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

Albermarle

OP - You might be wondering what happens if you say only ever crystallise say half your pension , meaning no LTA payable at all .
Unfortunately at age 75 ( or death ) all uncrystallised pension is counted towards the LTA, (plus any growth in crystallised funds that have not been taken as income. )

gm0

PensionWise is a bit of a lottery depending upon who you get on the phone.  Their briefing pack for their telephone guidance people is weak on LTA as it is not that mainstream a requirement for the people calling them.  Unsurprisingly it is focused on getting people up to speed on the pensions freedoms vs annuity etc.  My own experience on a call with them was that they "corrected" my understanding (as they saw it) with incorrect information.  I called up PAS and double checked that I had already understood correctly.  IFAs should know.

Here is a thought process to understand LTA for someone already breaching at or around mid 50s who isn't raking further tax advantaged employer contributions i.e. you plan early retirement and to stop work

1. Test 1 - Understand IHT rules as they exist today (pension outside, money taken out inside) - 40% rate over the limit - for now

2. Test 2 - Have a plan for consumption + gifting - heirs, charity and from that understand your IHT exposure over the years and are content with it and with how your desired (and the lower required) income are met.  If you are already ill then your views may be very different to a fit 50something with a generally long lived family background.

3. Test 3 - understand market sequence of return and what you will do to sustain yourself when there is a major correction in stock markets early in your retirement.  Make sure you have an intended portfolio (across everything) consistent with what *you* want to do to sleep well and manage this risk to the long term DC pension sufficiently (for your situation and attitude).

4. If all the above is OK - then pick your moment to crystallise - perhaps a short wait for a dip so that more stock fund units fits into 100% LTA, or at 55 according to cashflow needs.

5. Crystallise the lot and take the 25% tax free cash up to the LTA limit. 250k at standard - more for those with protection certificates.  Then after consumption  and one off purchases/projects - recycle this TFC into self, spouse, heirs S&S ISAs at 20k each pa.  Investments of choice to fit with others. No LTA applies to ISA growth. Inside IHT for yours, 7 year rule for IHT for the heirs but no CGT except for what is temporarily invested outside the ISAs (250k takes a while to shelter even at 80k (4x ISA) for the spouse + 2 kids scenario).  Can consider doing this in more than one phase i.e. half up front and then half later (or other fractions) although this will add a few years growth above LTA on the part inside the pension. But also more time for a handy "correction" to come along where more will fit into the LTA% that is left.

6. If valuable contributions (employer) have indeed now stopped/are stopping you can trigger MPAA (contribution limit) by starting to take income beyond the TFC. From then ensure that you draw ALL nominal growth of the 75% still in the pension wrapper until age 75 so that the number inside the fund is at or below the start figure at step 5.  Profile this draw up early down later allowing for other income so that SP or DB arriving in your 60s doesn't give you unnecessary HRB income tax issues. Anything above a value line (undrawn cash value of the 75% pot after 20 years) WILL be LTA taxed at 25% before income tax at age 75 - this is BCE5A/5B - look it up. This is real growth and inflationary growth over 20 years.  Slow handclap for clever use of fiscal drag by the treasury.

7. Draw more income than nominal growth depleting the capital - if you need to - most do - based on your overall plans, lifestyle, other DB pensions and SP, being aware of lifetime sustainability of DC pension and it's role for you alongside spouse, SP etc.

8. Consider other investment optimisations if they apply to your situation.  @jamesd posts on this topic regularly.  Beyond my appetite for risk and complexity.

9. Depending upon your and any spouse's comfort level with all of this - either hire an IFA or make plans for your demise and ensure your spouse and any heirs are aware of them - which could be as simple as "hire an IFA then here is the fact find binder" as it's a racing certainty the tax rules will be different 20 years out

10.  Forget about it other than annual income mechanics and go and enjoy life


If you aren't up for some version of the above to straighten this out DIY then you need IFA help now to take you through it.

Dead_keen

gm0 said:

10.  Forget about it other than annual income mechanics and go and enjoy life

Generally agree with this as a strategy. One point though is that you don't mention the bit in excess of the LTA after you've crystallised 100% of the LTA. I'm assuming that your plan is to kick this issue down the road (e.g. wait for the age 75 BCE or think about things a bit harder once you know what your income / tax rates are likely to be when you get to c70 or so). Is that right?

pip895

OP - I was in a slightly similar position to you although I was just approaching the LTA rather than above it.  Like you I was largely living of savings although making sure I used my NR band.  The freezing of the LTA suddenly brought into focus that unless returns on my investments failed to even keep up with inflation I was heading for an LTA charge before the freeze was through.  

After a lot of consideration and modelling I made the decision to crystallise my entire pot and start drawdown at close to my full basic rate band.   My reasons were:-

1. 25% would be removed from the equation - and allowed to grow outside the LTA.
In my case some of this cash has been re invested and will be moved into an ISA over the next few years using up some allowances and hopefully some of my CGT allowance going forward.  
2. Taking the full basic rate band gives the best chance of avoiding HRT and or LTA tax later on - the early years of retirement give the best opportunity for this before state pension starts into payment.
3. The main advantage of leaving cash in the pension is IHT avoidance but with hopefully many years to go this is very vulnerable to changes in the rules. I would almost be surprised if it doesn't get changed in the next 10 years.  (gifting excess income may be a better approach anyway)
4. The idea of waiting for a downturn didn't appeal as it would mean selling equities low or keeping 25% of my SIPP in cash for a potentially long period.
5. Finally with the LTA frozen things are more likely to get worse than better. 

I think in your position I would bite the bullet now, but of course I don't know your full situation and priorities.    Good luck with your deliberations!  

Albermarle

PensionWise is a bit of a lottery depending upon who you get on the phone.  Their briefing pack for their telephone guidance people is weak on LTA as it is not that mainstream a requirement for the people calling them.  Unsurprisingly it is focused on getting people up to speed on the pensions freedoms vs annuity etc.  My own experience on a call with them was that they "corrected" my understanding (as they saw it) with incorrect information.  I called up PAS and double checked that I had already understood correctly.  IFAs should know.

OP - As you can see , this subject can get quite complicated with a lot of competing factors and possible strategies.

As above I think you would be lucky to get a pensionwise advisor who was up to speed on this subject . There have even been comments on the forum before that even some IFA's do not fully understand all the potential ins and outs . So if you do go down the IFA route , make sure they know what they are talking about.

The alternative is to research more yourself, and make use of the info from the more expert posters on the subject on here ( that does not include me , although I think I now have a good grasp of the basics ) 

15Manor

Thank you everyone, I will have a proper read through of all of your responses later, so be prepared for more questions!!

gm0

@Dead_keen - per your question upon above LTA portion not mentioned - you suppose correctly. 

The already above LTA portion from mid-50s (with no tax free cash in it as there is none above the limit) is being left invested at lowest drag available in the schemes I have. So a 25% of value LTA charge will be taken at some point or other charge as rules changes may later dictate.  On current rules this would happen to me at 75 when the uncrystallised residue part of the 5A/5B event hits (rather than the growth of crystallised part I discussed above), or indeed upon death if this was prior.  Non-preferred clearly.

I see no practical alternative but to pay up happily - but every day is a learning day.

You can pay the charge early lock in the rule and tax rate today and then grow what's left as a crystallised investment or as I say here - leave it until later and pay the larger 25% amount then.  This obviously depends upon whether you need to draw income from that element of the pension.  It's really just another variation on slicing off pieces with phased FAD.  Once your % of LTA is fully consumed the above the limit slice tax rules are fairly independent of what is happening in markets. The 25% of these units are for Rishi (or successors) - all you control is when he/she gets them

MK62

MallyGirl said:

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.

This is good if the OP has a sizeable ISA already....if not then the problem is how to get it out of the pension and into the ISA (or GIA, but that opens another can of worms with CGT and Dividend tax).

Dead_keen

@gm0 - that is the bit I struggle most with. 

With a relatively low growth rate, that top slice will effectively be taxed at 40% (25% then 20%).  With more historically typical growth rates over twenty years it will be 55% (as it will be hard to stay a basic rate taxpayer with state pension and drawing the below-LTA pot).  Also, the assets in that top slice are effectively trapped in the pension as equity (or bonds/cash/commercial property).  They can't be used for other investments (e.g. residential property) and I struggle to see how I would ever draw income money from that top slice to gift (it feels mad to draw £222,222, taxed at 55%, to gift £100,000).