Setting me straight on the LTA (Once again)

Workerdrone

Apologies. I know this has been done to death, but the more articles and posts I read on it the more I keep wondering if I have the wrong end off the stick.

Here's my intention. At 60 to be around the LTA. I will crystallise the lot, keep 100k in cash inside the pension wrapper to guard against a few years of poor markets and stick the rest into something like a VLS 60:40.

So nice and simple. I have crystalised 100% of my LTA.

So my intent is to die with my pension pot full to pass on to the kids, but still to draw from it during retirement. Perhaps I am wrong but I regard the LTA as the goose which lays the golden eggs. i.e I can keep drawing cash out of the crystallised funds and won't have any LTA charge to pay as long as the total balance of the pot stays below the LTA at the point I crystallised it.

Say I had a very good 10 year run and VLS 60:40 returns 10% every year. I draw 90k a year out. After 10 years I have now drawn 900k out but I still have £1m in the pot. 100k cash + 900k in VLS. So my pot has given me £1.9m, but I've never needed to pay an LTA charge.

Am I right, is it really the golden goose which keep laying.

None of the examples I read of specifically target a person who wants to tread the line between keeping a pension pot almost full, but below LTA.

Flugelhorn

I thought the LTA was only relevant at the point of crystallisation? 

Admittedly mine is DB but is probably "worth" a lot more than it was when I started taking the pension but that is not relevant as it was only tested against the LTA when I started taking the pension.

Pat38493

I’ll be interested to see the answers but everything I’ve read seems to indicate you are right - as long as you keep the amount in your crystlized pot less than the original crystalized amount you should be ok.  

Only question is, can you actually crysalize it without drawing any out?  All the posts I’ve seen indicate that you crystallise it by performing some action e.g. taking out the 25% tax free amount.  I am not sure if you can just say the magic word “Crystallize” and move it across.

Workerdrone

Pat38493 said:

I’ll be interested to see the answers but everything I’ve read seems to indicate you are right - as long as you keep the amount in your crystlized pot less than the original crystalized amount you should be ok.  

Only question is, can you actually crysalize it without drawing any out?  All the posts I’ve seen indicate that you crystallise it by performing some action e.g. taking out the 25% tax free amount.  I am not sure if you can just say the magic word “Crystallize” and move it across.

That would work for me. I am actually hoping to have £1.18m in at 60. I will crystallise the lot. take £118k tax free for a silly purchase and do as intended above with the remains. lets see if some of the experts can confirm

Flugelhorn

I think you can just move a pot and take some tax free if you want and that is considered to be the crystallisation, OP says he will have crystallised 100% LTA.

I have a pot that I can't take as it would be horribly taxed. So it sits there uncrystallised, if I wanted to take any money then it would be shuffled off somewhere else and reduced in value by 50% but I think that is where it stops as far as the LTA tax is concerned ?? or maybe not 

Flugelhorn

Workerdrone said:

Pat38493 said:

I’ll be interested to see the answers but everything I’ve read seems to indicate you are right - as long as you keep the amount in your crystlized pot less than the original crystalized amount you should be ok.  

Only question is, can you actually crysalize it without drawing any out?  All the posts I’ve seen indicate that you crystallise it by performing some action e.g. taking out the 25% tax free amount.  I am not sure if you can just say the magic word “Crystallize” and move it across.

That would work for me. I am actually hoping to have £1.18m in at 60. I will crystallise the lot. take £118k tax free for a silly purchase and do as intended above with the remains. lets see if some of the experts can confirm

is the not the same as a DB pension hitting the LTA at "crystallisation" and now "worth" much more? You don't pay more tax.

ader42

Yes that’s a simple approach, but you do leave some money on the table using it.
If you only crystallize as you need rather than all at once then you would end up with more TFLS (assuming constant growth of course).

Also, leaving the £100k cash in the pension is possibly a bad idea - the upside is it is outside of Inheritance Tax in the pension, the downside is it adds to the LTA calculation and likely gets a lower level of interest.

Don’t forget the LTA allowance check at age 75.

Oh, and a LTA charge is not a bad thing really, like any tax you’ll be better off if you have paid it than if you hadn’t had the wealth to be charged it.

It would more likely pay you more (in income to you personally) to retire earlier and take funds out earlier and put some of it in ISAs, say at no more than the normal 20% income tax rate (around £50k a year). 

Pat38493

Workerdrone said:

Pat38493 said:

I’ll be interested to see the answers but everything I’ve read seems to indicate you are right - as long as you keep the amount in your crystlized pot less than the original crystalized amount you should be ok.  

Only question is, can you actually crysalize it without drawing any out?  All the posts I’ve seen indicate that you crystallise it by performing some action e.g. taking out the 25% tax free amount.  I am not sure if you can just say the magic word “Crystallize” and move it across.

That would work for me. I am actually hoping to have £1.18m in at 60. I will crystallise the lot. take £118k tax free for a silly purchase and do as intended above with the remains. lets see if some of the experts can confirm

That’s the part I wasn’t sure on - if you only take 10% of your pot as tax free cash, are you allowed to crystallize 100% during that transaction - firstly, are you legally allowed?  Secondly, are you procedurally allowed by your pension provider?  

I think I might have seen a comment here at some point that said that there is no legal reason why you can’t do this but pension providers may be “computer said no”

Secret2ndAccount

What you describe is possible, but a little unusual in my view. By leaving all the money in the pension you lose the 25% tax free benefit. I realise this leaves a bigger pot to grow, but, in the scenario you describe,  you would pay 40% income tax on any growth of that last 257k each year. If you take out the 257k at crystallisation you could:
a) give it to your offspring now, and pay no income tax, and probably still no iht (if you survive 7 years), They might appreciate the money more now than in 20 years, and you might enjoy seeing the fruits of it.
b) reinvest it and give it away more slowly. Even cash in the bank pays >4% for a 5 year fix. Regular gifts which don't affect your standard of living do not attract IHT.
c) live off that money if you don't get the hoped for 10% return each year.

I think if you model a few different scenarios you might feel you get better value by taking the 25% tax free.

RogerPensionGuy

Workerdrone said:

Apologies. I know this has been done to death, but the more articles and posts I read on it the more I keep wondering if I have the wrong end off the stick.

Here's my intention. At 60 to be around the LTA. I will crystallise the lot, keep 100k in cash inside the pension wrapper to guard against a few years of poor markets and stick the rest into something like a VLS 60:40.

So nice and simple. I have crystalised 100% of my LTA.

So my intent is to die with my pension pot full to pass on to the kids, but still to draw from it during retirement. Perhaps I am wrong but I regard the LTA as the goose which lays the golden eggs. i.e I can keep drawing cash out of the crystallised funds and won't have any LTA charge to pay as long as the total balance of the pot stays below the LTA at the point I crystallised it.

Say I had a very good 10 year run and VLS 60:40 returns 10% every year. I draw 90k a year out. After 10 years I have now drawn 900k out but I still have £1m in the pot. 100k cash + 900k in VLS. So my pot has given me £1.9m, but I've never needed to pay an LTA charge.

Am I right, is it really the golden goose which keep laying.

None of the examples I read of specifically target a person who wants to tread the line between keeping a pension pot almost full, but below LTA.

I think your about correct as I understand it, however I'm now 90% sure they will adjust a few pension rules on the next budget 15th March. 

To note the BCE that can occur at age 75 looks at the figures at that time, so pot could get to 2M at age 70 and if you vented to say 1M by 75, no LTA payable at BCE @ age 75.

My guess is LTA will be increased and geared to a sensible index.

AA go down ro 30K or the like.

AA for people with pots over 1M maybe reduced.

Input tax relief maybe all at 30%

MPAA figure with be increased.

☆☆☆☆☆☆☆☆☆☆☆☆

If they want to entice more people back to work to help reduce inflation, they will need to clear up some pension cliffedges and make The New Pension Freedoms fit for purpose in these times, most of all make pensions much more easy to understand and I hope they confirm any negative changes cannot be made without at least 10 years notice.

Workerdrone

To note the BCE that can occur at age 75 looks at the figures at that time, so pot could get to 2M at age 70 and if you vented to say 1M by 75, no LTA payable at BCE @ age 75.

Thanks

Venting to keep under 1m as you say is my intent. That's an interesting set of bold suggestions for March 15th. I like the idea of increasing input tax relief to 30%, and I like the idea of a final sensible increase in LTA. We've already seen the law of unintended consequences play out with higher earners (especially doctors) leaving the NHS. I hope this is enough to move the needle.

I suspect with 30% tax relief they would also want to scrap salary sacrifice arrangements..

Naturally the labour front bench would carp about this "benefitting the rich"