Setting me straight on the LTA (Once again)

Workerdrone

Secret2ndAccount said:

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.

Just to flesh it out a bit more. I hope to be at 1.18m at 60 (and the LTA to have grown to that by then. Crystallise the lot. Take £118k from the tax free lump for a silly purchase. then split the remainder to 100k cash buffer and 900k VLS 60:40. Hopefully live off the returns. Personally I only want/need 27.5k after tax a year so about 4% return. if VLS were to return amounts above that of course, I am going to need to draw that out to keep below the LTA, but then I will do as you say and help the kids out.

NoMore

Although allowable under the rules, I don’t think you will find any pension provider who will let you crystallise a pension and not remove 25 % of the crystallised amount as tax free from the pension wrapper. So for crystallising the current LTA you will get just over 250k in tax free cash outside of your pension. 

At the very least you will have to communicate with the pension company to indicate that you do not want the expected 25% tax free removed from the wrapper when crystalllising and see if they are able to facilitate that. As I said I will be surprised if they do and it may take you a long conversation to convince them to do it. 

Workerdrone

NoMore said:

Although allowable under the rules, I don’t think you will find any pension provider who will let you crystallise a pension and not remove 25 % of the crystallised amount as tax free from the pension wrapper. So for crystallising the current LTA you will get just over 250k in tax free cash outside of your pension. 

At the very least you will have to communicate with the pension company to indicate that you do not want the expected 25% tax free removed from the wrapper when crystalllising and see if they are able to facilitate that. As I said I will be surprised if they do and it may take you a long conversation to convince them to do it. 

Seems I may need to think more deeply about this.

ok here goes.

Total pot at time of retirement £1.18m (LTA covers it at that point)
Require 118k for silly purchase.
Crystallise 472k to get £118k tax free
Remaining pot £1m of which 354k crystallised.
Then £100k in cash buffer inside pension (to keep outside of estate for hit purposes)
£900k in VLS 60:40

Of course I am assuming I can have a mix of crystallised and none crystallised money held in the vas 60:40. When I draw my money down each year, its coming from the 354k.

I assume then that the remaining uncrystallised 826k could benefit for any future uplift in LTA?

God this is complex

Jez56uk

It does seem complex but in practice it's fairly straightforward.. most platforms will allow a mix of crystallised and non-crystallised held in the same fund.  I'm with Fidelity and have a SIPP account and a Drawdown account with the same funds invested in each. This allows flexibility in how money is withdrawn for tax optimisation as money withdrawn from the un-crystallised pot as lump sums benefit from 25% being tax free.  
With inflation forecast to fall only slowly over the next couple of years I would caution against holding £100K in cash.   Instead, consider holding the bulk of it in something like a Cash Builder Fund or a defensive fund such as Personal Assets Trust or Capital Gearing Trust, and keep a small amount as a "rainy day" contingency. 

NoMore

Your still going to hit the lta test at 75 and get 25 % of your remaining tax free cash from crystallising the remaining available lta. 

Maybe take a step back and look at your aims in relation to your entire financial picture instead of just worrying about lta within this one pension. It appears you want to leave as much in this pension to pass on to your heirs while avoiding iht. However I’m no expert on iht but perhaps this is not the best way to do it and taking some of that tax free cash may not result in much or any iht tax anyway. Maybe you could start giving them some of this cash before you die for example. 

Flugelhorn

Workerdrone said:

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.

Doctors pensions are more to do with the AA problems than the LTA (which is predictable and can be managed) - the AA is unpredictable and outside the individuals control, some have tax bills for more than they earned in the year 

Pat38493

RogerPensionGuy said:

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.

What makes you 90% sure of that?  

Particularly the part about input tax relief all at 30% - if you mean everyone gets 30% relief on all contributions regardless of marginal tax rate, I suspect this would require major changes to IT systems which would take a long time as it’s a fundamental change, and it might require primary legislation?

The elegance of the current system is that it can be thought of as “nobody pays any income tax on the contributions they make to pensions on the way in but only on the way out” .  If you unlink this and effectively create a unique relief rate for pensions, I think opponents will say that they want to tax you twice on your same money.

Albermarle

OP - This looks a bit optimistic !  Say I had a very good 10 year run and VLS 60:40 returns 10% every year

More seriously, as NoMore pointed out, to fully crystallise a pension, you have got to take the 25% tax free cash.
If you take less then you have to crystallise less. The rule is that however much you crystallise, 25% of that has to be paid out of the pension in tax free cash.
There has been speculation in past threads, that you can forgo the tax free cash and leave it in the pension. If it were technically possible, which is not really clear, it would in most cases be a bad idea and almost certainly the pension providers system could not cope with it anyway. So I would discount it as an idea.

Also to add to speculation about pension changes ( which comes up before every budget but normally nothing happens), the very generous treatment of DC pension pots on the death of the holder has been highlighted by the Institute of Fiscal studies. They have recommended moving the pots into the deceased estate for IHT purposes, and (less controversially) that beneficiary pensions be subject to income tax regardless of the age when the donor dies.

Personally I think salary sacrifice should be stopped, although technically it would not be that easy. Apart from the loss of Billions of pounds in NI revenue, it can also be used for higher salary people to still get child benefit and not pay student loans back.

zagfles

Workerdrone said:

NoMore said:

Although allowable under the rules, I don’t think you will find any pension provider who will let you crystallise a pension and not remove 25 % of the crystallised amount as tax free from the pension wrapper. So for crystallising the current LTA you will get just over 250k in tax free cash outside of your pension. 

At the very least you will have to communicate with the pension company to indicate that you do not want the expected 25% tax free removed from the wrapper when crystalllising and see if they are able to facilitate that. As I said I will be surprised if they do and it may take you a long conversation to convince them to do it. 

Seems I may need to think more deeply about this.

ok here goes.

Total pot at time of retirement £1.18m (LTA covers it at that point)
Require 118k for silly purchase.
Crystallise 472k to get £118k tax free
Remaining pot £1m of which 354k crystallised.
Then £100k in cash buffer inside pension (to keep outside of estate for hit purposes)
£900k in VLS 60:40

Of course I am assuming I can have a mix of crystallised and none crystallised money held in the vas 60:40. When I draw my money down each year, its coming from the 354k.

I assume then that the remaining uncrystallised 826k could benefit for any future uplift in LTA?

God this is complex

You might want to check your maths, your numbers don't add up.

But on the substantive point, yes it will be possible to hold a mix of crystallised and uncrystallised with any decent provider (some old fashioned providers may not allow it but they're probably also the type of platform that insists on an adviser). 

But what are you trying to achieve, if your investments equal the LTA and you only partially crystallise, then if the uncrystallised part grows by more than the LTA, you'll be over the LTA if/when you eventually fully crystallise or reach 75. Do you really expect the LTA to grow by more than your investments?

EdSwippet

Albermarle said:

There has been speculation in past threads, that you can forgo the tax free cash and leave it in the pension. If it were technically possible, which is not really clear, it would in most cases be a bad idea ...

Interactive Investor at least seems relatively clear that leaving tax-free cash on the table is an option. Step 7 of their instructions for SIPP flexi-access drawdown reads:

Next, enter how much of your pension you would like to take as a tax-free lump sum (up to 25%). Enter ‘0’ if you don’t want to take a lump sum.

I don't know what they do if you enter anything other than 25% (and I'm certainly not planning to try it and see!). I would hope they at least query and confirm it, since as you say, anything other than 25% is almost certainly user error; if not taken now, then never.