, and so on. Armed with all of that, you can then make an educated guess at the value of SIPP at which, if you crystallise, will leave you just enough remaining LTA percentage to accommodate the value of, and growth on, all your future pension contributions.

As you see, there are a lot of moving parts to all of this. It is an inexact science, and you cannot get it right. But the above will at least give you an idea of where on the continuum of 'crystallise everything now' through to 'wait until hitting the LTA' you might sit. Aim to err on the side of falling slightly short of 100% of the LTA at retirement. That way, you can let growth in the funds make up the shortfall.

jamesd

Tinten said:

You explained earlier that the £4,000 limit on new pension contributions only happens after some taxable income is withdrawn from the SIPP.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? 

Yes, 40k remains.

The most conservative lifetime allowance approach is to crystallise all 600k now by taking 25% as a tax free lump sum and the 75% into flexi-access drawdown. That's what I think you should do.

The main con of waiting is growth of the investments that increases the lifetime allowance used available and my impression that you're going to want to contribute 40k for many more years, so need to leave as much lifetime allowance free for that as possible. But leaving 400k to allow it for ten years might be more than you plan - and I don't know how long you expect to be paying in 40k.

A  pro Another con of waiting is the chance of a market drop. A covid crash would be handy for you because it'd reduce the values, you could crystallise, then the bounce back would leave you with the same value but less lifetime allowance used in the crystallisation.

Additionally, there's the con of what tax you'll pay in investments from the tax free lump sum when it's outside the pension, given that ISA is already fully used. VCTs can solve that but I'm far from sure you're a candidate for them. In wealth terms you are, but they take a bit of thinking to get your head around them and I'm not sure that it's wise for you to enter that area so soon after getting the hang of how the lifetime allowance works. In part because there's too much risk of you deciding that this is all too complicated to bother with, thereby making yourself a good deal worse off by not paying attention.

So, how much to crystallise? If you want an easy life, do the whole 600k now. It's simple and easy and done with and nobody can argue that it was certainly a bad move, just nuances in how good it is compared to other choices.

If you do want something more nuanced, first, form a view on how many years of 40k you want to do. That's the initial target for how much lifetime allowance you want to try to have left. Then form a view of how likely you think a beneficial for lifetime allowances purposes a market drop might be in a useful timeframe for you. If you have plenty of room with 600k crystallised, maybe crystallise 300k instead and let 300k continue to grow inside the pension. That simplifies your problem of how to invest tax efficiently outside the pension by having less money involved.

You know yourself better than we do, If you think that you may conclude it's all too much bother, do the whole 600k and make the 40k a year contributions without worrying about it again for at least five more years. Crystallise 100% of what's accumulated then would be continuing the don't touch it more than you need to approach.

EdSwippet

Also worth mentioning, since nobody else has yet said it, that simply retiring earlier than otherwise planned is a good way to minimise or avoid the LTA penalty.

This is what I did, and I highly recommend it.

jamesd

Indeed! I don't regret being pushed at 55. I could afford it without financial worries.

Albermarle

EdSwippet said:

Also worth mentioning, since nobody else has yet said it, that simply retiring earlier than otherwise planned is a good way to minimise or avoid the LTA penalty.

This is what I did, and I highly recommend it.

I  retired partly for the same reasons . Getting close to LTA , so the advantage of higher rate tax relief on contributions was disappearing.
In fact did one more year and with investments growth , will probably end up paying some LTA  in the end, even if I manage to avoid some of it by the usual steps suggested on here ( Small Pots , tactical crystallisation etc ) . Luxury problem though.

Tinten

jamesd said:

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).

jamesd said:

Tinten said:

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? 

Yes, 40k remains.

The most conservative lifetime allowance approach is to crystallise all 600k now by taking 25% as a tax free lump sum and the 75% into flexi-access drawdown. That's what I think you should do.

The main con of waiting is growth of the investments that increases the lifetime allowance available and my impression that you're going to want to contribute 40k for many more years, so need to leave as much lifetime allowance free for that as possible. But leaving 400k to allow it for ten years might be more than you plan - and I don't know how long you expect to be paying in 40k.

Another con of waiting is the chance of a market drop. A covid crash would be handy for you because it'd reduce the values, you could crystallise, then the bounce back would leave you with the same value but less lifetime allowance used in the crystallisation.

Additionally, there's the con of what tax you'll pay in investments from the tax free lump sum when it's outside the pension, given that ISA is already fully used. VCTs can solve that but I'm far from sure you're a candidate for them. In wealth terms you are, but they take a bit of thinking to get your head around them and I'm not sure that it's wise for you to enter that area so soon after getting the hang of how the lifetime allowance works. In part because there's too much risk of you deciding that this is all too complicated to bother with, thereby making yourself a good deal worse off by not paying attention.

So, how much to crystallise? If you want an easy life, do the whole 600k now. It's simple and easy and done with and nobody can argue that it was certainly a bad move, just nuances in how good it is compared to other choices.

If you do want something more nuanced, first, form a view on how many years of 40k you want to do. That's the initial target for how much lifetime allowance you want to try to have left. Then form a view of how likely you think a beneficial for lifetime allowances purposes a market drop might be in a useful timeframe for you. If you have plenty of room with 600k crystallised, maybe crystallise 300k instead and let 300k continue to grow inside the pension. That simplifies your problem of how to invest tax efficiently outside the pension by having less money involved.

You know yourself better than we do, If you think that you may conclude it's all too much bother, do the whole 600k and make the 40k a year contributions without worrying about it again for at least five more years. Crystallise 100% of what's accumulated then would be continuing the don't touch it more than you need to approach.

jamesd

Thank you for those detailed replies which are really helpful and considered.

"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)."

What happens exactly in your online SIPP account when you make the leap into the unknown area of crystallising?
My SIPP is with youinvest.co.uk, I don't know if the processes are the same for all platforms, but how does it generally work when you login to your SIPP account after starting to crystallise / claim the tax free lump sum? If you are holding equity funds, do you have to sell the amount you want to claim as 25% tax free lump sum, then does the tax free cash sit in your online account inside or outside the SIPP? If you want to re-invest that cash on the same platform do you transfer it across to a dealing account or ISA, or you have to withdraw it into your bank account? The assets remaining in the SIPP are now crystallised, so if you're holding funds do they remain in the same SIPP area as before - if you make further SIPP contributions later, and buy more fund units, how do you see which are crystallised investments and which are not? Do the platforms calculate your crystallised and uncrystallised holdings and flag how close you are to the LTA? 

jamesd

You always need to sell enough to make the 25% cash. The cash stays in the SIPP until it's paid to the bank account you specify. It might be possible to transfer some to an ISA but I doubt it, no harm in asking.

What happens with the 75% varies. Some places create a new SIPP drawdown account for only crystallised money and move the 75% there, without selling any investments, they just move them. Others use a combined crystallised and uncrystallised pot and don't move anything, but I dislike this approach because it makes it harder to see your true position or use different investment mixtures for uncrystallised and crystallised money.

Platforms must calculate the lifetime allowance on money you crystallise and tell you what percentage of the lifetime allowance you've used for each crystallisation. They can't know how close to the LTA you are reliably because you can have pensions somewhere else but you can work it out from the uncrystallised balance.

Tinten

Good to know. I will ask youinvest.co.uk whether they split crystallised and uncrystallised SIPP investments. Having a different investment strategy for each may be important.

EdSwippet

Tinten said:

Good to know. I will ask youinvest.co.uk whether they split crystallised and uncrystallised SIPP investments. Having a different investment strategy for each may be important.

According to this recent thread, they do not split them. It is an annoyance (I'm with Interactive Investor, and they do the same thing).

Tinten

EdSwippet said:

Tinten said:

Good to know. I will ask youinvest.co.uk whether they split crystallised and uncrystallised SIPP investments. Having a different investment strategy for each may be important.

According to this recent thread, they do not split them. It is an annoyance (I'm with Interactive Investor, and they do the same thing).

I had a look at that thread. It looks like hl.co.uk are one of the few that do split crystallised and uncrystallised.

One post also warned that once you have crystallised part of your SIPP pot, you cannot move it to another platform. 

Surely the system isn't set up so once you start crystallising your SIPP you are locked to that platform forever?!

I had a look at HL and on a large SIPP close to the LTA the annual account charges would be £1,000 more than A J Bell. 

I suppose you can use a spreadsheet to keep track on the value of your SIPP and the percentage that has been crystallised. But that doesn't help if you want to invest the uncrystallised portion in 40:60 bonds/equities for more steady / less risk returns, and the crystallised portion in 100% equities to maximize growth potential (now that I understand the LTA has already been applied so the crystallised investments can grow without any LTA cap provided the excess growth is withdrawn by age 75). That needs a platform that separates the portions.