Exceeding the LTA - how big an issue is this?

toolateforsums

All my future retirement plans are invested in a dc pension that is just past the £1M point . I am now in drawdown at the age of 56 . If my pension performs well over the next 20-30 years , it is highly likely I will exceed the LTA limit regardless of how slowly it creeps up , currently at £1,073,100 . Is this a real issue or more annoying that any good growth will be taxed more heavily at 25% when the LTA is calculated?

I cant help feel that this is one of those nice to have problems?

My drawdown rate is around 3%.

cf1972

Hi,

Firstly congrats, you're right it is a nice problem to have but well done with your pension :-)

Have you taken the tax-free sum to reduce the amount in the pension?

Apparently, the LTA doesn't kick in automatically but only at certain Benefit Crystallisation Events(easy to google, can't post links)

As you've got a large sum invested with them, would your Drawdown provider possibly have an advisor you could discuss this with? 

MK62

toolateforsums said:

All my future retirement plans are invested in a dc pension that is just past the £1M point . I am now in drawdown at the age of 56 . If my pension performs well over the next 20-30 years , it is highly likely I will exceed the LTA limit regardless of how slowly it creeps up , currently at £1,073,100 . Is this a real issue or more annoying that any good growth will be taxed more heavily at 25% when the LTA is calculated?

I cant help feel that this is one of those nice to have problems?

My drawdown rate is around 3%.

If you've already taken money out of your pension via UFPLS, your remaining LTA will be lower than £1073100 (all money withdrawn from your pension is tested against the LTA)

However, if you've already moved your whole pension into drawdown, then it will already have been tested against the LTA.

green_man

cf1972 said:

Hi,

Have you taken the tax-free sum to reduce the amount in the pension?
 

Does this actually reduce your LTA exposure?

Doesn’t the Tax free amount count towards the LTA?

toolateforsums

cf1972 said:

Hi,

Firstly congrats, you're right it is a nice problem to have but well done with your pension :-)

Have you taken the tax-free sum to reduce the amount in the pension?

Apparently, the LTA doesn't kick in automatically but only at certain Benefit Crystallisation Events(easy to google, can't post links)

As you've got a large sum invested with them, would your Drawdown provider possibly have an advisor you could discuss this with? 

I do have an IFA , but I like to also query with , admittedly perhaps not qualified ,but knowledgeble people within this forum.Generally , I see sound advice given . Incorrect responses are quickly corrected by others.

Due to a modest inheritance of £150k , I am also going to invest this in similar funds to the DC pension  , but in a General Investment Account. My IFA has proposed to crystallise my entire dc pension , taking out £250k tax free and putting this into the GIA along with my inheritance. This would leave £750k in my DC pension , and £400k in the GIA which is all obtainable without paying any tax on any withdrawals. The 400k GIA will drip feed £20k annually into stocks and shares ISA's .

Question:- , does the crysatllisation where I take the 25% tax free cash still count towards the LTA?Or do I now only have £750K to count against the LTA? I'm sure it is the former?

MK62

Correct, the former!

The whole amount you crystallise is tested against the LTA (the 25% TFC plus the remaining 75% which moves into drawdown)

PS, if you haven't yet crystallised, you could do so now without incurring any LTA charge, providing your pension plus what you've already taken (presumably by UFPLS), is less than the LTA.

Albermarle

Question:- , does the crysatllisation where I take the 25% tax free cash still count towards the LTA?Or do I now only have £750K to count against the LTA? I'm sure it is the former?

Anyway the tax free cash does count towards the LTA. Taking the tax free cash is a BCE ( benefit crystallisation event) .

So taking 250K tax free leaving £750K crystallised, will mean that you have used up 93.2% of the LTA ( £1m/£1,073,100) 

The benefit of taking the tax free cash , is that any future growth of the £250,000 will not contribute to LTA . If you left it in the pension , it would continue to grow ( hopefully) and would contribute more to the LTA % , especially as the LTA is fixed for a few years. On the other hand if investments do badly in the next few years, you would have been better leaving it in the pension , but we do not like to think too much about that scenario !

The main problem with taking all /most of the tax free cash, when you do not really need it , is that it is now potentially liable for IHT and possible CGT/dividend tax in the GIA account.

cf1972

green_man said:

cf1972 said:

Hi,

Have you taken the tax-free sum to reduce the amount in the pension?
 

Does this actually reduce your LTA exposure?

Doesn’t the Tax free amount count towards the LTA?

Hi Green Man, was thinking in terms of reducing the amount in the pension to reduce compound growth but must admit I did think that the tax-free sum didn't count towards the LTA so happy to be corrected and hope it's a problem I have to worry about in a decade or so :-)

Albermarle

 I did think that the tax-free sum didn't count towards the LTA so happy to be corrected 

Now corrected .

As an example . If you want to take say £50K tax free cash from your pension , you have to crystallise £200K .

So you get £50K tax free and £150K left as crystallised funds , which will be potentially taxable on withdrawal.

As you have crystallised £200K , you will use up £200K/£1,073,100 of your LTA =  18.6%

pip895

Rounding things to make the maths easy, you crystallise 100% LTA. 

25% goes into a GIA/ISA and the 75% into drawdown.  You pay no LTA tax PROVIDED the drawdown account is no bigger when you reach 75. 

To try and achieve this you will probably need to withdraw your full BR band and and probably some income at HR.  You will need a withdrawal rate rather higher than 3% I suspect.  You could also look at holding lower risk stuff & some cash in your drawdown account and upping the risk in your ISA/GIA to compensate.  Another option that can help is to defer the state pension allowing more withdrawals from drawdown.  

ex-pat_scot

pip895 said:

  Another option that can help is to defer the state pension allowing more withdrawals from drawdown.  

That's a really helpful suggestion that I hadn't considered.

Taking the 25% PCLS moves the remaining 75% into drawdown.
Then the strategy from now to age 75 is to take the max income up to the top of BR tax band ie £50,270 pa from the drawdown pot, so that the net drawdown pot size doesn't grow.

At 75, there's a LTA BCE test, whereby pot growth incl growth of the drawdown element is assessed. 
It would therefore make perfect sense to defer state pension from 67/68 (whenever it kicks in), taking the full £50,270 pa from drawdown rather than £12,500 from SP and £37,770 from drawdown.
Whilst this might run down the drawdown pot considerably, it will grow your SP asset by a similar amount, and without the risk of LTA further charge.

Obviously there are some considerations such as your longevity assessment once you reach SP age - no point deferring SP if you are unlikely to use much or any of it, if you have impaired longevity.