Avoiding the LTA?

Albermarle

zagfles said:

Albermarle said:

HCIMbtw said:

do you have to take 25% lump sum when you crystalise, or can this be deferred? 

You have to take it, as it is part of the crystallisation process.

Technically you don't have to take it, but it's a once only option at the point of crystallisation, and for a DC pension it would nearly always be sensible to take it. With DB it's quite often better not to take the tax free cash if it comes at the cost of a bad commutation rate

Another reason that someone might not take the tax free cash from a DB pension ( even if the commutation rate is OK) is to keep the guaranteed income , especially if they already have sufficient cash and everything else was in risk based investments in ISA's , DC pension etc. 

jamesd

gravlax said:

jamesd, I'm not sure I'd do VCTs although I will look into it. I think you may have to be UK tax resident, not sure. But I may move and retire outside the UK so staying flexible.

I think the barrier I am facing is accepting selling (to crystallise the whole pot) when the market is down! It goes against every instinct having held through all previous market falls. In a situation where you may be within a couple of years of starting to drawdown rather than contribute, seeing your pot fall from say £800,000 to £500,000 and then selling 25% to taking out £125,000 tax-free, rather than waiting until your pot has recovered to £800,000. An £800k tax-sheltered pot paying out 25% tax-free income, versus a £500,000 pot because you sell when it's down. It's a real leap of faith! I'm still trying to work out the numbers to see how you come out ahead.

VCTs are only available to UK residents. Still scope to use them while working but once you're abroad that's it and the tax exemptions won't apply in the country you're in. The 30% doesn't have to be repaid, though.

You're selling but not for long: you're immediately buying back the same things outside the pension (maybe income rather than accumulation units) so you're not out of the market for long. You could further reduce that time out of the market by using doubly or maybe triply leveraged ETFs, though not that these do not tack well, particularly the triple, in times of volatile markets. Still useful, though. Of course you don't have to by back the same things but if you don't like selling and are happy with the investments, that's what you would do.

Since you're invested in the same things both inside and outside the pension, the fact that you've made a tax-based shift out of the pension makes no difference in the outcome, you still get the same recovery back to 800k. Ignoring the details of taxation on unwrapped investments, which shouldn't be a big factor for the amounts we're discussing.

It's the same amount of money and the same investments, just partly moved for tax efficiency.

jamesd

HCIMbtw said:

do you have to take 25% lump sum when you crystalise, or can this be deferred? 

At the time of crystallisation of all or part of a pot you must choose to take between 0% and 25% as a tax free lump sum. You are not permitted to take a tax free lump sum from that portion of the pot later, so take 12% and you don't get to take the remaining 13% later. As a result the normal approach if you want say 12.5% would be to crystallise half and take 25% of the half. Same tax free amount. \But different crystallised amount so not as useful for the LTA planning being considered at the moment.

There are niche cases where taking less than 25% can be appropriate. Sometimes wanting to keep money in the pension, otherwise maybe already over the lifetime allowance and ineligible. These are pretty uncommon situations so a pension provider is quite likely to seek clarification about any request to take less than 25%.

Cus

Are there any easy to access stats on the average VCT returns? Saving on tax is great but not if average returns are very poor.

jamesd

The Association of Investment Companies probably has some. You can read how I did with my early ventures into VCTs in the topic My use of VCTs as part of retirement planning. As with investments of many types, individual performance of the VCT collective investment funds will vary with the fund and they have differing balances of risk and desired reward. I tend to favour the lower risk end investing more in later stage companies.

Mentioning VCTs here was initially quite controversial because they aren't investments for all and some people dislike mentioning specific collective investments. The topic with my outcome is a form of followup which illustrated that the investments have done better than the cautious initial assumptions that I discussed here and with the forum team in the early days of mentioning them.

Albermarle

Jamesd - Regarding VCT's , is there not quite a lot of admin involved - reclaiming taxes etc ?

pip895

In the past I have used VCTs to help mitigate tax on significant sums held outside tax wrappers.  As we weren't at that stage paying HRT we went for second hand VCTs. 

These work essentially just like an investment trust with the added advantage of no tax to pay on dividends or CGT on disposal.  You purchase typically on a decent discount and some of the older larger trusts are pretty stable and have good liquidity.  I believe the rules changed at some point to ensure new VCTs were genuinely taking on the risks associated with investing in early stage and very small enterprises, but trusts that predate this change can be invested in pretty mainstream stuff and are consequently relatively low risk.   

The three I picked were Octopus Aim VCT (OOA), Unicorn Aim VCT (UAV) and Baronsmead VCT (BVT).  They all performed well for me on a total return basis and I only sold once I could move the funds into our ISAs.

jamesd

Albermarle said:

Jamesd - Regarding VCT's , is there not quite a lot of admin involved - reclaiming taxes etc ?

If you choose and don't need to file a tax return you can let HMRC deal with it and you'll get the 30% automatically. If you do need a tax return anyway there's a box there. You can also choose to ask for the relief by contacting HMRC. There's nothing to do when you get the dividends, they  just arrive untaxed in your bank account or by cheque.

Ciprico

I read this post with great interest...

My sipp is at £860k, of which 330k is cash

I am approaching 59 and will probably retire at 60

I appreciate I have too much cash in SIPP, I recently sold some higher risk funds. I am still salary sacrificing about 38k pa

Am I right in thinking if I crystalise and pull out 25% ie £215k in tax free lump sum which will leave the remaining 645k crystalised and some room for growth before hitting LTA.  (about 140k)

And if I do that the only downsides are
1/ effort in investing unsheltered 215k - using CGT and interest allowances etc (for self and wife)
2/ 215k no longer sheltered from IHT 

So unless I missed something I really should get organised and do this....

Am I missing anything.

I am with Interctive Investor - do I need to shop around, de-accumulating is a totally new area for me...

Any comments gratefully received...

MallyGirl

That is the basic plan we have. You can get £40k a year into ISAs but will have to do something with the rest of the cash.
Yes - the tax free amount will be become part of the estate for IHT calculations.
II seems a reasonable choice.