Avoiding the LTA?

Albermarle

As above , if you are not so concerned about IHT , then it is the way to proceed.

Just for accuracy the current LTA is £1,073,100, so you have more like £200k headroom .
On the other hand it is frozen for another 4? years at least, so just inflation increases in your investments will use up some of that.
Of course a big market crash will reduce LTA worries .

 I am still salary sacrificing about 38k pa

If you are getting 40% tax relief on all of that then if it pushes you over LTA , you will pay 40% back assuming you will be a basic rate taxpayer in retirement . You will gain the 2 % NI though.
If you are only getting basic rate tax relief on some of it then you may want to consider reducing your contributions.

Ciprico

I don't get tax relief on salary sacrifice... I just don't pay tax on the contribution... But yes I am looking to reduce ss

jamesd

Ciprico said:

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

Yes, you have it right. II seems like a sensible place for a pot of your size.

Since you'll have around 200k of unused lifetime allowance after doing it you might as well continue the salary sacrifice since you should still be able to avoid a lifetime allowance charge. After crystallising you just need to ensure that the amount in flexi-access drawdown is no higher on your 75th birthday than the total of the amounts placed into flexi-access drawdown. Or at least, not higher by more than the remaining unused lifetime allowance. Usual way is to withdraw and often when the lifetime allowance is a potential factor it makes sense to start out using your whole basic rate band because this reduces the chance of needing higher rate withdrawing in the future.

If you want a higher emphasis on inheritance tax protection you could instead aim to keep the amount in flexi-access drawdown around the total placed into the flexi-access drawdown plus the unused lifetime allowance, by letting it grow to use the unused allowance.

For a couple of years while still working you might also just let growth accumulate in the flexi-access pension without withdrawing it, since you'll have both taxable earnings and the tax free lump sum outside the pension. But don't wait more than a couple or three years on getting started on the full basic rate band withdrawing because it can be a challenge to get out enough at the basic rate when the original total was around the LTA level.

While it's not low inflation today, the overall trend at the moment is low inflation, low interest and in that combination it's useful to think of cash as a substitute for bonds because historically in such times cash has beaten medium duration bonds, which lose capital value as interest rates increase. This will cease to be true when rates have returned to something like their pre-2008 levels, though maybe sooner if it becomes apparent that increases have ceased for a while.

Thrugelmir

Albermarle said:

 so just inflation increases in your investments will use up some of that.

Unless the investments are directly linked to inflation there's no correlation. 

SouthCoastBoy

gravlax said:

Some advice suggests the benefit of crystallising a SIPP early in order to maximize the potential future value of the SIPP, so it can exceed the LTA in value without triggering the LTA excess tax. One strategy involves taking advantage of a market drop.

As an example. A SIPP is worth £800,000. The market falls and the SIPP value is £640,000. At this point it is fully crystallised, taking 25% tax-free, £160,000 leaving £480,000 in the SIPP. The £160,000 is invested outside the SIPP so that total investments remain £640,000. When the market eventually recovers back to where it was (total investments £800,000) this would make £600,000 in the SIPP and £200,000 outside. The £100,000 increase within the SIPP (and any further increase) is not counted against the LTA.

I am trying to get more of an understanding of the LTA. The statement I have highlighted in bold is because if I understand it correctly next time you access money from your pension for assets not crystallised, or reach the age of 75, it would use up some more of the LTA, is that correct?

On purely a numbers perspective wouldn't there be an increase of £120k not £100k if total investment went back to £800k
i.e. to get 640k back to 800k there needs to be 25% growth,  25% of 480k = 120k

MallyGirl

yes, and yes.
That highlighted bit should read:

The £120,000 increase within the crystallised pot in SIPP (and any further crystallised increase) is not counted against the LTA until the second test at 75.

MrBobbins

Yet another person here in a similar situation. My DC workplace pension is currently sitting at around £920K, I'm Salary Sacrificing around £25K p/a, but I'm not 55 until next Sep. I'm a high rate tax payer (though considering bumping up my contributions by the necessary £2.1K to drop myself into standard rate next tax year).

I reckon I'll have around £970-980 in my pension when I hit 55, so I guess I should be ready to go then if I am going to crystallise! I don't have any children, so not too concerned about IHT implications, just more concerned about taking a fairly large sum out of the income/capital gains tax protections!

coyrls

MallyGirl said:

yes, and yes.
That highlighted bit should read:

The £120,000 increase within the crystallised pot in SIPP (and any further crystallised increase) is not counted against the LTA until the second test at 75.

The £120,000 increase within the crystallised pot in SIPP (and any further crystallised increase) is not counted against the LTA until the second test at 75, if the increase has not been withdrawn prior to the second test at 75.

EdSwippet

MrBobbins said:

I reckon I'll have around £970-980 in my pension when I hit 55, so I guess I should be ready to go then if I am going to crystallise! I don't have any children, so not too concerned about IHT implications, just more concerned about taking a fairly large sum out of the income/capital gains tax protections!

It looks that way. Crystallising everything would leave you around £100k remaining LTA, so four years of future pension contributions at your current rate. Maybe less if there's a worthwhile employer match and/or employer NI uplift.

How much longer do you plan to work. If fewer than three or four years then you could perhaps be a bit more relaxed on this. If more than that though, once you've used up your LTA then pensions are no longer a tax saving strategy (and could, depending on your income in retirement, be a tax-losing one), in which case you'll need to either investigate other tax saving options, or just retire earlier than planned (like me!).

As for taking out the PCLS, simplest is to invest it in the same assets as before, just outside the pension. Move as much as possible into ISAs, but even without the ISA wrapper, remember that you have a £12k/year or so capital gains tax allowance and a £2k/year dividend tax allowance that you can use to mitigate tax on gains on the reinvested PCLS money.

Albermarle

just more concerned about taking a fairly large sum out of the income/capital gains tax protections!

Other posters on other threads have said that with judicious management of a unwrapped investment account , it should be possible to pay no CGT /dividend tax on at least £100K of investments , maybe more . Also CGT and Dividend tax is less than LTA tax . Plus as said above if you can move some into ISA's as well , that helps . Of course a market crash would remove most of the problem as well.

There will be extra admin though for sure.

Also I agree with EdSwippet - reaching LTA and in effect losing the benefit of 40% tax relief on contributions , is possibly a good time to head for the exit. It was one thing that pushed me in that direction.