SIPP how to avoid LTA

kerrick

I thought that it was possible to withdraw income from a SIPP well in excess of the £1.07m limit, without exceeding the LTA by planning ahead as follows.

If your SIPP looks like it could exceed £1.07m in the future with gains and/or contributions, crystallise it all before getting close by taking a 25% lump sum. The 75% remaining is then crystallised and is not tested against the LTA until age 75. So it could remain invested and grow to any amount (£1m, 2m...) and any amounts can be withdrawn over time, and so long as the SIPP is below £1.07m (or the amount then in force) at age 75, there is no LTA excess tax due. If the SIPP is over £1.07m, (e.g. £3m) then you could withdraw £2m before age 75, and still no LTA is exceeded.

Also, in the above scenario if only a single 25% tax free sum was taken, then until any of the remaining crystallised 75% is withdrawn as taxable income it would still be possible to continue making contributions up to £40k p a. into the SIPP, creating a new uncrystallised portion. So if the SIPP was previously crystallised at £700k, then the new contributions can grow to about £370k before that also needs to be crystallised to keep the combined total crystallised SIPP below the £1.07m. But again cumulatively this pot can also grow without any further LTA tests until age 75.

If this strategy is correct it seems that it is possible to withdraw in total, cumulatively, well over the £1.07m amount of the LTA. 

But I often see advice suggesting that the £1.07 LTA is the maximum you can receive in total.

For example this today in the Telegraph:

"Question: Can I take tax-free cash to stay below the threshold?
Answer: Cashing out your 25pc tax-free lump sum will not keep your pension pot from hitting the lifetime allowance. Everything you take from your pension is added up to show how much of your lifetime allowance you have used."

Does this mean the strategy above does not avoid the LTA? 

Albermarle

Your plan/ideas are correct as far as I understand. The same process is often recommended by some posters on here. It would not suit everybody though because
1) You would have to be under LTA and over 55 ( soon 57) when you first crystallise .
2) The 25% tax free should ideally be  reinvested . It is too much to get into a ISA's for a few years , so you need to put it in a general investment account with the associated issues for CGT and dividend tax , or at the very least more administration.
3) The 25% tax free is no longer protected from IHT and maybe end up getting taxed at 40% anyway when you die .
4) You need to have a plan to use excess income you might not really need after crystallisation . Maybe gifting to charity or family or spending more . Otherwise a potentially bigger IHT bill.
5) You might go through this process only to see your pension crash in value rendering LTA irrelevant.
6) you lose the flexibility  to use tax free cash to keep your income tax bill down in following years .

As said it is a workable plan, but no plan is without any drawbacks . 

Notepad_Phil

Unfortunately newspaper articles are frequently misleading if not plain wrong - especially when it comes to financial matters.

I'm doing something similar to yourself in drawing down my crystallised funds to ensure that the age 75 tests do not result in my breaking the LTA, but I'm not sure you've got it 100% right (apologies if I've misunderstood you).

For simplicity let's say that the LTA remains at £1.07m for evermore.

Then I think you are saying that if you are close to the LTA then you would crystallise it and then drawdown enough to ensure that the SIPP value remains below £1.07m, whereas you would actually have to ensure that your SIPP value remains extremely close to its original crystallised value i.e. just over £750,000.

kerrick

Albermarle thank you for confirming the strategy is correct! Your points about IHT are valid, though as you suggest, avoidable.

kerrick

Notepad_Phil said:

Unfortunately newspaper articles are frequently misleading if not plain wrong - especially when it comes to financial matters.

I'm doing something similar to yourself in drawing down my crystallised funds to ensure that the age 75 tests do not result in my breaking the LTA, but I'm not sure you've got it 100% right (apologies if I've misunderstood you).

For simplicity let's say that the LTA remains at £1.07m for evermore.

Then I think you are saying that if you are close to the LTA then you would crystallise it and then drawdown enough to ensure that the SIPP value remains below £1.07m, whereas you would actually have to ensure that your SIPP value remains extremely close to its original crystallised value i.e. just over £750,000.

Yes it's complicated enough without incorrect journalism making it even harder to be confident.

Using that example of crystallising a £750k SIPP while it is still within the LTA, I had thought that once you crystallised it, the remaining 75% (£562,500) could grow to any amount even over the LTA £1.07m, so long as by age 75 all the excess over £1.07m has been withdrawn. So at age 75 it would be OK regardless how much income was taken after the initial 25% tax-free to end up with a SIPP valued at anything up to £1.07m. Is this not correct? 

However, if having crystallised an amount of £750k, and you then carried on making contributions to form a separate uncrystallised SIPP portion, and that was at some point crystallised with a value of around £320k, then I think you'd have to make withdrawals from the first crystallised portion by age 75 to cap that portion at £750k (£320k + £750k = £1.07m).

Are both these scenarios correct?

Albermarle

In the first example if you today crystallised a £750 K SIPP , it would use up 750K/1071K X 100 % of your LTA .

If there were no further contributions , then at age 75 any growth of the crystallised part ( above £562, 500 ) would be measured against the LTA limit at that time and another % calculated . If you add the two % together than anything over 100% would attract LTA tax.

In the second example you can follow the same logic . When the £320K is crystallised it will use up £320K/ LTA limit at the time X 100 to give a % to measure against LTA . Again any growth of the 75% crystallised part would be measured at age 75 against the LTA limit at that time to give a % .

It is worth noting that paying some LTA tax is not the end of the world,  and probably not worth arranging all your affairs around avoiding it completely . Normally it means you are only returning the tax relief you got in the first place . A kind of problem nice to have .

coyrls

In scenario 1, when you crystallise your £750K pension, you have used 70% of your LTA.  Your crystallised pot can therefore grow by 30% of the LTA at 75, without being subject to penalties.  If the LTA is still £1.07M at 75, that equates to £320,000.  The maximum your remaining £562,500 can grow to at 75 without LTA penalties is therefore £562,000 + £320,000 = £882,00 and not £1.07M.

gm0

There is I think one error.

Yes - in your original post you had correctly identified that growth in the 75% is tested again with any unused % LTA allowance available to offset.  It's the value of the 75% from initial crystallisation at age 75 which has to be kept down by drawing income. 

Where you went astray so far as I can see is not registering the point that this strategy relies on drawing income from crystallised funds.  And once you draw income your annual allowance is clamped to 4k per year not 40k.  Taking TFLS alone does not do this.  But not drawing the income to keep the pensions open to contributions can then cause a BCE5A/5B problem at age 75 with the 25% penalty - and annual income tax allowances are use it or lose it. 

The strategy described needs a well thought out income plan, a plan for your overall IHT position - and can then minimise penalties paid at age 75 for those in the zone of value where this is relevant.  Markets may - as others say make it moot.

kerrick

gm0, I said "then until any of the remaining crystallised 75% is withdrawn as taxable income it would still be possible to continue making contributions up to £40k p a."

What I meant was that you have until age 75 to make the necessary withdrawals to keep the first crystallised portion below whatever amount to stay within the LTA. So you could choose not to take anything more after the tax free 25% for as many years as you want to continue making up to £40k annual contributions.

kerrick

coyrls said:

In scenario 1, when you crystallise your £750K pension, you have used 70% of your LTA.  Your crystallised pot can therefore grow by 30% of the LTA at 75, without being subject to penalties.  If the LTA is still £1.07M at 75, that equates to £320,000.  The maximum your remaining £562,500 can grow to at 75 without LTA penalties is therefore £562,000 + £320,000 = £882,00 and not £1.07M.

I did not know that. So in the scenario in my first post the initial crystallised SIPP portion can be left to grow, but any excess over £822k must be withdrawn by age 75. 

If in the initial years after crystallising that £750k no taxable income is taken, so I can continue to contribute up to £40k p.a. into the SIPP - how do I calculate what this subsequent uncrystallised portion can grow to before I should stop contributing and crystallise it if I want to avoid the LTA?

coyrls

kerrick said:

coyrls said:

In scenario 1, when you crystallise your £750K pension, you have used 70% of your LTA.  Your crystallised pot can therefore grow by 30% of the LTA at 75, without being subject to penalties.  If the LTA is still £1.07M at 75, that equates to £320,000.  The maximum your remaining £562,500 can grow to at 75 without LTA penalties is therefore £562,000 + £320,000 = £882,00 and not £1.07M.

I did not know that. So in the scenario in my first post the initial crystallised SIPP portion can be left to grow, but any excess over £822k must be withdrawn by age 75. 

If in the initial years after crystallising that £750k no taxable income is taken, so I can continue to contribute up to £40k p.a. into the SIPP - how do I calculate what this subsequent uncrystallised portion can grow to before I should stop contributing and crystallise it if I want to avoid the LTA?

This is the difference between asking an amateur and an expert.  I know about scenario 1 because it is relevant to me.  Scenario 2 is not relevant and therefore I haven’t researched it.