LTA Thoughts Please

BennyBrownBoy

Hi All,

Appreciate, a "first world" nice problem to have perhaps, but am looking for thoughts on best way to approach forthcoming retirement in 18 months with regards to the LTA. I will likely need to take IFA advice but am looking to be best prepared to ask the right questions, be best informed etc.

I have 2 deferred DB pensions both with NRA 60 - payable June 2024. Most recent forecast (Jan 23) shows £40.4K pa combined. One has an AVC of £12.5K attached. Neither has an additional lump sum (except AVC) but will allow commutation to cash at 19:1. I don't wish to do this as have other savings (ISAs) and would prefer full pension options.

Also have a DC pot - currently valued at £265K. My reckoning suggests this puts me currently around £12.4K over the LTA.

If I continue to contribute at my current rate (sal sac) over 18 months I will add £60K to this, plus whatever growth in the funds - so maybe around £340K at age 60 (June 2024). Leaving aside further revaluation of my DB schemes before I get to 60, this would put me circa £87.4K above the LTA.

For background, my wife is retired and will draw her Teachers Pension also in 2024 at 60 and we are fortunate that the majority of our expenses/needs will be covered by our joint DB pensions. The DC pot is essentially a welcome "extra" that we would need to take small amounts of cash (approx £5Kpa) from until we are both at State Pension age (67). However, I would like to be able to draw from the DC pot in the most tax efficient way for larger purchases etc.

Accepting I probably won't be able to avoid a charge completely, I'd be really grateful for any thoughts on any steps I could be taking now/what to ask an IFA to minimise the additional tax charge. Also - is there a recommended order in which I should take my pensions? Should I reduce payments into my DC scheme (can drop from current 28% sal sac to 3% and still get employer max of 11%)? 

Thanks in advance for your thoughts/suggestions - this board has been incredibly informative over the years - I've learned loads, though find LTA issues especially complicated.

Thanks again.

Pat38493

Are you a higher rate taxpayer until retirement?  I’m guessing yes?

I would definitely continue to pay into the pension for any matched employer contributions.  Even beyond, that, it may well be that continuing to pay in to your pension is your least worst option where those contributions are coming from money that otherwise would be taxed at 40%.  

You might want to consult an IFA as you say or post more details about your spending needs in retirement, any money you want/hope to leave behind etc.

Based on everything I’ve seen, it’s normally better to take the DB pensions first, but even this could be subject to IFA advice if your DB scheme has a generous commutation rate for LTA liabilities.

Also keep in mind that the LTA tax is only assessed at the point you take the DB pension or crystalize an amount of funds in your DC, or eventually when you reach age 75.

Edit - also - if you don’t need more than the LTA to cover all your needs, you may also want to consider moving your DC pot into safer funds with less growth, or even some of it into cash within the DC - again subject to detailed analysis.

Albermarle

If you are able to take the DB pensions early, this can help with LTA. The 20X calculation is done on the reduced pension paid. Overall you tend not to lose out by taking them early as although you get a reduced pension, you get it for longer.
Of course if you are still working and paying 40% tax then it is probably less of a good idea.
Should I reduce payments into my DC scheme (can drop from current 28% sal sac to 3% and still get employer max of 11%)? 
This sounds like a good idea. Apart from LTA issues, you will not have much headroom for taking income out of the DC pension, before you start paying 40% tax .

Based on everything I’ve seen, it’s normally better to take the DB pensions first, but even this could be subject to IFA advice if your DB scheme has a generous commutation rate for LTA liabilities.

I do not really follow the latter part of this statement. A generous commutation rate giving a larger than usual lump sum in return for reduced pension, would increase LTA liability ? ( I think) as the lump sum is measured at 20X for LTA as well.
Anyway a bit academic as the OP will not take the lump sum and if they did the rate at 19:1 is middling at best,

BennyBrownBoy

Thanks Pat and Albermarle - appreciate your comments.

Pat - yes, 40% tax payer currently.

Re. sequence to take pensions - I was guessing that it would make more sense to take 25% tax free cash from DC scheme first, before taking my DB as if I took the DB first, I would not be able to take as much tax free cash from DC, as I would have used up more of the LTA when starting to draw from my DB schemes. I could have this completely wrong - any thoughts?

Pat38493

Albermarle said:

I do not really follow the latter part of this statement. A generous commutation rate giving a larger than usual lump sum in return for reduced pension, would increase LTA liability ? ( I think) as the lump sum is measured at 20X for LTA as well.
Anyway a bit academic as the OP will not take the lump sum and if they did the rate at 19:1 is middling at best,

I might be using wrong terminology but I got the impression from some other threads, that if there is an LTA liability on a DB pension, the pension company has to pay the required LTA tax to HMRC on the total exposure (presumably 20x the annual pension), and then the pension provider decides how much to reduce the pension by per year to compensate.  I think someone also referred to this as "commutation" although I am not sure if it's the correct term.

Pat38493

BennyBrownBoy said:

Thanks Pat and Albermarle - appreciate your comments.

Pat - yes, 40% tax payer currently.

Re. sequence to take pensions - I was guessing that it would make more sense to take 25% tax free cash from DC scheme first, before taking my DB as if I took the DB first, I would not be able to take as much tax free cash from DC, as I would have used up more of the LTA when starting to draw from my DB schemes. I could have this completely wrong - any thoughts?

When you take the 25% tax free cash, you are crystalizing the corresponding 100%, so if you take 25% of the entire fund you will crystalize all of it with corresponding LTA exposure.

That said, you might be right that this maximises the tax free cash that you can take up front, but it will also increase your LTA exposure on your DB pensions.  I'm not sure if anyone on this forum is expert enough to do all the maths behind your situation, but it may not make a huge difference either way - you will have to pay some LTA one way or another.

BennyBrownBoy

Thanks again Pat - your comments help "order" my thinking - probably need to speak to DB providers to check if they do this and what the reductions would be.

Do you happen to know that if I took "chunks" from my DC using UFPLS - would that whole amount also be tested against the LTA when I took it?

Pat38493

BennyBrownBoy said:

Thanks again Pat - your comments help "order" my thinking - probably need to speak to DB providers to check if they do this and what the reductions would be.

Do you happen to know that if I took "chunks" from my DC using UFPLS - would that whole amount also be tested against the LTA when I took it?

No - if you took a UFPLS the amount of each UFPLS is tested and adds to your cumulative LTA (which by the way is tracked as a % rather than an actual figure, so if you've used up 99% of the LTA, and then the LTA gets doubled, you have still used up 99%)  At least that's what I read on other threads.

I am also not 100% sure how your LTA exposure is tracked if you have multiple pensions - I don't know if you have to tell each pension how much you already used and it's your responsibility to give them correct figures or if HMRC somehow tracks it themselves.

BennyBrownBoy

Right...so - if I have understood correctly - if I took my DBs at 60, and to keep the maths simple, this used 80% of LTA (£800K - assuming an LTA of £1M for simplicity)...does this then mean I could take £200K out of my DC, using UFPLS, in say £20K chunks over 10 years and my LTA exposure would end up at 100% i.e. £1M?

Pat38493

Pretty much yes - at least that's my understanding.

At that point everything you have left in your pot would be uncrystallised so would be subject to LTA, either when you withdraw it, or when you reach age 75.

If you unfortunately die before age 75, that uncrystallised amount would pass to your nominated beneficiary (subject to discretion of pension fund trustee I think) in full with no LTA (and I think even with no income tax liability to the beneficiary on withdrawal if I understood correctly).

zagfles

Pat38493 said:

Pretty much yes - at least that's my understanding.

At that point everything you have left in your pot would be uncrystallised so would be subject to LTA, either when you withdraw it, or when you reach age 75.

If you unfortunately die before age 75, that uncrystallised amount would pass to your nominated beneficiary (subject to discretion of pension fund trustee I think) in full with no LTA (and I think even with no income tax liability to the beneficiary on withdrawal if I understood correctly).

LTA does apply on death under 75 if funds designated within 2 years, but no income tax.

If not designated within two years, no LTA but income tax instead.

Over 75, no LTA as that would have already been sorted at 75, but income tax.