Pension lifetime allowance - ways to avoid?

Adrian_Bond_007

Hi all. I haven't posted for years so please bear with me. 
I'm currently 40 and have a half decent pension pot (£130k) - but if my returns within the next few years work out, then it's not unreasonable to see the pot grow to £6-700k within a decade (I have alot of high risk investments). 

(For ref - it was £460k last November)!!!

That aside - I don't want to be paying 55% tax when I come to use the pension at age 58.  

Currently im a basic rate taxpayer if this is relevant. 

Is there any way to avoid the lifetime allowance? It seems like a very punitive tax that punishes good investment and saving. 

I have considered emigrating prior to drawing the pension - but have no idea if this would work or not. 

I've even written to HMRC and Terese cofee and given the standard "not my problem" letter. 

Of course I want to be legal and have no problem paying my basic taxes - just not 55% for the remainder of my life if I go £1 over the limit - which is also dropping regularly against inflation! 

Any help, ideas or guidance is appreciated. 

Cheers

Ade 

Pablo7474

Ade,

I think you have misunderstood a lot about the LTA. Firstly you only pay 55% on the excess over the LTA if you take it as a lump sum. 

More importantly, has your fund really dropped from £460k to £130k??

coyrls

It's a nice problem to have but not one that I would be worrying about with a pot of £130,000 with 18 years to go.

UrbanAchiever

The additional tax is 25% on any amounts taken as income over the LTA.  So not as bad as it seems, but still not palatable for some people.  Also, whilst the LTA is currently frozen at just over £1m, there's a reasonable chance that it may increase between now and when you are 58, which will give you some headroom.

If your employer matches or more your pension contributions, then it's still likely to be advantageous to continue paying in, even if you may breach the LTA.

Adrian_Bond_007

Pablo7474 said:

Ade,

I think you have misunderstood a lot about the LTA. Firstly you only pay 55% on the excess over the LTA if you take it as a lump sum. 

More importantly, has your fund really dropped from £460k to £130k??

Thanks for the replies guys. 
I think I need to understand this better. 

E.g.if I had £1m as a pot, then drew 25% at 58 it would reduce my LTA to £750k? 

I want to try to avoid the 55% tax indefinitely ideally - it's an insane amount of tax to pay. 

And yes, my pot has risen from £60k in march 2020, to £460k in November 2021, to £130k today. Nothing sold, but lots of great assets collected. 

Bitcoin is a hell of an asset lol! 

hugheskevi

I'm currently 40 and have a half decent pension pot (£130k) - but if my returns within the next few years work out, then it's not unreasonable to see the pot grow to £6-700k within a decade (I have alot of high risk investments). 

(For ref - it was £460k last November)!!!  

In this circumstance, hitting the Lifetime Allowance (LTA) would be a good thing as it means investments have been very successful. Not hitting the LTA would be a much worse outcome.

That aside - I don't want to be paying 55% tax when I come to use the pension at age 58.  

Currently im a basic rate taxpayer if this is relevant. 

Based on current legislation you could access the pension at age 57 (assuming you do not have a protected minimum pension age). If you are a basic rate taxpayer you would pay a 25% charge on the pension in excess of the LTA and then 20% income tax, thus losing 40% due to the combination of the LTA and income tax. So if you are getting employer matching then it is still likely to be overall net beneficial even if LTA is exceeded.

If you do think LTA is going to be an issue then then you might consider easing off individual contributions that do not benefit from  employer matching, as these are the least valuable, and then you could increase contributions closer to age 57/58 when the LTA position is clearer.

Is there any way to avoid the lifetime allowance? It seems like a very punitive tax that punishes good investment and saving. 

You might consider which investments you hold in which wrapper. For example, if you had a mixture of very risky and very safe assets across your portfolio, you might hold the risky assets in a pension wrapper until the LTA started to become an issue, and then change the portfolio so that the risky assets were in an ISA and less volatile assets in the pension.

I have considered emigrating prior to drawing the pension - but have no idea if this would work or not. 

You could make a QROPS transfer, which would be a Beneifit Crystallisation Event and be tested against the LTA at the point of transfer. However, this would be a fairly extreme example of letting the tax system determine major life choices.

I've even written to HMRC and Terese cofee and given the standard "not my problem" letter. 

Writing to HMRC asking how to avoid their tax system is unlikely to get a helpful response. I wonder what exactly you would expect them to reply with?

Of course I want to be legal and have no problem paying my basic taxes - just not 55% for the remainder of my life if I go £1 over the limit - which is also dropping regularly against inflation! 

The 55% charge only applies to amounts in excess of the LTA and is what you would pay if you took the funds as a lump sum. If instead you elect to take the funds as taxable income and are a basic rate taxpayer you would only pay a 40% charge (25% charge and 20% income tax).

It's a nice problem to have but not one that I would be worrying about with a pot of £130,000 with 18 years to go.

100% agree - I think the exercise should at most be about scenario planning, and probably around how and when to shift the pension into less volatile assets should the LTA become an issue in forthcoming years.

E.g.if I had £1m as a pot, then drew 25% at 58 it would reduce my LTA to £750k? 

If you crystallised £250,000 of the pot you would have utilised 23.29% of your LTA (based on current value). The 76.71% remaining would apply based on whatever the LTA value is at the next benefit crystallisation event.

Pablo7474

A pension that allows bitcoin? 

If you can make the returns you claim, I don’t think you need to worry about the LTA charge on excess over limit. 

Adrian_Bond_007

"The 55% charge only applies to amounts in excess of the LTA and is what you would pay if you took the funds as a lump sum. If instead you elect to take the funds as taxable income and are a basic rate taxpayer you would only pay a 40% charge (25% charge and 20% income tax)."

Thank you so much for all your responses guys. It's really appreciated. 

In the above example from Hugh - if I were 58 at £1m, and took £250k tax free lump sum, then took the rest as a monthly income upto the basic rate allowance I would be fine and pay 20% tax. 

The 25% extra charge is what I'm trying to avoid in a legal way. This would apply if I were over the £1m mark and took either an income or lump sum.

I guess I'm at the mercy of governments who seem hell bent on punishing good investment and prudent saving.

As others have mentioned - if BTC does what I hope for - then getting to £1m is no issue at all. It's volatile af so not for the feint hearted!!!

Finding a way to get it tax efficient is very difficult thanks to the FCA dumbasses who removed the only method we had via the CBT provider ETP. 

For what it's worth - I have a good blend of uranium miners, gold and silver miners, BTC miners, BTC and Ethereum. Not exactly a risk free pot some might say! 

Thank you again for your help everyone. 

Ade

Notepad_Phil

Adrian_Bond_007 said:

...
In the above example from Hugh - if I were 58 at £1m, and took £250k tax free lump sum, then took the rest as a monthly income upto the basic rate allowance I would be fine and pay 20% tax. 
....

Taking the 25% tax-free lump sum from a £1m pension would take you very close to using 100% of the LTA but wouldn't exceed it; so provided this was your only pension and you did not contribute any further funds into it and you took out all of the future growth of the remaining crystallised portion then you wouldn't break the 100% LTA figure - whether you ever needed to get into paying HR rates would depend on how well the crystallised portion performed over the subsequent years.

Taking all the growth out is very important as there are further tests of the LTA at age 75 - so if the crystallised portion was higher than it was when you first crystallised it then it gets added to the LTA used and you could be hit that way if you weren't aware.

Grumpy_chap

Adrian_Bond_007 said:

Is there any way to avoid the lifetime allowance? 

1. get a pension fund nearish the LTA
2. stop making further pension contributions and buy a sports car
3. if the problem persists, buy a better sports car

Pablo7474

Adrian_Bond_007 said:

For what it's worth - I have a good blend of uranium miners, gold and silver miners, BTC miners, BTC and Ethereum. Not exactly a risk free pot some might

I would be more concerned about the pot going to zero than worrying about the potential LTA charge! Good luck!