Avoiding 60% marginal tax rate

Pat38493

EdSwippet said:

Pat38493 said:
Also from what you say, if I draw out all of the flexi access money before reaching 75, it will never be subjected to LTA charge even if some of the drawn out money was growth that was achieved in the years running up to 75?  Since the fund is already crystallised it won't be tested at withdrawal until 75?

Almost. For a DC pension, the LTA test happens when (a) you crystallise some or all of your uncrystallised funds, and (b) you reach age 75. The first of these is under your control, and covers only uncrystallised funds (that is, the amount you're crystallising). The second is forced, not under your control, and covers both any uncrystallised funds and also all nominal growth in crystallised funds.

You can avoid LTA penalties on the first, (a), by timing crystallisation so as to crystallise your pension exactly at the LTA (for optimum tax-free lump sum). For the second though, (b), you have no control on the timing, so instead you have to manage this by ensuring that your nominal gains in the crystallised funds are zero at age 75.

In between (a) and (b) you are free to draw down as much from the crystallised part as you like, with no LTA tests. The age 75 BCE is the only time that pension money is (spitefully) re-subjected to a second LTA test.

So, your statement "if I draw out all of the flexi access money before reaching 75" should really read "if I draw out all of the nominal gains in the flexi access money before reaching 75". Crystallise £1m for £750k in the drawdown part at a £1m LTA (again round numbers for simplicity), and you just need to ensure that the drawdown part is no higher than £750k when you pass your 75th birthday.

You could, of course, arrange that by holding low- or even no-growth assets in the drawdown part, cash at the extreme. However, that would be self-defeating where the alternative is to get some growth or income from this part, but just make sure to draw it (taxably) before age 75. Reducing income to zero is one way to reduce tax, but not usually a winning one.

Finally, notice that the age 75 test on crystallised funds works on nominal amounts. If you have used up 100% of your lifetime allowance crystallising the pension in the first place, and this is the aim, you have 0% of it left to help out at age 75. At that point, even if the LTA has increased with inflation over time, or perhaps even been hugely increased by a less tax-hungry goverment (hah, as if!), 0% of an LTA of any size is still £0. So ... you need to draw the entire nominal gain to avoid age 75 LTA penalties.

Charming, isn't it?

It's all fairly clear but complicated to manage, and the complication for me is that a significant chunk of my pension pot is in a DB scheme and I will have to decide when to draw the benefits of that depending on both risk appetite for the DC part, and LTA considerations - from what I can forecast roughly, if I wait until NRA to draw my DB benefits, I will certainly be at risk from LTA exposure and also I will potentially use most of my DC savings up to state pension age - maybe the safest way but leaves me unable to take advantage of possible investment growth from 65 onwards.

If I take the DB pension much earlier (e.g. at 55), I have still quite some cushion in the LTA department but I am then gambling that my future returns on DC will outweigh my commutation penalties.  My DB pension company gave me what seems to me to be a rather generous forecast for taking the benefits at 57 and when I questioned it their answer was very vague, so I will request another forcast in a couple of years to compare.

In the end I cannot know my LTA exposure until I decide when to take the DB benefits.

I guess we are now drifting quite far aware from the original topic which was answered about 2 pages ago  

EdSwippet

Pat38493 said:
I guess we are now drifting quite far aware from the original topic which was answered about 2 pages ago  

We are. And you're right that DB pensions add a huge extra set of unknowns into the bear pit that is LTA planning. Fortunately -- or perhaps otherwise -- I don't have one, only pure DC, so I don't have those complications. Because I don't have them, I can't help with yours.

On the topic of the original question, pension contributions above the annual allowance, I'm curious to know if you decided one way or another? Did anything in this thread clear confusion, or has it simply replaced one problem with two? :-)

Pat38493

EdSwippet said:

Pat38493 said:
I guess we are now drifting quite far aware from the original topic which was answered about 2 pages ago  

We are. And you're right that DB pensions add a huge extra set of unknowns into the bear pit that is LTA planning. Fortunately -- or perhaps otherwise -- I don't have one, only pure DC, so I don't have those complications. Because I don't have them, I can't help with yours.

On the topic of the original question, pension contributions above the annual allowance, I'm curious to know if you decided one way or another? Did anything in this thread clear confusion, or has it simply replaced one problem with two? :-)

I have not decided yet but the takeaway for me was that the benefit of doing this is not as big as I imagined especially if LTA comes into play.  I have rollover allowances for the next 3 years anyway so this decision only needs to be taken I guess in 2025.

Pat38493

Grumpy_chap said:

Pat38493 said:

True but I don't really need that amount of money in retirement for several reasons.  First, we intend to downsize the house to help fund some items during retirement.  Second, my partner has a full DB NHS fully funded pension scheme.  Third, when I am looking at our outgoings, we are spending a lot of money on things which won't be needed in future.  I am currently running a more detailed analysis by categorising all transactions in detail over the next few years to see what I need.

Further, I am pretty sure I would need funds in excess of the LTA in order to maintain my current theoretical net income on "normal" levels of pension contributions (I am currently putting in the max each year).

A financial adviser told me that the 2/3rd income rule might be a bit overkill if you are a high earner like me if you assume you will pay off major items like mortgage and so on.

So, by down-sizing the house, the pension income will be supplemented by a large cash pot from which you will draw down.

Your partner will have a very good gold-plated pension, but that will still be lower than their FTE currently.


I am always intrigued by people who state they will need less money disposable once they retire.  Yes, no mortgage to pay, but increased costs for:

• More leisure time, meals out, holidays.  And pick the best, no slumming it in Economy if you don't have to.
• Take up an expensive hobby - I fancy gaining a pilots licence for Micro-Light.  Or membership of a golf club, not cheap.
• Paying for help around the house and garden as mobility starts to decrease
• Eventually, nursing home fees.

When I retire, I am going to need a good £1M upwards annually

Coming back to this point - actually in some of the scenarios I' looking at, as a couple we will actually have a good chance to have two thirds of our prior joint net income (or maybe even a bit more), but still completely avoiding 40% tax due to the gross incomes being more evenly divided between us.  Of course there is the dreaded SOR risk to watch out for but this would just have to be managed on the fly.  

Graham81

What OP really needs is a spouse with a little (but commercial) business that really needs a new van. OP becomes a partner in it, takes 99% of the profit share for the year, and use the amount of loss the AIA creates against the salary. Yes, it is more complicated than that, but it's a lot more tax efficient.

Jeremy… this is interesting I wondered if you could expand on this? My wife doesn’t currently have a business (or work)  but I guess we could create one… would this enable me to avoid paying 60% tax somehow and her draw a wage from that company upto the personal limit?  

Jeremy535897

I am not talking about a company. Suppose a non-employed spouse runs a little business, like window cleaning. They make £5,000 a year say, within the personal allowance. Employed spouse becomes a partner. When a profit is made, employed spouse's share is 1%, so £50. Tax due is £20 say. But the following year a new van is needed for the business, costing £30,000. In that year, the business makes a taxable loss of £25,000. Now employed spouse takes a profit share of 99%, so has a loss of £24,750, which can be set against income like wages. Non-employed spouse has a loss of £250 that is carried forward.

One day the van is sold for £10,000, but this, together with the annual profit, is allocated 99% to non-working spouse, so there might be some basic rate tax, but a lot less than the tax relief claimed.

Graham81

Jeremy535897 said:

I am not talking about a company. Suppose a non-employed spouse runs a little business, like window cleaning. They make £5,000 a year say, within the personal allowance. Employed spouse becomes a partner. When a profit is made, employed spouse's share is 1%, so £50. Tax due is £20 say. But the following year a new van is needed for the business, costing £30,000. In that year, the business makes a taxable loss of £25,000. Now employed spouse takes a profit share of 99%, so has a loss of £24,750, which can be set against income like wages. Non-employed spouse has a loss of £250 that is carried forward.

One day the van is sold for £10,000, but this, together with the annual profit, is allocated 99% to non-working spouse, so there might be some basic rate tax, but a lot less than the tax relief claimed.

Very useful and informative! Thank you 🙏🏻