SIPP how to avoid LTA

Albermarle

kerrick said:

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 If your SIPP was worth £900k, then fell to £600k, if you crystallise at £600k (£150k withdrawn / £450k crystallised investments) and markets bounce back so the £450k becomes £675k then the "problem" is that at some point by age 75 you need to have withdrawn the £225k of growth on £450k if you want to avoid the LTA.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

For Option 1 
If you crystallise £600k then you will have used 600/1073 x 100 =  56% of LTA used .
If the £450K becomes £675K by the time you are 75 . Then the calculation is £225K/LTA limit at the time. lets say it was £1200K . So £225/1200 X 100 = 19% of LTA used . So overall 75% of LTA - so no LTA charge and you would have had room for more contributions .

Crystallising a large SIPP after a big market fall is often discussed on the forum as a potentially good idea , but with some caveats ;
Despite whatever you read , nobody knows when the next market fall will come or how big it will be . So you might be still here in two years time with the SIPP 20% bigger and wishing you had crystallised it earlier.
Alternatively if markets do fall , they tend to bottom out and start rising again and then maybe fall again , so how do you catch the bottom , or close to it. This problem is exacerbated by the fact it takes a finite time to crystallise a SIPP , maybe even a week or two.

kerrick

Albermarle said:

kerrick said:

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 If your SIPP was worth £900k, then fell to £600k, if you crystallise at £600k (£150k withdrawn / £450k crystallised investments) and markets bounce back so the £450k becomes £675k then the "problem" is that at some point by age 75 you need to have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

For Option 1 
If you crystallise £600k then you will have used 600/1073 x 100 =  56% of LTA used .
If the £450K becomes £675K by the time you are 75 . Then the calculation is £225K/LTA limit at the time. lets say it was £1200K . So £225/1200 X 100 = 19% of LTA used . So overall 75% of LTA - so no LTA charge and you would have had room for more contributions .

Crystallising a large SIPP after a big market fall is often discussed on the forum as a potentially good idea , but with some caveats ;
Despite whatever you read , nobody knows when the next market fall will come or how big it will be . So you might be still here in two years time with the SIPP 20% bigger and wishing you had crystallised it earlier.
Alternatively if markets do fall , they tend to bottom out and start rising again and then maybe fall again , so how do you catch the bottom , or close to it. This problem is exacerbated by the fact it takes a finite time to crystallise a SIPP , maybe even a week or two.

The calculation method helps a lot thanks. More complicated than I thought! 

The key thing here I hadn't appreciated is that the additional test against the LTA is the original amount crystallised plus the growth, i.e current value less original amount at the point of crystallising, not the whole value of the crystallised SIPP again.

Assuming you are taking an income from your SIPP, for example £10,000 once year, are these LTA 'tests' carried out every time you make a withdrawal from your SIPP? Not just at age 75. 

Notepad_Phil

kerrick said:

Assuming you are taking an income from your SIPP, for example £10,000 once year, are these LTA 'tests' carried out every time you make a withdrawal from your SIPP? Not just at age 75. 

Not for taking income out of the crystallised pot. It's only at age 75 that the growth in the crystallised pot is considered.

However if you were taking £10,000 of income out of the uncrystallised pot via a UFPLS then that sum would have an impact on your LTA - it's basically crystallising £10,000 and taking £2,500 tax free along with a taxable £7,500.