LTA Dilemma

JP1970

• Age 51 &3/4
•  Salary after sacrifice pension 99k
•  Pension contributions this year onwards 40k ( employees 10k me 30k)
•  Carry forward allowances 55k from prev. 3 tax years
•  Sipp allowance used this year 20k
•  Spouse (not working ) already paid 2880 into her SIPP
•  Current DC funds c600k
• DB pension 5,555 + cpi (upto 5%)from 2035.

Plan is to retire at 55 take 25% lump (est 210k) and live off that for 4 years, then drawdown c55k a year until DB kicks, at which point reduce drawdown when DB kicks in, then again when state pension kicks in

  I have 55k (= carry forward allowances) cash available to put into DC, my question has 2 parts

1) assuming LTA Is frozen at current 1073k am I likely to reach LTA limit? 

2) If yes, Is it worth using carry forward to invest £55k or does benefit of tax relief come get neutralised by 25% LTA charge later ?

I am aware that there is IHT protection to putting the 55k into DC.

 Any thoughts most welcome, I thought  I was quite financially savvy but the more I read on LTA the less I understand it.

Thanks

Dazed_and_C0nfused

Plan is to retire at 55 take 25% lump (est 210k) and live off that for 4 years, then drawdown c55k a year until DB kicks, at which point reduce drawdown when DB kicks in, then again when state pension kicks in

Sounds an odd choice.  Why don't you want to utilise your Personal Allowance in those years?

Also little bit confused by your figures as it looks like at least £60k has been contributed this tax year already.  Is that using some of the £55k or was it actually £75k to start with?

Is the £20k added to your SIPP net or gross?

Salary sacrifice is where you don't contribute, you agree to a lower salary and in return your employer contributes more.  That is why there is no pension tax relief, as they are employer contributions.  So is it actually £40k employer contribution? 

Salary after sacrifice pension 99k

Pension contributions this year onwards 40k ( employees 10k me 30k)

JP1970

Thanks Daze_and_C0nfused.
My thinking was by taking it as a lump at earliest point then I would reduce the chance of growing in excess of LTA down the line.

Sorry, I mean 40k pension contribution and 20k ISA allowance used (rather than  SIPP)
Employer contribution is c10k . I make additional contributions through payroll to bring it up to the 40k limit.
I hope this helps clarify.

Albermarle

•  Sipp allowance used this year 20k

This statement is confusing, There is no such thing as a SIPP allowance. All DC pensions are lumped together when calculating the total for the year. So as the previous poster said it looks like you already contributed £60K this year?

JP1970

Sorry, meant ISA 20k +pension contributions total 40k

Albermarle

) assuming LTA Is frozen at current 1073k am I likely to reach LTA limit? 

Current pension pot is £600K then plus say a further £100K contributions @ £40K pa. Probably investment growth will be muted over the next couple of years. So lets say it is £750K when you take the tax free lump sum and therefore crystallise the whole pot.

So £750K/£1073K = 69.9% of LTA used.

Later you will take the DB pension which may be worth around £7500 pa at that time . Multiplied X 20 = £150K 

IN a worst case scenario the LTA has remained frozen so £150K/£1073K = 14 % of Lta used . So overall 84% , so you still have 16% of £1073K left = an extra £170K you can still have in the pot without breaching LTA. So based on this rough calculation you can utilise the £55K carry forward and benefit from the tax relief. 

Personally I would be more worried about the drawdown rate and the pot running out .

£55K for ten years, then £50K , then £40K , is not at all sustainable for a pot of this size. By the time you are 70 it could well have run out. 

JP1970

Thanks Albermarle, 3.25 years @40k still go +600k now would give 730. It would only take c10% growth  over 3.25 years to get to 800k/200k lump. I also have 200k other savings/investments and OH DB pension to factor in but I left out of original question as they weren't directly relevant to LTA.

DreZZ

JP I wouldn't get hung up with LTA worries at the point you are at.  Yes the LTA is frozen for a few years and who knows what future changes may do to it.  I retired at 55 three years ago on similar salary numbers and DC pension to you.  Also have a £7500 pa DB pension at 60.
Here are my thoughts for your situation.
Max out your DC pension at 40K pa total of employer and your contributions for final 3 years.  If you can afford it use your unused carry forward.  If you can still afford it max out your and spouse's ISA allowances into S&S ISAs.  
I specifically planned ahead to finish work end of September to allow £40k pension contribution, reduce pay through sal sac to almost min wage and pay very little tax in last financial year of working - just used some savings to tide us over.
Once you are over the line (assuming you are not getting another job and making future pension contributions) there are plenty options to manage LTA .  We don't have any IHT issues so don't worry about how much money in ISAs - we value the flexibility.
Personally I have crystallised £320k last 2 tax years to put £20k into my and spouses S&S ISAs.  Also last tax year taken max income to just stay in 21% tax bracket (Scottish tax payer).  Currently have some unwrapped investments but will get them moved onto ISAs next couple of years.
We now have a good balance of SIPP and S&S ISA - about 65% SIPP and 35% ISAs both invested exactly the same funds.  I use Voyant Go cash flow analysis software which I would highly recommend - I will probably get stung for some LTA and maybe higher rate tax in later life (depending on actual portfolio growth rate) but without a fully functional crystal ball there is no perfect answer to manage your tax in the longer term.  Just manage it well short term to medium term.

Albermarle

JP1970 said:

Thanks Albermarle, 3.25 years @40k still go +600k now would give 730. It would only take c10% growth  over 3.25 years to get to 800k/200k lump. I also have 200k other savings/investments and OH DB pension to factor in but I left out of original question as they weren't directly relevant to LTA.

With £800K and £200K other savings , you will start with One Million.

The SWR ( Safe Withdrawal Rate ) at 55 is around 3 % . So £30K pa. With the DB pension kicking in later and then the state pension, you could probably up this a bit to say £40 Kpa, dropping later to £35K and then £25K

Taking £55Kpa for the first 10 years is going to put a serious strain on the pots ability to survive as long as you do, especially if it is increased each year to keep up with inflation. Ten years inflation at 4% pa will mean that £55K will have to increase to £80K to maintain its spending power. Unless we have another boom decade for investments, then that level of withdrawal will seriously dent that £1 Million. 

JP1970

Thanks Albermarle , food for thought. I have quite a bit of flex on "the number". I have my own model (speadsheet) which allows to me see the impact of various tax/ inflation/growth scenarios, but I am keen to look into Voyant Go (as mentioned by DreZZ). Is that  something which can only be accessed through an adviser ?

Albermarle

I do not know anything about Voyant, Hopefully someone else can answer you.

If you have not done so already, you may also wish to research 'Safe Withdrawal Rate' There is a lot of info about it, and some differences of opinion. I would not take everything you read as gospel truth, but it is a theory that many withdrawal strategies are based on. At the least it is some sort of recognised guideline.
In simple terms it takes historical data and calculates the withdrawal rate from say age 60, that would give you a 95% chance of the pot lasting into your Nineties. Somewhere around 3.5% is the figure, with the actual cash amount increasing with inflation each year. As this % figure is increased the chances of it running out eventually increase. 
Once you get to a withdrawal rate 5% or more the odds of running out long before your Nineties start to increase significantly.

Probably to get the income you are looking for reasonably safely, you maybe need to think about working a bit longer, to amass a bigger war chest.