Large SIPP; Tax and Drawdown Strategies

xxx75

Cus said:

Do you manage your own investments or do you use a professional service? 

I manage my own investments.

xxx75

One thing springs to mind… you take the max 25% TFLS, thereby crystallizing the whole pot and don’t need to worry about the LTA until you are aged 75 - at which point it is tested again and you would have another LTA charge? Does anyone know if that is correct? E.g. if the pot was still £2.5m at age 75 would there be another LTA charge of £250k (assuming protecton at the £1.5m level remains). 

AIUI, if I crystalize the whole pot of £3.4m and take the TFLS of £375,000 then there would be an immediate LTA excess charge of £475,000 (£3.4m - £1.5m)*25%. My crystallized pot would be £2.55m and if I withdrew all the growth then at 75 I would still be left with £2.55m and therefore no further LTA charge. 

JohnWinder

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.
I’m not convinced by the ‘use IFA’ arguments. There’s a lot to lose if you get it badly wrong but you’ll still eat, while we encourage those with borderline enough to DIY, and they can ill afford to get it badly wrong.
Are the tax laws harder to understand for the wealthy? Are the investing and decumulation principles and practices different for big and small sums; never seen them explained with that caveat.
I think it more comes down to how interested, literate, numerate, courageous and controlling you are. I don’t hand over control of 3.5 mil readily, but that’s me.

xxx75

[Deleted User] said:

If it was me and I didn't want to talk to an IFA (which I probably wouldn't) I'd think about the things that are the same general things as everyone does, but with more focus on tax.

1. So Sequence of return risk:  I'd want a number of years of "basic" spending in cash / premium bonds/gilts.  The number of years is up to you and your comfort level. The rest I'd put in a low cost well diversified tracker fund. I'd have read the "Living Off Your Money" by McClung book and have chosen a strategy to top up the cash/premium bonds/gilts from equity.  

2. Cashflows: To understand your tax situation you need to know where your spending money is coming from.  If you haven't done it, I'd suggest creating a relatively simple spreadsheet that shows this.  It would basically have your ages in the first column and then what you want to spend each year next to it (ignore inflation).  Then where that income is coming from (e.g. interest, dividends, etc).  The balancing figure comes from either pensions or savings. Let's ignore savings for now because this is the "easy" spreadsheet and assume it all comes from your pension.  Next split your pension between crystallised (£1.5m - £375,000) and the uncrystallised (the rest).  Give each a post-inflation return each year (e.g. 2%, it doesn't really matter) and then deduct your the amount you need to drawdown from your pension each year from the crystallised pot.  Have a look at what year the crystallised pension goes negative (on £100,000 per year its probably late 60s - let's say 68).  At that stage all drawings need to come from the uncrystallised pot.

So focusing on tax:

1. Is the £80,000 to £100,000 pre or post tax?  It obviously makes a big difference.

2. As soon as you run out of crystallised pension (age 68 in my example) the LTA tax charge will kick in and so the amount leaving your pension pot will go up hugely.  Not much you can do about that really but it leads to an interesting question of whether you might as well take the hit early? No one on these forums really talks about strategy on the bit above the LTA other than (1st world problem and kick-the-can-down-the-road).

3. You'll be a 40% / 45% taxpayer.   Your wife isn't and so you'd want to move income into her name where possible to use her basic rate band and help stop you losing your personal allowance (which starts once you get £100,000).

4. IHT is interesting.  I'm less worried about it than many on here.  The fact that pensions are currently outside your estate is a great thing.  But you can gift to kids, etc over time to reduce the impact (e.g. regular gifts out of income or seven years before death).  If you are in poor health I'd be thinking about getting tax advice about IHT (but not from an IFA).

5. You mention a foreign property. I don't know where it is but it might be tempting to live there four for years (and manage the statutory residence test).  Then move to somewhere like Cyprus for a year and draw the whole pension out by the end of year 5 (paying 5% tax and the LTA tax). If this is interesting then I'd suggest you get specialist tax advice (i.e. not an IFA, not someone selling QROPS, not a local accountant) as the anti-avoidance rules are quite tough and it increases your estate for IHT.  But doing this while you are younger gives you more freedom to gift assets to kids / grandkids at an earlier age.

As an adide, the "4%" rules (or "3.5%" or "3%" as you have a longer than 30 years expect retirement) is the downside scenario.  The upside could see you with £50m when you die.  So you'd want to think how you manage that angle too - to get the money out you'll pay 55% tax on it.  But does that mean you may never spend it or give it away because it is an eye-wateringly large amount?  So you end up at age 75 not having enjoyed it and paying the tax then?  That's why I'm not keen on the kick-the-can-down-the-road strategy.

Thanks for you time and comments.

1.  Exactly what I was planning.
2.  I do have Excel spreadsheets with a number of scenarios doing this.

tax

1. Post tax
2. Indeed.  Do I take the tax hit early or pay a lot more later? I know it's a nice problem to have but a quandary non the less.
3. Absolutely doing this.
4. Doing this also.  In good health for now.
5. Looked into this but decided not to re-locate abroad just to avoid tax.

I will try to balance the spending, gifting and inheritance.

xxx75

JohnWinder said:

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.
I’m not convinced by the ‘use IFA’ arguments. There’s a lot to lose if you get it badly wrong but you’ll still eat, while we encourage those with borderline enough to DIY, and they can ill afford to get it badly wrong.
Are the tax laws harder to understand for the wealthy? Are the investing and decumulation principles and practices different for big and small sums; never seen them explained with that caveat.
I think it more comes down to how interested, literate, numerate, courageous and controlling you are. I don’t hand over control of 3.5 mil readily, but that’s me.

I do agree but I am a little concerned I might have missed something so I would likely seek a one off consultation with an IFA just to double check my figures and understanding.  
I would not require any ongoing advice as I feel confident enough to manage my own investments so will definitely not be paying out £17k a year.

Albermarle

xxx75 said:

JohnWinder said:

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.
I’m not convinced by the ‘use IFA’ arguments. There’s a lot to lose if you get it badly wrong but you’ll still eat, while we encourage those with borderline enough to DIY, and they can ill afford to get it badly wrong.
Are the tax laws harder to understand for the wealthy? Are the investing and decumulation principles and practices different for big and small sums; never seen them explained with that caveat.
I think it more comes down to how interested, literate, numerate, courageous and controlling you are. I don’t hand over control of 3.5 mil readily, but that’s me.

I do agree but I am a little concerned I might have missed something so I would likely seek a one off consultation with an IFA just to double check my figures and understanding.  
I would not require any ongoing advice as I feel confident enough to manage my own investments so will definitely not be paying out £17k a year.

A one off consultation would be pretty pricey though I guess. At least 1% and maybe more if tax specialists etc have to be included. Then again you would have to pay similar as an initial charge before moving on to ongoing charges.

coyrls

[Deleted User] said:

JohnWinder said:

Are the tax laws harder to understand for the wealthy? 

1.  The LTA is relevant.  It is complex and applies at different times and in different ways.  Because of this there are different mitigation strategies.  Take an edge case, your crystallised pension is £200,000 over the LTA on the day before your 75th birthday.  Do you take the money out immediately as income at 45% (no LTA) and its in your estate for IHT purposes or leave it and pay 25% LTA rate and it's not in your estate for IHT purposes. If you leave it in will you want to pay 45% tax (on the 75% left over) in the next year when you need it?  Change the edge case to that you are 70 and you can see yourself be over?  This is just not relevant for people not near the LTA.  And a lot of people (but definitely not all) who write stuff on this forum get LTA stuff wrong.

You buy a short term annuity with the £200,000 because that doesn't trigger an LTA test.  I imagine you would roughly get your money back over the 5 years of the annuity (pre-tax) and be under the LTA test at 75.

Nebulous2

Linton said:

xxx75 said:

The £375,000 I am planning a property purchase abroad.

The SIPP would be used to provide an income and leave as a highly tax efficient inheritance (though I am aware that future governments could change this).
I feel I am in a privileged position to pass on generational wealth.

Seeking as much advice and strategies is my priority and this would obviously include consulting with IFAs.
Just wondered what the well informed posters here would do in my position as regards the tax and drawdown implications.

As far as I can remember over the past 15-20 years on this forum no-one has ever admitted to having your level of wealth.  So the number of really well-informed replies may be rather limited.  Perhaps you can tell us what happens.

I saw a semi-regular contributor say they had more than that fairly recently. The post was later edited to be more generic without figures. 

It's definitely a rarity though. Retirement at 54 / 49, is not that common either. 

coyrls

[Deleted User] said:

coyrls said:

...

You buy a short term annuity with the £200,000 because that doesn't trigger an LTA test.  I imagine you would roughly get your money back over the 5 years of the annuity (pre-tax) and be under the LTA test at 75.

I agree that a short-term annuity bought with drawdown funds doesn't trigger a BCE.  But the point I was trying to make was in relation to "Are the tax laws harder to understand for the wealthy?".

I know the point you are making and I agree with it.  You gave a number of options for your "edge case", I was adding a further option that you hadn't included and that I think would often be a better choice than the ones you did include.  My point only emphasises your point that tax laws are more difficult to understand when dealing with large amounts of money.

Cus

I think it might be beneficial to speak with a tax consultant if there is something unusual to look at. I don't know your background but to have such a significant amount over the LTA is either bad planning, great investing, or perhaps unusually specific set of circumstances that have ended with this.  I don't know whether your fund amount is significant enough to really have any funky tax set up, and your future plans might just be a case of standard high income tax management tbh.  Make sure you are also on forums discussing how to enjoy your retirement also 😀