Should I go over the SIPP lifetime allowance?

Tinten

Thanks jamesd, your previous replies were really helpful.

I agree the IHT is not too hard to plan for. If 75 the currently final test on the LHT limit, then does that mean prior to age 75 you can withdraw as required to stay below the  limit, but after the age 75 LHT test has been passed you can allow the assets in a SIPP accumulate as much as desired and the full amount can be passed on without IHT?

On the point about timing crystallisation of a SIPP when asset values have dropped, e.g. a market fall, I haven't seen this discussed or pointed out on any advice information about SIPPs. Not everyone can choose when to crystallise, but now it's been explained so well here, it seems a very important consideration for anyone whose pot could approach the LTA before age 75. 

Albermarle said "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."

What is the process between clicking to sell units and actually fixing the value to be crystallised against the LTA? If you sell units in a global tracker ETF and that trade is almost instant, what's the process after that which is slow enough that markets could recover before your crystallisation amount is fixed as a % of the LTA?

jamesd

Yes, your second paragraph about withdraw before 75 then grow is entirely correct.

Where waiting really comes into its own is if the person is close to the lifetime allowance than you, so they are struggling to get it all out within the allowance. Your position is more discretionary because you do still have lots of headroom for planned contributions and at least some growth, which is part of why I think certainty beats a waiting plan in your case: no apparent need for you to risk growth taking you over when you can crystallise well below. Not that you can't do it  for a fair chunk and it easily could work well. Or not. No real way to know. Though if you don't crystallise the 40k a year each year that'll build up a pot you can crystallise during a downturn.

To crystallise you take the tax free lump sum (or buy an annuity) with uncrystallised money. You probably don't even need to sell investments except to generate enough cash to pay you the 25%. They can be moved over to the crystallised bit.

pip895

I was considering waiting to crystallise until there was a downturn but decided it wasn’t a good idea.  To crystallise you need to sell 25% of your funds (assuming you don’t want to give up the tax free saving). Not really something you want to do in a downturn.  In addition you obviously end up with less tax free cash.  You could also be waiting a long time and with the LTA frozen it is effectively shrinking by inflation - better to get on and do it..

jamesd

Why would being in a downturn be a bad time to crystallise? It's the best of times. You use less of the lifetime allowance while crystallising and then get the benefit of any recovery growth on the 25% outside the pension instead of where it'll increase lifetime allowance usage. The mere fact of crystallising doesn't change your investments, you just buy the same things with the 25% after crystallising if you don't want to spend any money. And since they are the same things, they recover in just the same way as if they had been inside the pension.

Crystallising also doesn't reduce tax free cash. Again, just invest in the same way and you get exactly the same amount tax free, just grown inside the ISA or wherever instead of continuing to be grown inside the pension. There can be differences due to tax inefficiency of some investments outside a pension until moved into an ISA, though.

EdSwippet

Tinten said:

What is the process between clicking to sell units and actually fixing the value to be crystallised against the LTA? If you sell units in a global tracker ETF and that trade is almost instant, what's the process after that which is slow enough that markets could recover before your crystallisation amount is fixed as a % of the LTA?

Questionnaires about things like have you taken financial advice, provider generating drawdown illustrations/projections, risk warnings, confirming bank details for the PCLS, and all of the general CYA that the government seems to require of pension providers. It used to be very clunky, mostly paper and snail-mail, but one of the odd benefits of Covid is that some SIPP providers seem to have gone paper-free as far as possible, so that now it's mostly down to filling in some PDF forms locally and then emailing them to the provider.

As far as I can tell though, still largely a manual process at the pension company. From experiences (not Youinvest, but others) I'd guess you might be looking at ten days or so from first contact to crystallisation date. Could be a bit less, or a bit more, depending on the provider. Don't expect an overnight or instant thing, is the message.

So not a dreadfully long process. But then, the past few market 'crashes' seem to have been very short-lived. If you have the ready cash, you can hedge time out of the market by fronting up the PCLS, so that you sell in the pension and buy outside (or in an ISA, ideally) on the same day, then back-fill wherever you got this cash from when the PCLS is finally paid out to you. That only works if you can manage the required cash-flow, though.

pip895

jamesd said:
Crystallising also doesn't reduce tax free cash. Again, just invest in the same way and you get exactly the same amount tax free, just grown inside the ISA or wherever instead of continuing to be grown inside the pension. There can be differences due to tax inefficiency of some investments outside a pension until moved into an ISA, though.

Crystallising in a downturn obviously does reduce the tax free cash.  There are as you point out things you can do to mitigate it, but if you intend to help your kids into the housing market or pay of a mortgage with the cash then these things aren’t available. 

There are also risks associated with waiting for a downturn- it may not happen in the timescale you want and you may end up crystallising at an even higher value.  

In my own case I was below the LTA but it was looming so crystallising early was avoiding action - my decision might have been different if I had actually exceeded it - possibly.

jamesd

If you left the money in the pension without crystallising it, using the same investments, those things are or aren't available at the same time because the investments are the same and so is the value. You've the same amount tax free whether you've already taken it out of the pension and had the growth there or have it still in the pension with the growth inside. The difference is the lifetime allowance usage to get it.

zagfles

jamesd said:

Why would being in a downturn be a bad time to crystallise? It's the best of times. You use less of the lifetime allowance while crystallising and then get the benefit of any recovery growth on the 25% outside the pension instead of where it'll increase lifetime allowance usage. The mere fact of crystallising doesn't change your investments, you just buy the same things with the 25% after crystallising if you don't want to spend any money. And since they are the same things, they recover in just the same way as if they had been inside the pension.

Except that you will need to sell 25% of your pension in a downturn, and it'll sit in cash while the crystallisation paperwork is done, which could take a few weeks. In those few weeks the market might recover and you've just lost the growth on 25% of your pension. Unless your provider allows you to take the 25% in-specie, I don't think any do.

If you timed the "covid dip" perfectly, and decided to crystallise on 23/3/2020, and your provider was lightning quick and managed to process everything in 3 days, so you sold £250k or so of equities on 23 March in the SIPP and rebought them outside the SIPP on 26 March, those 3 days out of the market would have cost you about 10-15%, about £30k, because as usually happens with big dips, they're followed by big (perhaps partial) recoveries.

Thrugelmir

jamesd said:

Why would being in a downturn be a bad time to crystallise? It's the best of times. You use less of the lifetime allowance while crystallising and then get the benefit of any recovery growth on the 25% outside the pension instead of where it'll increase lifetime allowance usage. The mere fact of crystallising doesn't change your investments, you just buy the same things with the 25% after crystallising if you don't want to spend any money. And since they are the same things, they recover in just the same way as if they had been inside the pension.

Crystallising also doesn't reduce tax free cash. Again, just invest in the same way and you get exactly the same amount tax free, just grown inside the ISA or wherever instead of continuing to be grown inside the pension. There can be differences due to tax inefficiency of some investments outside a pension until moved into an ISA, though.

Then logic suggests that one should exceed the LTA by a margin and wait for the downturn. Average historic downturn in a bear market is 36%. A fund could be worth £1,675,000 and still remain within the allowance. 

zagfles

Thrugelmir said:

jamesd said:

Why would being in a downturn be a bad time to crystallise? It's the best of times. You use less of the lifetime allowance while crystallising and then get the benefit of any recovery growth on the 25% outside the pension instead of where it'll increase lifetime allowance usage. The mere fact of crystallising doesn't change your investments, you just buy the same things with the 25% after crystallising if you don't want to spend any money. And since they are the same things, they recover in just the same way as if they had been inside the pension.

Crystallising also doesn't reduce tax free cash. Again, just invest in the same way and you get exactly the same amount tax free, just grown inside the ISA or wherever instead of continuing to be grown inside the pension. There can be differences due to tax inefficiency of some investments outside a pension until moved into an ISA, though.

Then logic suggests that one should exceed the LTA by a margin and wait for the downturn. Average historic downturn in a bear market is 36%. A fund could be worth £1,675,000 and still remain within the allowance. 

Except that the downturn may not happen immediately, it could happen after 50% further growth. For the vast majority of past points in time, the market never dipped 36% lower than that point. See previous discussion on this here, where we only used 23% https://forums.moneysavingexpert.com/discussion/6281860/pensions-already-exceed-lta-how-do-bces-and-taxation-apply/p2