Should I go over the SIPP lifetime allowance?

Tinten

"it's important to think of the LTA in % terms not £ terms" this does make it clearer to grasp.

Am I right that what's been discussed is taking income via "Flex-access drawdown"? And the 25% tax free lump sum is PCLS and I can take multiple PCLS lump sums? I ask this because PCLS stands for a "pension commencement lump sum" which suggests something at the start (only)?

I'm sure I've got it now but some of the terminology could be clearer.

 

zagfles

Tinten said:

"it's important to think of the LTA in % terms not £ terms" this does make it clearer to grasp.

Am I right that what's been discussed is taking income via "Flex-access drawdown"? And the 25% tax free lump sum is PCLS and I can take multiple PCLS lump sums? I ask this because PCLS stands for a "pension commencement lump sum" which suggests something at the start (only)?

I'm sure I've got it now but some of the terminology could be clearer.

 

I don't think you have got it. The PCLS is indeed something at the start only. But you can split your pension and take 25% PCLS of the section you've "split off", ie crystallised. The rest remains "uncrystallised" ie untouched, in a separate pot.

Eg if your pension is £1million. You want to take £25k PCLS. You crystallise ie split off £100k, and you take £25k PCLS from that. The entire £100k is "crystallised" and the entire £100k will count against the LTA. Regardless of whether you take any income from the £75k.

If you want another £25k PCLS you need to split off another £100k. You can carry on until your whole fund is crystallised. You can keep taking 25% PCLS of the amount you split off until either you've crystallised it all or you've used up your entire LTA.

As above some providers, rather than having separate pots for the crystallised and uncrystallised parts maintain a % of the whole pot which is crystallised. You can think of this the same way, eg in the example above on a £1M pot after crystallising £100k and taking £25k PCLS the % crystallised would be 7.69% (ie 75k/975k), which is the same as having a crystallised pot of 75k and uncrystallised of £900k

Tinten

zagfles said:

Tinten said:

"it's important to think of the LTA in % terms not £ terms" this does make it clearer to grasp.

Am I right that what's been discussed is taking income via "Flex-access drawdown"? And the 25% tax free lump sum is PCLS and I can take multiple PCLS lump sums? I ask this because PCLS stands for a "pension commencement lump sum" which suggests something at the start (only)?

I'm sure I've got it now but some of the terminology could be clearer.

 

I don't think you have got it. The PCLS is indeed something at the start only. But you can split your pension and take 25% PCLS of the section you've "split off", ie crystallised. The rest remains "uncrystallised" ie untouched, in a separate pot.

Eg if your pension is £1million. You want to take £25k PCLS. You crystallise ie split off £100k, and you take £25k PCLS from that. The entire £100k is "crystallised" and the entire £100k will count against the LTA. Regardless of whether you take any income from the £75k.

If you want another £25k PCLS you need to split off another £100k. You can carry on until your whole fund is crystallised. You can keep taking 25% PCLS of the amount you split off until either you've crystallised it all or you've used up your entire LTA.

As above some providers, rather than having separate pots for the crystallised and uncrystallised parts maintain a % of the whole pot which is crystallised. You can think of this the same way, eg in the example above on a £1M pot after crystallising £100k and taking £25k PCLS the % crystallised would be 7.69% (ie 75k/975k), which is the same as having a crystallised pot of 75k and uncrystallised of £900k

I thought I had got it, but you say I haven't. I had said that PCLS is something that can be done more than once ("multiple times"), by which I meant each time I want to crystallise more of the SIPP. In other words PCLS is not a once only 25% payment only at the start of accessing your pension for the first time.

You say this is wrong and PCLS happens only at the start. But then your illustration is of multiple PCLS crystallisations. 

I can't see how your illustration is different from my description of the process. What's the subtle difference I am missing?

zagfles

Tinten said:

zagfles said:

Tinten said:

"it's important to think of the LTA in % terms not £ terms" this does make it clearer to grasp.

Am I right that what's been discussed is taking income via "Flex-access drawdown"? And the 25% tax free lump sum is PCLS and I can take multiple PCLS lump sums? I ask this because PCLS stands for a "pension commencement lump sum" which suggests something at the start (only)?

I'm sure I've got it now but some of the terminology could be clearer.

 

I don't think you have got it. The PCLS is indeed something at the start only. But you can split your pension and take 25% PCLS of the section you've "split off", ie crystallised. The rest remains "uncrystallised" ie untouched, in a separate pot.

Eg if your pension is £1million. You want to take £25k PCLS. You crystallise ie split off £100k, and you take £25k PCLS from that. The entire £100k is "crystallised" and the entire £100k will count against the LTA. Regardless of whether you take any income from the £75k.

If you want another £25k PCLS you need to split off another £100k. You can carry on until your whole fund is crystallised. You can keep taking 25% PCLS of the amount you split off until either you've crystallised it all or you've used up your entire LTA.

As above some providers, rather than having separate pots for the crystallised and uncrystallised parts maintain a % of the whole pot which is crystallised. You can think of this the same way, eg in the example above on a £1M pot after crystallising £100k and taking £25k PCLS the % crystallised would be 7.69% (ie 75k/975k), which is the same as having a crystallised pot of 75k and uncrystallised of £900k

I thought I had got it, but you say I haven't. I had said that PCLS is something that can be done more than once ("multiple times"), by which I meant each time I want to crystallise more of the SIPP. In other words PCLS is not a once only 25% payment only at the start of accessing your pension for the first time.

You say this is wrong and PCLS happens only at the start. But then your illustration is of multiple PCLS crystallisations. 

I can't see how your illustration is different from my description of the process. What's the subtle difference I am missing?

You seemed to think it was about "taking income via "Flex-access drawdown"". It isn't. That's why I thought you hadn't got it. Also you seemed to be confused by the once only payment at the start. That is the case, you can only take it at the start. But you can slice the pension into parts and take PCLS of each part. But the PCLS is only available at the start of that part.

And it's an option, you don't have to take it (usually mad not to with DC).

For instance, you could crystallise your entire £1M pension and choose to take £100k PCLS. If you did that, you can't take any more tax free cash at all from the pension! That why you need to understand that the PCLS is only available at the start, and to get round that if you don't want it all up front you need to split the pension as above.

So maybe you have got it just thinking about/wording it in a different way.

Tinten

OK thanks for that, yes I think it was the wording. Although you also make a point of saying the process being discussed is not "Flex-access drawdown". If not, then what is it? I'd like to be sure as there are various acronyms and names, and want to be on the same page when discussing my plans with my SIPP platform or advisors.

Previously on the thread jamesd who has given some really helpful replies said "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." This is in the context of my position: a £600k SIPP now, with a view to crystallising it, but not taking any further income other than the 25% lump sum, so that I can continue to make the max £40k annual contributions (I have several years carry forward to use). Thereafter I would ensure I remain within the LTA at age 75 or at crystallising stages prior, by making withdrawals from the crystallised portion of investments to remain within the LTA. 

I've probably explained the process not very well. But is  this not flexi access drawdown approach?
 

zagfles

Tinten said:

OK thanks for that, yes I think it was the wording. Although you also make a point of saying the process being discussed is not "Flex-access drawdown". If not, then what is it? I'd like to be sure as there are various acronyms and names, and want to be on the same page when discussing my plans with my SIPP platform or advisors.

Previously on the thread jamesd who has given some really helpful replies said "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." This is in the context of my position: a £600k SIPP now, with a view to crystallising it, but not taking any further income other than the 25% lump sum, so that I can continue to make the max £40k annual contributions (I have several years carry forward to use). Thereafter I would ensure I remain within the LTA at age 75 or at crystallising stages prior, by making withdrawals from the crystallised portion of investments to remain within the LTA. 

I've probably explained the process not very well. But is  this not flexi access drawdown approach?
 

Yes. But it's the "taking income..." bit that got us talking at cross purposes. Taking income usually refers to taxable income, not the PCLS (even if taken in stages)

Tinten

I see now. Pensions are a verbal minefield!   

Tinten

jamesd said:

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.

Just reading this post again - and not understanding these "pros and cons".

"The main con of waiting..." (i.e. not crystallising my SIPP now) "is growth of the investments that increases the lifetime allowance available" If I wait, and the investments increase in value, then doesn't that decrease the lifetimes allowance available (leave less headroom before I may exceed it)? I see it's a con of waiting, if it decreases the LTA available, so not sure about the increase LTA argument.

"Another con of waiting is the chance of a market drop. A covid crash would be handy..." If my SIPP drops in value because of a market crash, then I crystallise the whole SIPP, then the invested amount bounces back, isn't that a pro of having waited (for a crash) not a con? If a SIPP is £600,000, crystallise it all, then that's 60% of the LTA used. If instead of this I wait for a market fall, and the SIPP value falls to £500,000, then I crystallise it all, I've used 50% of the LTA, then the £500,000 bounces back eventually to £600,000 but the £100,000 gain doesn't count toward the LTA if it's withdrawn before age 75. This opens another question - is there a case (if you can) for waiting for market crashes to time crystallisation of SIPP pensions?

  

Albermarle

Tinten said:

jamesd said:

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.

Just reading this post again - and not understanding these "pros and cons".

"The main con of waiting..." (i.e. not crystallising my SIPP now) "is growth of the investments that increases the lifetime allowance available" If I wait, and the investments increase in value, then doesn't that decrease the lifetimes allowance available (leave less headroom before I may exceed it)? I see it's a con of waiting, if it decreases the LTA available, so not sure about the increase LTA argument.

"Another con of waiting is the chance of a market drop. A covid crash would be handy..." If my SIPP drops in value because of a market crash, then I crystallise the whole SIPP, then the invested amount bounces back, isn't that a pro of having waited (for a crash) not a con? If a SIPP is £600,000, crystallise it all, then that's 60% of the LTA used. If I wait for a market fall, and the SIPP value falls to £500,000, then I crystallise it all, I've used 50% of the LTA, then the £500,000 bounces back eventually to £600,000 but the £100,000 gain doesn't count toward the LTA if it's withdrawn before age 75. This opens another question - is there a case (if you can) for waiting for market crashes to time crystallisation of SIPP pensions?

  

I think you are right and this time Jamesd has got things the wrong way around .

This opens another question - is there a case (if you can) for waiting for market crashes to time crystallisation of SIPP pensions?
There is a case for this , but you might be waiting a long time and then by the time you organise the crystallisation ( it can't be done with the click of a mouse ) there could be some recovery . A compromise could be to part crystallise now  and wait for a crash with the rest .

I am thinking of doing something similar but it is a balance with future IHT liabilities . Taking the 25% out of the pension and reinvesting it outside ( as opposed to spending it) exposes it to potential IHT in future ( and possibly CGT and dividend tax , or at least more admin/paperwork ) .
So it can be take your pick - 40% LTA or 40% IHT .....

jamesd

Tinten said:

Just reading this post again - and not understanding these "pros and cons".
... This opens another question - is there a case (if you can) for waiting for market crashes to time crystallisation of SIPP pensions?

  

Albermarle said:

I think you are right and this time Jamesd has got things the wrong way around .

This opens another question - is there a case (if you can) for waiting for market crashes to time crystallisation of SIPP pensions?
There is a case for this , but you might be waiting a long time and then by the time you organise the crystallisation ( it can't be done with the click of a mouse ) there could be some recovery . A compromise could be to part crystallise now  and wait for a crash with the rest .

I am thinking of doing something similar but it is a balance with future IHT liabilities . Taking the 25% out of the pension and reinvesting it outside ( as opposed to spending it) exposes it to potential IHT in future ( and possibly CGT and dividend tax , or at least more admin/paperwork ) .
So it can be take your pick - 40% LTA or 40% IHT .....

Thanks, James agrees and has edited the original post, which now says:

"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."

Don't rely solely on waiting for a drop. It might or might not happen and you should be positioned decently for either eventuality.

The IHT issue can be solved by some people via giving while they are still alive.