Who can advise on pension LTA and when to start drawing down?

Albermarle

EdSwippet said:

Albermarle said:
Many say if you have to pay some LTA tax , then it means you have won the game and don't worry about it too much.

I don't know about "many", but you have certainly said it pretty regularly. ;-)

To me, this seems too fatalistic. Below age 55 options are certainly limited, but once over age 55, there are ways to reorganise your money to mitigate or even entirely avoid paying the LTA penalty, yet without changing your overall risk profile or investment returns.

It is true that they are not cost-free options; they save tax, but do not entirely avoid it. Using them usually means you bring forwards a tax bill, and so pay more in non-LTA tax than otherwise. But when this extra non-LTA tax you end up paying now is significantly lower than you would pay later on with an LTA penalty, there is a good case for action rather than just a shrug of resignation.

I am afraid as a regular contributor to this forum , it is inevitable that one repeats oneself regularly 

In any case I have also taken some steps to reduce LTA ( small pots etc ) which as you say makes sense . I am only hesitating about full crystallisation due to IHT, and will be tempted more to do it if markets take a downturn.

My oft repeated point is more about keeping some perspective on the situation, in that having a Million Pound pension is supposed to allay worries and not cause them .

Scrudgy

Albermarle said:

My next step is to leave my company scheme and transfer my entire pot to a SIPP, where I will crystallise the whole pot up to the LTA and transfer the tax free lump sum to ISA’s for me and my wife

Scrudgy - All  your points are valid and well explained , but just to highlight the fact that taking the tax free cash out of the pension, potentially exposes it to IHT at a later date depending on your other circumstances.

Actually yes good point. I have not really considered IHT very much. I might just part crystallise as needed and put some more reading into it.

pip895

EdSwippet said:

To me, this seems too fatalistic. Below age 55 options are certainly limited, but once over age 55, there are ways to reorganise your money to mitigate or even entirely avoid paying the LTA penalty, yet without changing your overall risk profile or investment returns.

It is true that they are not cost-free options; they save tax, but do not entirely avoid it. Using them usually means you bring forwards a tax bill, and so pay more in non-LTA tax than otherwise. But when this extra non-LTA tax you end up paying now is significantly lower than you would pay later on with an LTA penalty, there is a good case for action rather than just a shrug of resignation.

I agree with this - I think if you are a higher rate tax payer and are using up your full ISA allowance every year, there are more limited options to avoid the LTA without a heavy tax penalty else where (the use of VCTs being one exception often mentioned)

If like me however, you are a basic rate tax payer, then you do have the opportunity to pay a bit more basic rate tax now and avoid some/all higher rate/LTA tax later on.  

Albermarle

Scrudgy said:

Albermarle said:

My next step is to leave my company scheme and transfer my entire pot to a SIPP, where I will crystallise the whole pot up to the LTA and transfer the tax free lump sum to ISA’s for me and my wife

Scrudgy - All  your points are valid and well explained , but just to highlight the fact that taking the tax free cash out of the pension, potentially exposes it to IHT at a later date depending on your other circumstances.

Actually yes good point. I have not really considered IHT very much. I might just part crystallise as needed and put some more reading into it.

Other posters often point out that one possible way around the IHT issue , is to actively give money away to family or charities whilst you are still alive. Obviously if you die shortly afterwards then large gifts to family/individuals will still be taken into account for IHT . However if you live 7 years they will escape it altogether . Gifts to charities are exempt as far as I know .

Dead_keen

Scrudgy said:

The thoughts around the LTA that occupy me these days as a 55 year old are:-

If you have exceeded the LTA, then

• ...
• My next step is to leave my company scheme and transfer my entire pot to a SIPP, where I will crystallise the whole pot up to the LTA and transfer the tax free lump sum to ISA’s for me and my wife, do some premium bonds and maybe some fixed interest savings or a general investment account.
  
• ...
• I can then re-enrol in the company scheme to put in the 6% and then continue to take the firms 6% as part of my take home salary until I pull the trigger and retire.
• With the AVC money I am no longer stuffing into the pension (gone from £40k to £6k). I now take it as salary and pay the 41% tax (Scotland) on it and place it in ISA and cash savings.

...

Please feel free to add comments to my thoughts, it all seems to makes sense to me, but I maybe I have missed something fundamental that I need to change my thoughts.

Some employer schemes will let you transfer some or all of your DC pension to a SIPP without having to leave the scheme.

What's your strategy for the pot in excess of the LTA?  Kick the can down the road until you are getting close to 75?

Scrudgy

Dead_keen said:

Some employer schemes will let you transfer some or all of your DC pension to a SIPP without having to leave the scheme.

Sadly not allowed, I must leave the scheme. I am however allowed to enrol again immediately after leaving, strange but true.


What's your strategy for the pot in excess of the LTA?  Kick the can down the road until you are getting close to 75?

Probably, will just try to manage it as best I can.

Something like this I guess.

15Manor

OK, this has gone down a route I wasn't expecting, as in I was interested in who I could speak to in order to explain the basics to me..... However, some really interesting things have come up, so I am happy to give some more detail for the pension nerds (like I am trying to be) amongst us.
I am 55, no longer working and living off savings. I have a pension pot currently worth 1.2 million  What I don't understand are crystallisation events. So, at the moment, pension is worth 1.2, when do I pay LTA tax on that? There is no plan to take an annuity, I believe flexible drawdown is what I would want. So, today it's worth 1.2, this year I take £50K out, apparently 25% tax free but do I pay extra 25% because of LTA at this point or when? I really think this is one of those things (like physics at school) you either get or you don't. I have tried and tried to get google to simplify this, thank you again 

NoMore

To simplify the numbers lets say the LTA is 1 Million pounds, and you only have a DC pension pot your withdrawing from.

You have a pot of 1.2 million, you wish to draw down 50k (25% of which is tax free), at that point you have crystallised 50k of your pension and it is tested against the LTA, wherein it has used 5% of the LTA so you now have 95% of the LTA left. Every time you take tax free cash you crystallise the amount of pension to enable that cash and use up a x% of the LTA. Once you reach 100% in total of all crystallisations, you no longer get any tax free cash and withdrawals are now subject to the LTA charge.

That's it simplified, there is nuances in how you could withdraw (UFPLS or Flexi Access Drawdown) but the basics of the LTA remain the same, just you may have crystallised funds still within the pension.

MK62

15Manor said:

OK, this has gone down a route I wasn't expecting, as in I was interested in who I could speak to in order to explain the basics to me..... However, some really interesting things have come up, so I am happy to give some more detail for the pension nerds (like I am trying to be) amongst us.
I am 55, no longer working and living off savings. I have a pension pot currently worth 1.2 million  What I don't understand are crystallisation events. So, at the moment, pension is worth 1.2, when do I pay LTA tax on that? There is no plan to take an annuity, I believe flexible drawdown is what I would want. So, today it's worth 1.2, this year I take £50K out, apparently 25% tax free but do I pay extra 25% because of LTA at this point or when? I really think this is one of those things (like physics at school) you either get or you don't. I have tried and tried to get google to simplify this, thank you again 

This is my understanding....(though I don'r claim to be an LTA tax expert here)

A crystallisation event happens each time you take money from your pension(s).

Assuming this pension is a DC scheme (defined contribution...aka money purchase) then you have two options to withdraw money.......but for the purposes of LTA, they are treated the same.

The first is UFPLS, where you take money directly from the uncrystallised funds (currently £1.2M)......the first 25% is income tax free, but the whole amount withdrawn is a crystallisation event, which is tested against the LTA. If it was your first withdrawal, and let's say it was £50k, then you would use 50000/10731% of your LTA, or 4.66%, leaving you 95.34% of your LTA left for future withdrawals. No LTA charge is payable now, as you have not exceeded the LTA - you've only used 4.66% of it.

Income tax would be charged on £37500.....The LTA is frozen until 2026, so if you take £52000 next year, you'll use 52000/10731% = 4.85%......and so on. An LTA charge becomes payable once you use >100% of your LTA (unless you hit 75 before that - see below).

The other method of withdrawal is to crystallise all or part of the currently uncrystallised pension.

If you crystallised the whole pot now, you'd get up to 25% tax free (but that is limited to 25% of the LTA) with the remainder being placed into drawdown for you to take income. As you'd be crystallising £1.2M now, you'd use more than your LTA, and so an LTA tax charge would be payable.....on the difference of £126900 (1200000-1073100). If you take this as a lump sum, the tax is 55%.......but if you put that into drawdown as well, to provide an income, the tax charge is 25%.

You can also part crystallise your pension........if you crystallised half, no LTA charge would be payable now, as you'd only have used 600000/10731% of your LTA (55.91%). However, you may just be delaying things as sooner or later, you'll need to crystallise the remainder........or else they'll get you at 75, when several more LTA tests come into play (one is against the growth in your crystallised pot......the other is the total of all your benefits yet to be crystallised). As you'd already have used 55.91% of your LTA, you'd have 44.09% of the LTA left......which might be say 1.8M by then (but remember your uncrystallised pot would also have grown (hopefully anyway)....potentially by a bigger % than the LTA).

As the LTA is frozen until 2026, then if you are planning to crystallise your pension, you may be better off biting the bullet and just paying the LTA charge now......if your pot rises in value, the charge will just increase. Alternatively you could gamble that your pot will fall in value......if you think it will, then crystallise as soon as it falls below the LTA (a correction of -11% would see to that).

Crystal ball time......there's no way to know which way it will go.......and murphy's law states that whichever option you choose will end up being the wrong one.....

Rest assured though that the LTA charge you pay will be spent wisely by the government on your behalf.....

MallyGirl

MK62 said: 

As the LTA is frozen until 2026, then if you are planning to crystallise your pension, you may be better off biting the bullet and just paying the LTA charge now......if your pot rises in value, the charge will just increase. Alternatively you could gamble that your pot will fall in value......if you think it will, then crystallise as soon as it falls below the LTA (a correction of -11% would see to that).

Crystal ball time......there's no way to know which way it will go.......and murphy's law states that whichever option you choose will end up being the wrong one.....

Rest assured though that the LTA charge you pay will be spent wisely by the government on your behalf.....  

This is where having a better understanding is useful.
Your pot is increasing in value (hopefully) but you can mitigate the LTA tax cost of that growth a bit by having the higher risk stuff in ISAs / GIAs and the lower risk inside the pension wrapper. Same overall portfolio but held in the most LTA tax effective way.