Crystallisation - must you take the 25% cash?

dunstonh

So we'd prefer not to suddenly end up having about £500k in cash paid out from both our pensions, and critically, into our estate for IHT purposes.

Take it out and use an investment in trust.  Or buy an annuity with value protect on it.

EdSwippet

Albermarle said:

Of course another valid alternative is not to lose any sleep over this 'luxury problem', and just pay the tax with a smile !

( and I know Ed Swippet will not agree with me on this point  )

Predictably predicted!

I cannot recall any instance where I have paid tax, particularly at a rate above more than half of my income, with anything approaching a smile. I can however recall several occasions where I have given money to relatives and to charity that have left me smiling.

The latter are my own preferred way of dealing in future with this type of 'luxury problem'.

artyboy

dunstonh said:

So we'd prefer not to suddenly end up having about £500k in cash paid out from both our pensions, and critically, into our estate for IHT purposes.

Take it out and use an investment in trust.  Or buy an annuity with value protect on it.

Ah........ that's given me more research to do, thanks DunstonH!

And to my earlier post, yes clearly I was being thick and misreading things so apologies all, much clearer now.

Think I'm also going to look at getting an IFA - always been DIY but it sounds like there are things I wouldn't obviously spit in terms of estate planning.

As an aside, I am a Costco member and they are pushing 'Assured Private Wealth' with supposed discounts for members. From what I've read here, any company with 'Wealth' in the name is to be approached with caution, but if anyone here has an opinion of them, interested to know...

Albermarle

Think I'm also going to look at getting an IFA - always been DIY but it sounds like there are things I wouldn't obviously spit in terms of estate planning.As an aside, I am a Costco member and they are pushing 'Assured Private Wealth' with supposed discounts for members. From what I've read here, any company with 'Wealth' in the name is to be approached with caution, but if anyone here has an opinion of them, interested to know...

You have a little bit of an unusual ( but very nice) situation, where not only do you have a potential LTA problem, but your wife does too. Perhaps more importantly you will presumably have a much bigger IHT issue with your combined family wealth. I think most of the comments you have received so far probably relate more to the more 'normal' situation we see on this forum, where only one family member has a big pension pot, and IHT is an issue that can be managed to some extent.
As your case is a bit more complicated, and needs both you and your spouse being actively involved, then an IFA could be a good call.
I have never heard of Costco's 'Assured Private Wealth' but their website seems to suggest they are not just offering financial advice, but LPA guidance, will writing etc , which I think is maybe a bit unusual.

EdSwippet

Albermarle said:

... I think most of the comments you have received so far probably relate more to the more 'normal' situation we see on this forum, where only one family member has a big pension pot, and IHT is an issue that can be managed to some extent.

I am not sure why you conclude that the commentary up to now is less applicable than 'normal'. Where both partners in a household have LTA issues, the solution is to crystallise and then spend, gift to family, friends and charities, and so on, just twice as aggressively as where only one partner is bumping up against the LTA.

Talking this through with an IFA would certainly be worthwhile, but nothing stated so far invalidates the core mathematics of the situation. That is, tax on money held outside a pension above the LTA is lower than inside, and IHT can be managed through spending, giving, and bequeathing, whereas LTA penalties cannot.

zagfles

artyboy said:

I'm possibly being thick - and I do have a habit of tying myself in knots over financial stuff - but i seem to be getting different answers to the same question - this is what it boils down to:

If I have a £1m pension and I fully crystallise it at age 57, do I have to immediately take the £250k tax free cash outside of the pension wrapper (and therefore into my 'estate' for IHT purposes)? Or can I leave it within the pension/outside my estate, and withdraw it more gradually as needed?

People are talking at cross purposes.

When you crystallise, you have the option of taking up to 25% of the amount you crystallise as tax free cash. If you choose not to take the tax free cash, then you never get the option again. If you choose not to take the full 25% at crystallisation, the opportunity is lost. The crystallised pension, after whatever tax free cash you've chosen to take, is then taxable when you draw it.

There is the option of partial crystallising, where you only crystallise part of the pot. Then you can take 25% of that part, leaving the rest of the pension uncrystallised. You can then crystallise another part, taking 25% of that part as tax free cash.

What you can't do is crystallise all or part of a pot and leave some of the tax free cash of the crystallised part for later. You have to take it when you crystallise, or lose the option.

People get confused by the way some providers describe it. Some imply that taking tax free cash causes crystallisation or part crystallisation. That is wrong. Crystallisation give the option of taking 25% of whatever you crystallise as tax free cash, take the option or lose it. As Ed says, for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

So if you want to fully crystallise, you can take up to 25% tax free cash (up to the LTA), if you don't take 25%, the rest will be taxable when you draw it.

Albermarle

EdSwippet said:

Albermarle said:

... I think most of the comments you have received so far probably relate more to the more 'normal' situation we see on this forum, where only one family member has a big pension pot, and IHT is an issue that can be managed to some extent.

I am not sure why you conclude that the commentary up to now is less applicable than 'normal'. Where both partners in a household have LTA issues, the solution is to crystallise and then spend, gift to family, friends and charities, and so on, just twice as aggressively as where only one partner is bumping up against the LTA.

Talking this through with an IFA would certainly be worthwhile, but nothing stated so far invalidates the core mathematics of the situation. That is, tax on money held outside a pension above the LTA is lower than inside, and IHT can be managed through spending, giving, and bequeathing, whereas LTA penalties cannot.

The basic mathematics, that IHT is easier to manage than LTA, of course stays the same
 However I  would have thought the argument for crystallising as early as possible is maybe changed, because it is presumably more difficult to siphon away 2 x £250K rather than one. We do not know the OP, and some people would maybe not be so keen on giving away so much money, to friends, family and charities, or to bump up their spending to such a degree. Especially if they have other large cash savings or investments as well. Plus the more investments outside the pension/ISA, the more management it needs, so I thought altogether it started to look more and more that some professional help would be helpful, more so than if only one of the couple had these issues.

dunstonh

Talking this through with an IFA would certainly be worthwhile, but nothing stated so far invalidates the core mathematics of the situation. That is, tax on money held outside a pension above the LTA is lower than inside, and IHT can be managed through spending, giving, and bequeathing, whereas LTA penalties cannot.

If the LTA isn't breached before age 75 and the fund is fully crystallised, then a possible answer is to draw more income (possibly up to the basic rate band) and use gifts from income each year.

You could keep your lower risk investments in the pension and the higher risk ones in the ISA before 75 and then switch the other way around after.  i.e. stagnate the growth the pension until the LTA is not an issue any more.   You would not compromise the overall portfolio as you would still hit your target weightings.  Except it would be the combined portfolio across multiple wrappers rather than each wrapper individually.

When the children inherit the pension, they will have a chunk of pension money that is never calculated against the LTA again and not subject to IHT and can be passed from generation to generation with no future tax.

EdSwippet

zagfles said:
... for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

What could these be?

I'm not asking only to be argumentative, by the way. It is just that I genuinely cannot think of a scenario where crystallising a DC pension but taking less than the maximum tax-free, or even nothing tax-free, could be useful. In every case for crystallising I can conjure up, it seems that taking the maximum tax-free beats other options, at least based on reasonable assumptions about the future.

There are definitely some unfortunate cases where crystallising at all will with hindsight turn out as a mistake. For example, crystallise on Monday and get hit by a beer truck on Tuesday, leaving an entire PCLS subject to IHT that would otherwise have escaped. For that pathological case, I suppose crystallising but taking no PCLS would save IHT. But then again, so would simply not crystallising the pension.

So, genuine (not rhetorical) question: if there are situations in which crystallising a DC pension and taking less than 25% tax-free are sensible, what are they?

QrizB

EdSwippet said:

zagfles said:
... for a DC pension it's unlikely to be a good idea not to take the max tax free cash, although there will be some circumstances.

What could these be?

Perhaps one examplke is as described by dunstonh, for intergenerational asset transfers?

dunstonh said:

When the children inherit the pension, they will have a chunk of pension money that is never calculated against the LTA again and not subject to IHT and can be passed from generation to generation with no future tax.