LTA strategy after freezing of allowance

owly1

I am just retired and have a DB in payment meaning my remaining LTA is less than 20%

I also have an untouched DC with the market recovered, worth 300 k today

Clearly there is not enough LTA left to cover even todays crystallisation value

My thoughts are to use up the remaining LTA, ASAP to get max TFC in chunks out of my DC.

My thought is to make the withdrawals as UFPLS rather than drawdown so that I can invest the funds in ISAs where the income growth is tax free

The first chunk will be biggest as I have a current tax year with almost no income but in subsequent years I think to delay state pension and take smaller 75/25 lots to keep just below the higher income tax level.

Once the LTA is gone I think to leave the remaining pension till 75 invested in higher risk investments (as it’s reasonably long event horizon and better to grow a bigger pot to inevitably share with taxman). Also there is the IHT benefit of the pension remains being outside estate.

Is there any advantage to taking a UFPLS as a BCE before a DB ? 

Am I correct that UFPLS leaves no crystallised part remaining (compared to drawdown where the remains 75% of used funds  remain invested in pension and their growth contributes to LTA excess charge at 75 if over LTA)

Does this strategy make sense? Have I missed anything especially regarding the final assessment at 75 and the ongoing UFPLS transfer to ISAS 

I agree it’s a nice position to be in ! But I feel slightly that the reward for my earlier DC investment risks is higher tax

jamesd

DB funding of the lifetime allowance charge is likely to be punitive compared to DC, so unlikely to be better to go over with the DB. Not necessarily worthless to find out the commutation used but don't expect it to be good.

You can adopt an approach of gradual crystallisation while hoping for a convenient market downturn that lets you get more out within the LTA. The Covid crash in 2020 was a fine example of such an opportunity.

Marcon

You can 'increase' your LTA by up to £30,000 by having 3 'small pots', each of no more than £10,000 at the time you withdraw them using the 'small pots' regime. Small pots use 0% of the LTA.

ex-pat_scot

Marcon said:

You can 'increase' your LTA by up to £30,000 by having 3 'small pots', each of no more than £10,000 at the time you withdraw them using the 'small pots' regime. Small pots use 0% of the LTA.

Indeed. My calc has my total target as £1,103,100 and calculations thereon.  ie £1,073,100 LTA plus three lots of small pots.
There will necessarily be an element of admin required, but there's another £7,500 tax free cash and £22,500 that avoids any LTA surcharge, so seems to be worth it.

fizio

I was in a similar boat earlier this year and did the following
1. took DB with max lumpsum - approx 80% LTA
2. Took DC to 100%  LTA and max tax free cash
3, Took the excess LTA as 55% Tax cash 

I did find that the best option (or least worst) is very different depending on exact combinations of funds, db/dc and pension scheme rules. The other f2 actors are whether or not you want to leave an inheritance and if you expect to be HRT payer.
Took a lot of spreadsheet calcs to find the optimum solution

MK62

If you wait for a downturn, you could end up in a worse position than crystallising now and just paying the tax.

Albermarle

fizio said:

I was in a similar boat earlier this year and did the following
1. took DB with max lumpsum - approx 80% LTA
2. Took DC to 100%  LTA and max tax free cash
3, Took the excess LTA as 55% Tax cash 

I did find that the best option (or least worst) is very different depending on exact combinations of funds, db/dc and pension scheme rules. The other f2 actors are whether or not you want to leave an inheritance and if you expect to be HRT payer.
Took a lot of spreadsheet calcs to find the optimum solution

I guess one issue with this strategy is that you will have a lot of cash looking for a home.
Presume you have had to get into the world of unwrapped investments, and grappling with CGT and dividend tax reporting ?
Unless you just spent it all on a new yacht ?

fizio

Albermarle said:

fizio said:

I was in a similar boat earlier this year and did the following
1. took DB with max lumpsum - approx 80% LTA
2. Took DC to 100%  LTA and max tax free cash
3, Took the excess LTA as 55% Tax cash 

I did find that the best option (or least worst) is very different depending on exact combinations of funds, db/dc and pension scheme rules. The other f2 actors are whether or not you want to leave an inheritance and if you expect to be HRT payer.
Took a lot of spreadsheet calcs to find the optimum solution

I guess one issue with this strategy is that you will have a lot of cash looking for a home.
Presume you have had to get into the world of unwrapped investments, and grappling with CGT and dividend tax reporting ?
Unless you just spent it all on a new yacht ?

100% correct and I am still trying to figure out what to do with it having done the usual ISA/premium-bonds etc. I did blow 0k on a Polestar 2 electric car but thats about it. My 2 options are to drip feed into a GIA or add to my BTL portfolio. Currently the markets for both look expensive so will mull over till the new year.. nice problem to have ...

zagfles

fizio said:

Albermarle said:

fizio said:

I was in a similar boat earlier this year and did the following
1. took DB with max lumpsum - approx 80% LTA
2. Took DC to 100%  LTA and max tax free cash
3, Took the excess LTA as 55% Tax cash 

I did find that the best option (or least worst) is very different depending on exact combinations of funds, db/dc and pension scheme rules. The other f2 actors are whether or not you want to leave an inheritance and if you expect to be HRT payer.
Took a lot of spreadsheet calcs to find the optimum solution

I guess one issue with this strategy is that you will have a lot of cash looking for a home.
Presume you have had to get into the world of unwrapped investments, and grappling with CGT and dividend tax reporting ?
Unless you just spent it all on a new yacht ?

100% correct and I am still trying to figure out what to do with it having done the usual ISA/premium-bonds etc. I did blow 0k on a Polestar 2 electric car but thats about it. My 2 options are to drip feed into a GIA or add to my BTL portfolio. Currently the markets for both look expensive so will mull over till the new year.. nice problem to have ...

I can understand 1 & 2 but not 3 if you don't need the cash. With 1 & 2 you'd only have about £50k or so in PCLS, £20k of which could go straight into an ISA and the rest over a couple of years, in the meantime unwrapped growth/dividends on £30k or less likely to be within dividend/CGT allowances. Then just make sure you drawdown all the DC growth so you don't get clobbered with another LTA charge at 75.

zagfles

MK62 said:

If you wait for a downturn, you could end up in a worse position than crystallising now and just paying the tax.

Indeed, it's no different to trying to time the market for buy/sell decisions, except in gear. You'd also need to try to call the bottom and inevitably the PCLS would be in cash in a potentially rebounding market which could cost more than the LTA tax savings! And if the market never falls below current values (which is common) then you'd end up paying more LTA tax than crystallising now. A very dodgy strategy. See these discussions:

https://forums.moneysavingexpert.com/discussion/6281860/pensions-already-exceed-lta-how-do-bces-and-taxation-apply/p1

https://forums.moneysavingexpert.com/discussion/6299492/should-i-go-over-the-sipp-lifetime-allowance/p1

jamesd

MK62 said:

If you wait for a downturn, you could end up in a worse position than crystallising now and just paying the tax.

zagfles said:

Indeed, it's no different to trying to time the market for buy/sell decisions, except in gear. You'd also need to try to call the bottom... if the market never falls below current values (which is common) then you'd end up paying more LTA tax than crystallising now.

It's entirely possible that there can be no downturn and hence that growth could leave a higher lifetime allowance charge bill, which of course just means that you've paid more charge but are still better off. Though with a frozen LTA you could get sub-inflation growth and be worse off by the inflation.

What we know from the current cyclically adjusted price/earnings ratios is that current conditions are very favourable for the delay approach. But very favourable does not mean a guarantee, just that probabilities favour it.

Of course there is no need to time the bottom of a market. You can execute at any level and do it all at once or in chunks as seems appropriate.

There are times that are highly unfavourable for this approach, like just after a major market drop, but we're not in those times and have the advantage of being able to decide based on current knowledge whether times are good or bad for it. Market conditions matter for when it's worthwhile to do this.

Arguments that it can't ever be a good idea because it sometimes isn't don't make a lot of sense when you can look at the starting conditions to see whether they are favourable or not.