OK not to take lump sum?

Pat38493

Albermarle said:

with a presumed 55% tax rate on eventual withdrawals

So would it be correct that if a 40% rate was presumed, then the argument for taking out the PCLS would be weaker? Especially now with the reduction in CGT and Dividend allowances?

Also I presume it depends on how far over the LTA one is likely to be, would that also influence any decision ? 

I was wondering this too - maybe @eds@EdSwippet is a higher rate tax payer already and is assuming that it will all be taxed at higher rate for his own scenario?

NedS

Albermarle said:

Pat38493 said:

Albermarle said:

To put it another way - the LTA is not calculated based on the ongoing SIPP balance, but the amount that you have drawn out crystallised in total (stated as a % at the time of withdrawal). If you choose not to crystallise all of it, the remainder will be effectively crystallised for you at 75 or when you die.

OP - As the post above explains well ( just needed one correction as above ) you have misunderstood how LTA works .You need to read through these posts, and research uncrystallised and crystallised pensions. Specifically for LTA, Benefit crystallisation events ( BCE's) etc

You also have to take into account that, if you are likely to be liable for IHT when you die, anything still in the pension is not included in the IHT calculation.

Although not usually quite so black and white, it can be a case of 40% IHT or 40% LTA.

So can you remind me - if there is uncrystallised funds in your pension at 75, are those taxed at 55% or 25%?  I guess you are saying it's 25% but you will end up at 40% when you pay income tax if you draw it out? (but I thought there was no tax free cash on funds in excess of LTA so wouldn't it then become 45% if you are on 20% marginal?).

If you take a lump sum , then the LTA charge is 55%
If you take income , it is 25% + your rate of income tax.
If you are a 20% taxpayer then you effectively pay 40% ( £100 minus 25% = £75 minus 20%= £60) 
If you are a 40% taxpayer then you effectively pay 55% ( same as with a lump sum)

There are various allowances for savings, capital gains etc beyond just ISA allowances - the first x amount is zero tax and then there is an allowance beyond that I think.  I haven't looked at it in detail recently but I think you can invest a reasonable amount in unsheltered assets and funds without paying any tax.  I think there is a starting rate for savings, then an allowance and then your capital gains tax allowance so if you use the right investments outside the pension you will be able to make a safe return on £250K for a few years without paying any tax and even then the CGT is 10% I guess if you are not earning

I think probably you are being a bit overoptimistic saying you could get away with paying no tax on £250K, but it not easy to calculate as you say . As a rule of thumb it has been said on the forum that you could have £100K /£125K invested outside an ISA /pension, and not pay any tax with careful management. However CGT and dividend allowances are being cut significantly , so I guess this figure will significantly reduce. Yes you can use ISA's , savings allowances etc, but only to a point.
Also note the phrase in bold. Managing an investment account/tax outside an ISA/pension would not be everyone's cup of tea and certainly needs more attention/time tax wise, than investments in a pension or ISA.

If tax is an issue, and certainly tax allowances for CGT, dividend tax and tax on interest have been cut, you should also consider gilts. With a gilt, you pay tax on the coupon (interest) but there is no CGT to pay on repayment of the principle (face value) of the gilt. During the recent mini-budget induced gilt crisis, some government gilts were yielding over 4.5%, most of which was as a tax free "capital gain" as the coupon on some of these gilts are very low (0.125-0.25%), so of that 4.5% return, 0.125-0.25% may be of the form of taxable coupon payments whilst the remainder is a tax free capital gain by purchasing the gilt at significantly under face value. Admittedly, gilt rates have fallen, and are now closer to 3.5% which may not be as attractive, but it's largely tax free on low coupon gilts. If I had won the Euromillions lottery the week of the gilt crisis, I'd have been putting millions into low coupon Gilts at 4.5% YTM. Still, a  ~3.5% risk free and largely tax free is not to be sniffed at (e.g, see TN25, Treasury Gilt 0.25% 31/01/2025). I would certainly be looking to use Government gilts if I had large amounts of unwrapped cash to invest, unless you can get a better rate of return elsewhere after tax (e.g, some savings accounts currently paying 5% which will still net 4% for a basic rate tax payer at zero risk)

EdSwippet

Albermarle said:

with a presumed 55% tax rate on eventual withdrawals

So would it be correct that if a 40% rate was presumed, then the argument for taking out the PCLS would be weaker? Especially now with the reduction in CGT and Dividend allowances?

Maybe, or maybe not. A 40% rate on withdrawals above the LTA presumes basic rate tax. That drops the annual tax on dividends to 7% (8.25% after the recent increase) and capital gains tax to 10%, which of course flatters the out-of-pension results just as basic rate tax on final withdrawal flatters the in-pension results. And I entirely ignored the CGT and dividend allowances in my projection -- I'm using them up already with non-PCLS money.

Of course, as with any of these things, if you play with the numbers you can get any result you want. Assume 0% tax on final pension withdrawal (at age 95!) gets you to paying only the 25% PCLS penalty. Mix that with higher rate or additional rate tax paid on the alternative, taking the PCLS and investing outside the pension, and of course the pension, even above the LTA, looks a lot rosier. But how likely are these combinations? And of course, the entire edifice is very sensitive to changes in investment performance assumptions, tax rates, unpredictable future government meddling, and what have you.

In the end though, as stated earlier, an uncertain and future inheritance tax problem can often be mitigated, whereas a certain and present LTA one cannot. I'd also be inclined to guess, though without any real basis for this, that the likelihood of an uplift or some relaxation in the IHT sting is somewhat more likely than any relaxation in the LTA sting.