About to activate pension but currently over the LTA?

RogerPensionGuy

Hi All.

I've two pensions, a DC(active) and DB(deferred), on today's numbers with the current LTA I'm about 12% over the LTA limit.

The DB gets bigger every day I delay activation, currently going up about 6% PA due past NRA in that plan and just been advised it will increase 5% this April due inflation increase being applied.

Currently the DB is 30K PA X 20 is 600K for information. 

I'm still working and putting basic pension contributions in as company contributions are good if I just contribute the minimum. 

I expect to stop paid employment anytime in the next year or so, I'm currently 61.

I have sensible ISAs, GIA, premium bonds and cash so don't need pension income in the short term.

My big decision is do I activation the DB scheme before April to limit the % LTA used and forever have that % used on the books or do I hold back and hope thr LTA goes up after the budget on the 15th March and be able to take a more relaxed approach and obviously hope I can avoid going over the LTA limits over the years.

My DB scheme people tell me I would need to activate the paperworks by the end of February to ensure pension would of activated before April.

My decision would of been much easier if the budget was the 15th of February.

All the readings I do lead me to believe the LTA will be getting pushed up as its completely out of kilter with inflation and the real world and will temp some people to work a bit longer to help increase the working population and reduce some critical sectors from staff shortfalls. 

Any views most welcome?

Cheers Roger.

GrubbyGirl_2

How long is a piece of string............however one of the major complaints of Doctors was the lowering of the LTA which meant that many left (by retirement) the NHS as their pensions were severely adversely affected.  I think at some point the Government will have to address this if they want to address the lack of doctors in the NHS, but I'm not convinced it will be this budget as there are more pressing issues, and the doctors don't seem to be complaining much lately. 

Albermarle

All the readings I do lead me to believe the LTA will be getting pushed up as its completely out of kilter with inflation

Many tax limits are frozen/not increasing with inflation, not just the LTA one.

I think they will stick with what has already been said- that is it will remain frozen until at least April 2026. Would be bad politics to increase a limit for Millionaires ( how the press would portray it) and keep all other allowances frozen.

I know there some issues about getting early retirees back to work, but I am personally a bit sceptical that increasing the LTA would do much for that problem. 

EdSwippet

RogerPensionGuy said:

All the readings I do lead me to believe the LTA will be getting pushed up as its completely out of kilter with inflation and the real world and will temp some people to work a bit longer to help increase the working population and reduce some critical sectors from staff shortfalls.

Nobody can read the tea leaves on this one, though of course the usual media outlets will speculate anyway. As mentioned above, raising the LTA probably won't persuade anyone back to work (certainly not me!). What it might accomplish at the outside though is to partially stem the flow of people for whom reaching the LTA motivates earlier retirement.

My first guess is that any increase in the LTA, if it comes, will arrive with a compensatory punishment attached. Perhaps a large reduction of the PCLS percentage, or a significant cap on the total PCLS available. So you might want to take into account the possibility of a headline LTA increase ultimately not being to your liking anyway.

My second guess is that any change in this area will be no better thought through than any of the previous ones. That's to say, not thought through at all. Just politicking, with reasoning limited to "this is something".

Pat38493

I am more with Albermarle - I reckon they might announce an LTA increase in March, but it will only be effective from after the current announcements end (and even then they might change it because anything announced for several years away is just blather).

That or if they do change something now it will be paired with offsetting changes which makes it impossible to forecast what to do ahead of time.

There could be a lot of pressure coming to the government soon in other areas.  I think they believe they have got away with the announcements of freezing the personal allowance and band limits for 5 years (or is it 7 years now?).  If the media and/or their opposition come up with a simple, understandable way of explaining to the public the massive scale of income tax rises they are facing in the next few years, they will be in stormy waters again. 

I haven't crunched the numbers and I keep meaning to, but I suspect that freezing those allowances and bands for 5 years at a time of high inflation is equivalent to a real terms multi % rise in income tax which is worse the poorer you are.  It's a stealth tax increase squarely targeted at the poor and so far they have got away with it - actually I wouldn't be surprised if the proposal to remove the 45% tax was a dead cat to distract from it, but it will come back sooner or later (or if it doesn't then their opposition deserves to lose for missing such an open goal).

All that said, if I was in the OPs situation and I didn't need the money for quite a few years I would probably wait, although it's a bit of a gamble either way.  Don't forget that DB pensions not in payment are usually better protected against inflation than when they are in payment.

NedS

As your DB pension will use around 60% of your LTA, activating it now would be like hedging your bets - it sets it in stone but also leaves ~40% available, and if they were to then increase the LTA you will benefit from any increases on the remaining 40% which may be sufficient to crystallise your DC and stay under the limit.

I think they need to think long and hard about the LTA. If the aim is to get over 50's back to work, I don't see how raising the LTA now will help an NHS consultant whose already retired and used 100% of LTA - increasing the LTA now is not going to help them so they are not going to return to work if that is the reason they retired. Changes would have to be retrospectively applied, or applied in a way whereby any increase is in addition to any previously used LTA. The damage has already been done and this is only going to get even more messy if they try to retrospectively fix it.

EdSwippet

NedS said:

As your DB pension will use around 60% of your LTA, activating it now would be like hedging your bets - it sets it in stone but also leaves ~40% available, and if they were to then increase the LTA you will benefit from any increases on the remaining 40% which may be sufficient to crystallise your DC and stay under the limit.

Looking at the numbers given, if they do this I'd say the chance of the OP entirely avoiding the LTA in future is pretty slim. 12% above the current LTA is £1.2M. If their DB pension is £600k for LTA purposes, that makes their DC pension also around £600k. And with 44% LTA headroom left after crystallising the DB pension, the LTA would need to rise to £1.36M before that £600k DC pension is unmolested by it.

That is, the OP would need a close to 30% rise in the LTA at the next budget. Of course, they'd get some benefit from any rise, but if I've got both the extrapolations and the sums right, a rise taking them entirely out of the scope of the LTA, although not impossible, looks a bit implausible.

None of which is the slightest help with the OP's impending decision. :-(

RogerPensionGuy said:

My DB scheme people tell me I would need to activate the paperworks by the end of February to ensure pension would of activated before April.

A random thought. What happens if you start the paperwork but then later change your mind? Can you? If yes, how late can you leave it? Would after the March budget be too late to reverse or cancel the process, or not?

Pat38493

One further point here - OP says stopping paid employment “anytime in the next year or so”.

Putting the DB pension into payment purely in order to limit future LTA exposure means you will pay (40%?) tax on all the pension payments until you stop work - another point to consider in the decision.  Also - if you put your pension into payment now and the increases are capped, does this mean you won’t get the full inflation increase if inflation remains high in the next months?

RogerPensionGuy

Tks all posters, much appreciated. 

Many good pointers and I especially love the idea of kicking off the pension activation stuff in this month and if I feel any pension changes could be good for me, I'll cancel the activation process and leave it all cooking.

I'm fully aware I'm in a fortunate position but it's not by chance, I normally earn about average pay X 1.3 over the years and did regular overtime for many many years allowing me to build up sensible pensions.

It's been so hard to plan as governments have been changing the rules far to many times and unless a person was at a good point like the various "protections" actually worked at these points of time, person was just stuffed.

I've tried doing balanced investments and just trying to maximise the net value I receive out of my pensions.

Anymore views most welcome.

Cheers Roger. 

leosayer

Pat38493 said:

One further point here - OP says stopping paid employment “anytime in the next year or so”.

Putting the DB pension into payment purely in order to limit future LTA exposure means you will pay (40%?) tax on all the pension payments until you stop work - another point to consider in the decision.  Also - if you put your pension into payment now and the increases are capped, does this mean you won’t get the full inflation increase if inflation remains high in the next months?

Agree with all your points.

I don't see one reason for the OP to commence the DB pension until the tax year after he has stopped working. 

It can be easy to get so caught up in avoiding the LTA tax that you end up worse off overall.

RogerPensionGuy

leosayer said:

Pat38493 said:

One further point here - OP says stopping paid employment “anytime in the next year or so”.

Putting the DB pension into payment purely in order to limit future LTA exposure means you will pay (40%?) tax on all the pension payments until you stop work - another point to consider in the decision.  Also - if you put your pension into payment now and the increases are capped, does this mean you won’t get the full inflation increase if inflation remains high in the next months?

Agree with all your points.

I don't see one reason for the OP to commence the DB pension until the tax year after he has stopped working. 

It can be easy to get so caught up in avoiding the LTA tax that you end up worse off overall.

I could commute the 30K PA to 22.5K PA and get a lump of tax-free cash and then limit my gross pay to about 27K via pension contributions.

However I agree trying to jump around the various moving pension rules may not achieve best results, I will just have to mull over all the info and make a balanced decision.