Tax free lump sum - keeping it invested

MoneySavingGerbil

My wife is 57 and has a SIPP with AJ Bell that we want to crystallise fairly soon. I’ve read the advice from jamesd and others on recent LTA threads and we’re happy that it’s the right thing to do as she’s likely to exceed the LTA. She has a DB pension payable at 60 and an salary sacrifice pension with her employer that she's still contributing to. Based on the current values of SIPP, employer DC scheme and the DB scheme she's at 95% of LTA now. With inflation creeping up and 3 more inflation increases of the DB scheme due before it becomes payable going over eventually seems inevitable. Crystalizing most of the SIPP now should at least minimize the excess although I'm minded that we should leave some kind of buffer in case inflation stays high as we'd rather the DB scheme wasn't needing to withhold additional tax. We've already moved 30K of the AJ Bell SIPP to Hargreaves Lansdown ready to do the three small pots trick when she stops working, assuming that loophole hasn't been closed.

The AJ Bell SIPP is currently invested in VLS60 and HSBC Balanced. We’re both still working and don’t need the lump sum and intend for it to stay invested. What I’m unclear about is whether we have to sell funds within the SIPP to generate the 25% TFLS and then reinvest that in our chosen funds outside the SIPP or whether the funds can stay as they are and AJ Bell can just split the investment so that 25% (the TFLS) is held in our general dealing account and the 75% that’s crystalized is still within the SIPP? It'd be nice to avoid unneccesary buying/selling charges and delays. Is this possible or is selling funds to generate 25% as cash and then crystallising and finally reinvesting the only way?

HappyHarry

Unfortunately so. Your wife will need to crystallise the funds, draw the tax free cash and re-invest in her general dealing account. 

The only time saving is that AJBell maybe able to move the cash directly from her SIPP to her general dealing account workout the need to go via her bank account.

zagfles

Have you considered taking the DB early, this reduces the amount crystallising, but you'd have to do the sums carefully, and account eg for extra tax if that plus current employment income etc pushes into higher rate tax etc. It's a complicated equation with lots of guesswork, but it's worth thinking about.

MoneySavingGerbil

zagfles said:

Have you considered taking the DB early

We've discussed it briefly but it's a 5% reduction for every year taken early. She already feels like taking the TFLS from the SIPP is "taking her pension" early, but has come round to the idea after going through the LTA implications and has been reassured by the fact that we're not spending it. I think accessing her DB scheme early and especially suffering a 5% drop is probably a step too far for her to contemplate and that's fine. It's her pension and I certainly don't want her to be uncomfortable with any decisions.

The tax situation is complicated. She's already dropped her hours but maturing stock options pushed her over £100K last year and are likely to do the same this year despite contributing 50% of her salary to the pension scheme via salary sacrifice. So she's already suffering some what with the reduction in personal allowance. We both appreciate it's a very lucky position to be in. Paying some LTA tax is to be expected.

zagfles

MoneySavingGerbil said:

zagfles said:

Have you considered taking the DB early

We've discussed it briefly but it's a 5% reduction for every year taken early. She already feels like taking the TFLS from the SIPP is "taking her pension" early, but has come round to the idea after going through the LTA implications and has been reassured by the fact that we're not spending it. I think accessing her DB scheme early and especially suffering a 5% drop is probably a step too far for her to contemplate and that's fine. It's her pension and I certainly don't want her to be uncomfortable with any decisions.

The tax situation is complicated. She's already dropped her hours but maturing stock options pushed her over £100K last year and are likely to do the same this year despite contributing 50% of her salary to the pension scheme via salary sacrifice. So she's already suffering some what with the reduction in personal allowance. We both appreciate it's a very lucky position to be in. Paying some LTA tax is to be expected.

Right - yes with 5% ERF and topping £100k income it's not likely to be a good idea to take the DB early!

Albermarle

HappyHarry said:

Unfortunately so. Your wife will need to crystallise the funds, draw the tax free cash and re-invest in her general dealing account. 

The only time saving is that AJBell maybe able to move the cash directly from her SIPP to her general dealing account workout the need to go via her bank account.

My SIPP provider has  introduced a separate 'cash management account ' You can use this to transfer cash from pension to ISA ( for example ) without the need for it to go via your bank account . No idea if Aj Bell have this facility though.

OP - Presume you have taken into account that by taking the 25% TFLS out of the pension , your are potentially exposing it to Inheritance tax at a later time ?

MoneySavingGerbil

Albermarle said:

OP - Presume you have taken into account that by taking the 25% TFLS out of the pension , your are potentially exposing it to Inheritance tax at a later time ?

No kids so no immeidiate concerns on IHT, but you've prompted me to so some research. I hadn't really thought through the implications of pensions being ouside the estate. Neither of us have wills and we're planning on getting those sorted in the next few months. I'm guessing we really ought to have an additional beneficiary listed on our DC pensions other than each other for some minimal percentage so that if something happened to both of us at the same time the pension trustees have some idea of our wishes.

Albermarle

MoneySavingGerbil said:

Albermarle said:

OP - Presume you have taken into account that by taking the 25% TFLS out of the pension , your are potentially exposing it to Inheritance tax at a later time ?

No kids so no immeidiate concerns on IHT, but you've prompted me to so some research. I hadn't really thought through the implications of pensions being ouside the estate. Neither of us have wills and we're planning on getting those sorted in the next few months. I'm guessing we really ought to have an additional beneficiary listed on our DC pensions other than each other for some minimal percentage so that if something happened to both of us at the same time the pension trustees have some idea of our wishes.

Yes , I guess if you both died at the same time , the trustees would look for  the next of kin , who maybe would be some family member you do not even have regular contact with .
You can leave pension pots to charity if you wish , as you have no dependents .
Also leaving money to charity in your will reduce your inheritance tax bill .

gravlax

Albermarle said:

My SIPP provider has  introduced a separate 'cash management account ' You can use this to transfer cash from pension to ISA ( for example ) without the need for it to go via your bank account . No idea if Aj Bell have this facility though.

A separate cash account facility you describe is a very useful feature. Can you share which SIPP platform offers this?

zagfles

gravlax said:

Albermarle said:

My SIPP provider has  introduced a separate 'cash management account ' You can use this to transfer cash from pension to ISA ( for example ) without the need for it to go via your bank account . No idea if Aj Bell have this facility though.

A separate cash account facility you describe is a very useful feature. Can you share which SIPP platform offers this?

I think with some you can use their general investment account to temporarily hold cash transferring eg between pension and ISA

Albermarle

gravlax said:

Albermarle said:

My SIPP provider has  introduced a separate 'cash management account ' You can use this to transfer cash from pension to ISA ( for example ) without the need for it to go via your bank account . No idea if Aj Bell have this facility though.

A separate cash account facility you describe is a very useful feature. Can you share which SIPP platform offers this?

Fidelity offer this but I do not think they are the only one.
Another small advantage is that fees can be taken from this account and you can fund it directly. So fees do not come out of the SIPP or ISA.