SIPP how to avoid LTA

Albermarle

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scenario in my first post the initial crystallised SIPP portion can be left to grow, but any excess over £822k must be withdrawn by age 75.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?

You can not do that very accurately as 
1) You can not predict how the investments in the pension will perform 
2) Hopefully at some point LTA limit will start to rise again once the current freeze is over .

If you are getting higher rate tax relief on your contributions , then if you go over and pay some LTA, then you have not gained or lost. You are just giving back the tax relief.
If you are only getting 20% tax relief then probably best to aim to stay within LTA with a safety margin.

Notepad_Phil

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scenario in my first post the initial crystallised SIPP portion can be left to grow, but any excess over £822k must be withdrawn by age 75.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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

If you are going take all growth out of every crystallised piece, then you would have approx 30% of the LTA left to play around with, so you could add approx £320,000 of contributions before you needed to crystallise it.

To me it's easiest if you think in terms of percentages of LTA. The percentage used for all your crystallised portions; the percentage that will be used when you crystallise the remaining uncrystallised portions; and the percentage that will be used when you get to 75 due to the growth in your crystallised funds. You then 'simply' need to make sure that these percentages don't break the 100% barrier - and hope that there's no further change in LTA rules.

Note the growth is based on the amount that has been left in the SIPP when you crystallise each separate portion, e.g. if you crystallise £700,000 then it's the growth of the £525,000 that remains in the SIPP for this portion that matters - you would need to ensure that this portion has enough drawn out so that it's no more than £525,000 by the time you get to 75 if you don't want it to add to you LTA used.

coyrls

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

The problem is that as soon as you start taking growth out of the first crystallised portion, your contributions to the uncrystallised pension are limited by the MPAA.

Notepad_Phil

coyrls said:

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

The problem is that as soon as you start taking growth out of the first crystallised portion, your contributions to the uncrystallised pension are limited by the MPAA.

In the world of not exceeding the LTA I'd say that's just a fact of pension life which the lucky few will need to plan for. Similar to knowing about small pots, how best to take a DB pension (if you're lucky enough to receive one), what.types of fund you may want to invest inside and outside your pension, etc.

coyrls

Notepad_Phil said:

coyrls said:

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

The problem is that as soon as you start taking growth out of the first crystallised portion, your contributions to the uncrystallised pension are limited by the MPAA.

In the world of not exceeding the LTA I'd say that's just a fact of pension life which the lucky few will need to plan for. Similar to knowing about small pots, how best to take a DB pension (if you're lucky enough to receive one), what.types of fund you may want to invest inside and outside your pension, etc.

It is, indeed, a fact.

kerrick

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

If you are going take all growth out of every crystallised piece, then you would have approx 30% of the LTA left to play around with, so you could add approx £320,000 of contributions before you needed to crystallise it.

To me it's easiest if you think in terms of percentages of LTA. The percentage used for all your crystallised portions; the percentage that will be used when you crystallise the remaining uncrystallised portions; and the percentage that will be used when you get to 75 due to the growth in your crystallised funds. You then 'simply' need to make sure that these percentages don't break the 100% barrier - and hope that there's no further change in LTA rules.

Note the growth is based on the amount that has been left in the SIPP when you crystallise each separate portion, e.g. if you crystallise £700,000 then it's the growth of the £525,000 that remains in the SIPP for this portion that matters - you would need to ensure that this portion has enough drawn out so that it's no more than £525,000 by the time you get to 75 if you don't want it to add to you LTA used.

If you crystallise a £700k SIPP, take 25% out, leaving £525,000, you say you would need to ensure (by withdrawing the excess) that the crystallised SIPP does not exceed £525,000 at age 75. Is it not allowed to increaae up to the LTA limit £1.07m?

So if you were not planning to make any further contributions, and did not need to access the pension, would it not have been better to leave it to grow as close to the naximum LTA as possible?

If the value at age 75 is essentially capped at the value you originally crystallise, then does my strategy put forward in my opening post still have potential as a strategy?

coyrls

kerrick said:

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

If you are going take all growth out of every crystallised piece, then you would have approx 30% of the LTA left to play around with, so you could add approx £320,000 of contributions before you needed to crystallise it.

To me it's easiest if you think in terms of percentages of LTA. The percentage used for all your crystallised portions; the percentage that will be used when you crystallise the remaining uncrystallised portions; and the percentage that will be used when you get to 75 due to the growth in your crystallised funds. You then 'simply' need to make sure that these percentages don't break the 100% barrier - and hope that there's no further change in LTA rules.

Note the growth is based on the amount that has been left in the SIPP when you crystallise each separate portion, e.g. if you crystallise £700,000 then it's the growth of the £525,000 that remains in the SIPP for this portion that matters - you would need to ensure that this portion has enough drawn out so that it's no more than £525,000 by the time you get to 75 if you don't want it to add to you LTA used.

If you crystallise a £700k SIPP, take 25% out, leaving £525,000, you say you would need to ensure (by withdrawing the excess) that the crystallised SIPP does not exceed £525,000 at age 75. Is it not allowed to increaae up to the LTA limit £1.07m?

So if you were not planning to make any further contributions, and did not need to access the pension, would it not have been better to leave it to grow as close to the naximum LTA as possible?

If the value at age 75 is essentially capped at the value you originally crystallise, then does my strategy put forward in my opening post still have potential as a strategy?

As explained the £525,000 cannot increase up to the LTA limit, it can increase by the percentage of the LTA (at 75) that you have remaining after crystallisation.  Whether you make withdrawals or not, it is the total remaining in your pension that is tested at 75, withdrawals are not included in the test at 75.

coyrls

To take an easy example, if the LTA is £1M at crystallisation and you crystallise a pension of £1M, leaving 750K in the pension (after taking the 25% tax free lump sum), then to avoid any LTA penalty at 75, the pension must be below or equal to £750K because you used 100% of the LTA when you crystallised.

Notepad_Phil

kerrick said:

Notepad_Phil said:

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?

It depends on how much growth you are going to take out of the first crystallised portion by the time you get to 75.

If you are going take all growth out of every crystallised piece, then you would have approx 30% of the LTA left to play around with, so you could add approx £320,000 of contributions before you needed to crystallise it.

To me it's easiest if you think in terms of percentages of LTA. The percentage used for all your crystallised portions; the percentage that will be used when you crystallise the remaining uncrystallised portions; and the percentage that will be used when you get to 75 due to the growth in your crystallised funds. You then 'simply' need to make sure that these percentages don't break the 100% barrier - and hope that there's no further change in LTA rules.

Note the growth is based on the amount that has been left in the SIPP when you crystallise each separate portion, e.g. if you crystallise £700,000 then it's the growth of the £525,000 that remains in the SIPP for this portion that matters - you would need to ensure that this portion has enough drawn out so that it's no more than £525,000 by the time you get to 75 if you don't want it to add to you LTA used.

If you crystallise a £700k SIPP, take 25% out, leaving £525,000, you say you would need to ensure (by withdrawing the excess) that the crystallised SIPP does not exceed £525,000 at age 75. Is it not allowed to increaae up to the LTA limit £1.07m?

So if you were not planning to make any further contributions, and did not need to access the pension, would it not have been better to leave it to grow as close to the naximum LTA as possible?

If the value at age 75 is essentially capped at the value you originally crystallise, then does my strategy put forward in my opening post still have potential as a strategy?

I think you may have missed my bit at the end: "if you don't want it to add to your LTA used.".

So someone who was worried about hitting the LTA but not planning to add any new contributions, would indeed likely just leave the crystallised pot to grow (assuming that markets are kind and the growth in the value outweighs the income taken) - then at age 75 the growth in the crystallised pot will be considered and hopefully plans have gone right and they don't exceed the 100% of LTA used.

kerrick

Thank you. I can see why it's better to think in percentages of the LTA.

With reference to my opening post and the idea that a sharp market fall can be turned to your benefit by crystallising the SIPP when it's value has fallen:

1. If your SIPP was worth £900k, then fell to £600k, if you crystallise at £600k (£150k withdrawn / £450k crystallised investments) and markets bounce back so the £450k becomes £675k then the "problem" is that at some point by age 75 you need to have withdrawn the £225k of growth on £450k if you want to avoid the LTA. 

2. In the same situation, if you only withdrew the tax-free amount, and wanted to make make further contributions, then by crystallising the earlier investments at £600k rather than when they were valued at £900k, you have locked in the option for contributions + growth in an uncrystallised SIPP of up to 44% LTA (£473k) rather than just 16% LYTA (£173k) at LTA = £1.073m.

Reasoning correct? As we may be in for a sharp market fall soon this may be relevant!