LTA / 25% TFLS and Contributions

sumigo

Hi all.

Have been following forum recently and found it to be a great source of information.

Am still trying to digest a lot of the information so not sure I've got everything straight.

I am approaching 55 and deciding whether to pull the trigger this year or next.

My pension pot is just over the LTA so was planning to take the 25% when I reach 55 ( and reinvest in ISAs, GIAs etc) and then continue to contribute to the pension until retirement.

(I am part of a GPP where the company contributes 12.5% to my 5% so think it still makes sense to stay enrolled).

Am I right in thinking that, as long as you don't take any taxable income from your pension, the contribution limit will not be affected ?

Also, I understand that there will be another BCE event at 75 so would need to ensure that I take enough out of the pot yearly to ensure the limit is not exceeded and become subject to LTA tax charge.

Is there any advantage at 55 taking out less than 100% of the LTA to leave headroom in case there is any increase in the LTA in subsequent years ?

Thanks

Albermarle

Am I right in thinking that, as long as you don't take any taxable income from your pension, the contribution limit will not be affected ?

Correct

Is there any advantage at 55 taking out less than 100% of the LTA to leave headroom in case there is any increase in the LTA in subsequent years ?

Probably not as this would mean leaving uncrystallised funds in the pension, that would presumably grow and so when eventually crystallised , would probably take more LTA than if you did it now ( even if the LTA had increased in that time) For example if you had £1.1 M and crystallised it all now, then approx £30K would be subject to a LTA charge.
Instead if you only crystallised £900K , this would use up 84% of LTA. Lets say in 10 years time the remaining £200K had grown to £300K and the LTA had grown to £1.4 M, you would have £224K left of LTA , so would pay a tax charge on £76K . So even taking into account inflation, you would pay a bit more LTA tax. The fact the LTA remains frozen for another 3?years will make this worse.

Also, I understand that there will be another BCE event at 75 so would need to ensure that I take enough out of the pot yearly to ensure the limit is not exceeded and become subject to LTA tax charge.

Yes , but of course as you are still adding to the pension, then there will also be uncrystallised funds that would be subject to LTA at some point .

dunstonh

Is there any advantage at 55 taking out less than 100% of the LTA to leave headroom in case there is any increase in the LTA in subsequent years ?

The LTA is causing damage to workplaces.  In particular the NHS. It is leading to a shortage of doctors.   The purpose of the LTA was to capture tax avoidance from large cap companies paying off their chairman/directors via the pension.   It has since mutated into a cashpoint machine for the treasury that falls under the "bash the bankers" mentality.  Despite it now hitting middle-income jobs.       And that is the problem with any potential increase.    Labour will accuse the Conservatives of looking after their banker friends if the LTA goes up.  

The current position of both major parties is to redistribute wealth from middle-income households to low-income households with no attempt to deal with the lazy.   So, whilst a decent LTA increase is possible.   It doesn't feel like it will happen in the short term.  Only hindsight will tell but it's probably best to plan on it being in a similar ballpark figure.

You can help yourself a bit but using the ISAs/GIA for the equities and the pension for the fixed interest securities. i.e. put the low growth stuff in the pension and the high growth stuff in the ISA (at least until age 75).   However, don't forget inheritance tax.  There is little point trying to avoid breaching the LTA too much only to find your estate will suffer IHT.

sumigo

Thank you dunstonh for the comprehensive and clear response. I have always found your posts in the forum to be very useful.

I agree the LTA is hitting more and different targets than originally intended but complaining about being in this relatively fortunate position is unlikely to get much sympathy ! While I am keen to minimise taxes, I think there is a danger to focus too much on this and should instead be grateful of the tax advantages when contributing
 

Albermarle

 While I am keen to minimise taxes, I think there is a danger to focus too much on this and should instead be grateful of the tax advantages when contributing

A very sensible view !

EdSwippet

sumigo said:

... I think there is a danger to focus too much on this and should instead be grateful of the tax advantages when contributing
 

While you're getting a good match from your employer, so gratitude due there, I'm not sure that gratitude to the government is entirely appropriate.

The LTA penalty will at minimum unwind, and potentially more than unwind, tax relief on contributions when you come to withdraw from a pension above the LTA. The government giving you something that they later (more than) negate is hardly a benefit.

Albermarle

Perhaps freezing the LTA is a roundabout way of further limiting how much 40% tax relief you can get, as they are reluctant to take the leap of actually removing/reducing higher rate relief.
In saying this I am assuming that the large majority of people with LTA issues, have got there with the aid of large amounts of 40% tax relief, along with good financial management and expenditure control of course.

UrbanAchiever

sumigo said:

Hi all.

Have been following forum recently and found it to be a great source of information.

Am still trying to digest a lot of the information so not sure I've got everything straight.

I am approaching 55 and deciding whether to pull the trigger this year or next.

My pension pot is just over the LTA so was planning to take the 25% when I reach 55 ( and reinvest in ISAs, GIAs etc) and then continue to contribute to the pension until retirement.

(I am part of a GPP where the company contributes 12.5% to my 5% so think it still makes sense to stay enrolled).

Am I right in thinking that, as long as you don't take any taxable income from your pension, the contribution limit will not be affected ?

Also, I understand that there will be another BCE event at 75 so would need to ensure that I take enough out of the pot yearly to ensure the limit is not exceeded and become subject to LTA tax charge.

Is there any advantage at 55 taking out less than 100% of the LTA to leave headroom in case there is any increase in the LTA in subsequent years ?

Thanks

You mention taking out enough each year to avoid what remains in your pension growing above the LTA.  However you need to take care with this.  Anything you take after the 25% TFLS will be treated as income.  And if you have to take a large amount out each year, this will be hit by income tax at the usual rates.  So you need to compare the tax relief on payments you made into the pension versus the tax you will pay taking it out.

Ideally you'll get say 40% tax relief on payments in and only pay 20% income tax on what you take out.  But to stay in the 20% bracket may mean you cannot take enough out to avoid it growing too much.

This is helpful to determine the optimal position:

https://www.lcp.uk.com/media-centre/2021/06/why-savers-should-not-always-be-afraid-of-the-lifetime-allowance/

Pablo7474

Your query is really around the MPAA and making contributions after accessing the pension, but it may also be a good idea to check out pension recycling rules so you are familiar with them.