Is it worth paying LTA for a larger DB pension?

messijay

I have run the figures and am getting myself in knots over this. I hope that someone can give me a reasoned view.

 

From April  2022, when I hit 60,  I will have about 74% of LTA remaining  after I start taking a DB pension of 1,600 a year. I would get state pension of 11,500 from  2029 when I am 67.

 

I have195k crystallised and 175k uncrystallised in a pension as well as 100k in an S&S ISA and 85k in cash. My issue is what to do about a second DB pension. It is not fully index linked as once started 40% is level and  CPI increases up to 5% only apply to about 60% of i). CPI up to 5%is applied all of the  pension prior to it being in payment .

 

I have been quoted the following for the second DB pension, which rises more steeply in the later years:

Apr 22 - 25,728

Apr 23 - 27,529

Apr 24 - 29,459

Apr 25 - 31,517

Apr 26 - 33,704

Apr 27 - 36,096

50% is payable to my partner on my demise.

 

Plan A was to live off, crystallised pension savings and ISA funds until 2027 to get the maximum  DB pension at 65. From 65 I planned to draw on the DC pension to take me up to the top of the basic rate band.  Once state pension is added at today’s rates that would be a gap of around 1k a year to the higher rate band, but  the gap would grow as the real value of the DB pension declined. However plan A would  incur LTA. Lump sums are given at a rate that is LTA neutral so that does not help as an alternative.

 

Plan B  was to monitor DC growth and start drawing the second DB pension when they were aligned and I was just at or slight over the LTA, probably when the DB was around 30 to 31k. I would fully crystallise then.  I could always defer the SP for a few years to get more fully indexed pension.

However I am having second thoughts as if I took the pension at 65 the LTA cost at 25% may be around £35k and I would have lost 95k by not taking the pension three years earlier. This 130k gets me an extra £6600 a year (only partly index linked).   This is a ‘reverse commutation’ of  19.7. On the board you often see it being suggested that people keep their pension if commutation is below  25, so on the face of it this may not be too bad.  If it was 15 I’d definitely take it, 19.7 seems a bit steep. The effective reverse commutation could rise as the pension and DC funds increase. Plan C would be to monitor the pension and  uncrystallised DC pot and start taking the pension either at  65 or earlier if the effective reverse commutation  hits say 23 or more. Is there a sensible way to think about this tradeoff?

 

I like the flexibility of being able to use my DC in plan B and ensure I stay at standard rate income tax, and paying less in LTA and was leaning that way, but wondered what thoughts others had on this.

Triumph13

The key thing is not to let the tax tail wag the pension dog.  Before knowing what's best you need to work out how much income you actually think you need in retirement, what your ambitions (if any) are regarding leaving an inheritance, how much of your income you want to have properly inflation protected etc.  

The correct solution for you will be the one that best meets these aims, not the one that pays the least tax or necessarily maximises lifetime income if you live to x age.

Diplodicus

Yes. The advantages of growing £1m+ in a tax-sheltered environment outweigh facing the hurdle of LTA in the 2030s imho.

pip895

Diplodicus said:

Yes. The advantages of growing £1m+ in a tax-sheltered environment outweigh facing the hurdle of LTA in the 2030s imho.

Unless your primary objective is IHT mitigation avoiding it is beneficial - It is a pretty punitive tax.  Avoiding it can allow utilising ISAs to the max + other allowances give options even before you start to look at things like VCTs etc.   

Lifetime gifts are the best way to mitigate IHT imo.

Diplodicus

Unless I have been exposed to a very selective group of MSE posters, my impression is that it is primarily a bunch who know everything about maximising the tax-advantages of the accumulation phase and are now concentrated on avoiding tax for the rest of their lives, with very little ambition to risk further gains in the long interim.

For that I suppose there is a badge but not one I'd want to wear.  

Paying tax should be a privilege. 

pip895

Diplodicus said:

Paying tax should be a privilege. 

Not on this board if it can be painlessly and legally avoided lol.   

The reason to keep it in the SIPP is to save tax but once you hit the LTA you don't save tax...  Have it in a GIA - its really not that bad tax wise if you use your allowances.

I do draw the line at options like putting the whole pot into cash or wealth preservation funds to stop it growing though - I mean why!!!

Diplodicus

pip895 said:

Diplodicus said:

Paying tax should be a privilege. 

Not on this board if it can be painlessly and legally avoided lol.   

Yes, I have noticed lol. 

But if you modulate your investment strategy towards avoiding tax and that leads to a worse outcome, what would you call that?
Irony?

QrizB

Diplodicus said:

But if you modulate your investment strategy towards avoiding tax and that leads to a worse outcome, what would you call that?

£100 invested in VLS80 will grow in exactly the same way whether in a SIPP, ISA or GIA.

Which one to use depends, in part, on how it will be treated for tax.

Malthusian

Diplodicus said:

Paying tax should be a privilege. 

Maybe it should, but in the world we live in, the highest tax rates are levied on those with the least money (at the point where withdrawal of means-tested benefits is at play). No-one is obliged to order their affairs to pay more tax (Judge Learned Hand).

If you put money into a pension and it gets hit by an LTA charge, then it wasn't in a tax-sheltered environment - the complete opposite.

Diplodicus

Apart from the obvious: you rightly cannot shuffle your whole SIPP into another tax-shelter, the LTA hurdle is to be jumped at 75.
Commiserations for someone sitting out the investment party since the mid 2010s. You may never catch up.

Albermarle

I do draw the line at options like putting the whole pot into cash or wealth preservation funds to stop it growing though - I mean why!!!

You can not compare investing in Wealth Preservation Funds to staying in cash . The Funds do grow long term above inflation.

 £100 invested in VLS80 will grow in exactly the same way whether in a SIPP, ISA or GIA.

Which one to use depends, in part, on how it will be treated for tax.

I think the point Diplodicus is trying to make , is that some people change their investment strategy , depending on the situation . So for example someone approaching LTA in their SIPP , may change to VLS 40 , but leave VLS80 in the others . I think it is a sensible strategy but he thinks it is too cautious /too tax avoidance focused.
Each to their own .