Large SIPP; Tax and Drawdown Strategies

mcc100

JohnWinder said:

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.

Mine are watering at the thought of how much the IFA earned completing the OP's DB transfer.

Albermarle

mcc100 said:

JohnWinder said:

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.

Mine are watering at the thought of how much the IFA earned completing the OP's DB transfer.

Maybe now a IFA who has retired early !

xxx75

mcc100 said:

JohnWinder said:

IFA = 0.5% x M3.5. My eyes are watering at paying £17k each year in advisor fees.

Mine are watering at the thought of how much the IFA earned completing the OP's DB transfer.

It was around £23,000.
Didn't have much choice on paying that one.

xxx75

Cus said:

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 😀

It was a DB transfer that now looks like incredible value with gilt yields up here so I am happy I did it.
No funky tax set up.

gm0

One possible consideration is indeed crystallising only up to the limit of tax free cash.  A phase of FAD. So the £1.5m protected.  LTA and its 375k.  Not more (or only as needed anwyay).  The remainder remains uncrystallised and growing with no income and no LTA paid (yet) or due until age 75 or a chosen crystallisation of chunks ongoing with UFPLS say each paying 25% LTA charge and receiving no TFC - so all taxable income in year. 

You redeploy the 375k as you choose - property, ISA recycle with no further LTA concerns.

There is no tax free cash above the £1.5m protection anyway.  The 25% marked for income LTA charge will not be triggered until later when you do touch portions beyond  £1.5m.  If the rules *are* the same then.  Could be better (albeit unlikely).  Or could be worse (who knows but also very possible).

If that doesn't work as an income/drawdown rate then further chunks can of course be crystallised to taste and the 25% paid (which will be paid on current rules at age 75 anyway).  BCE5A, 5B (Crystallised growth and untouched uncrystallised).

Your chosen provider may have restrictions on drawdown methods and what can be done with what pot once you start. 
If this is a concern - you can of course chunk it up into separate pots at different providers before you start. So that each one can be handled separately in the way you choose. (And invested cheaply based on the different portfolio options on each platform - large pots can be very effectively invested in ETFs with a low capped fee on some platforms. 

Best done with partial transfers before the pension is crystallised and touched as the process for that is trivial. People have had trouble with partial transfers of already crystallised pensions.  So there can be process tripwires even if your situation should be allowed under the rules.  Avoidable.  Set it up how you want it from the start.  Caveat - many people (here) think my 3 pots arrangement - two crystallised pots at different providers using different fund houses and a residual uncrystallised in the original scheme is overly complex. And they don't consider the risks that this arrangement is targeting as important.  i.e. a different subjective judgement on materiality and the desirablity of managing down impact of low probability events.  I have explained the costs and hedging logic as I see it - on other threads so I won't repeat all that again here.

In any event regulatory change is by far the biggest issue.  Pensions and IHT. LTA threshold and TFLS.  Nobody here knows which changes will make the cut in the next decade.  All anyone can do is take a view on which rules suit their situation and plans today.  And act or hold back until later.  Which creates a position which may avoid or trip up on a future rule change.

I consider retrospective changes which unwind existing pension access transactions to some arbitrary cutoff date in the past to apply some form of new "equivalent" taxation to be unlikely.  It's just too big a circus of complexity and legal and political pain.

By contrast an ISA lifetime limit.  Further change around LTA value or tax rate from budget day. Or crimps to annual allowance, Fiddling with tapers. And the IHT treatment of pensions as outside estate as part of broader IHT reform. 
Base rate for TFLS which is small at 0 rate and 20% on the rest of the 25%.  All these ideas are arguably in play albeit with very different likeliehoods of happening.  

I consider pension reform which raises the cost to treasury of income tax forgone to relief to be vanishingly unlikely.  Any attempt to claw more tax from pensioners - DB and DC will therefore be accompanied by an ongoing clamp on Annual Allowance.   Hard to predict the shape of the fiddling on LTA value. LTA rates. And DB multiplier.  Easiest option (already taken) was to freeze allowance and let fiscal drag do its work.

If you keep above LTA portion uncrystallised you are hostage to an arbitrary raise in the LTA charge rate.  But may miss a tax opportunity if there is a bigger restructuring and this specific charge goes away in the mix of reforms. 
Vs crystallising the lot locks in the rule today (for good or ill).  And if you think it won't get more generous only less generous then that is the bet you make.

Nobody knows.  Neither forumites nor advisers can tell you much about regulatory future.  All speculative.

xxx75

Thanks to gm0 for your time and comments.
I have a lot of similar thoughts regarding future governments tax policies and your first paragraph idea.

Let's say I have the following two choices at 55;

1. Crystallise the whole pot of £3.4m and pay the LTA excess charge of £475,000  (£3.4m - £1.5m)*25%

I take the maximum TFLS for £375,000 (£1.5m *25%)

I am left with £2.55m in my crystallised pot.

I drawdown the growth every year of approx. £100,000 and I pay the relevant income tax on that (approx. £27,000)

Any shortfall in income can be taken tax free from our ISA's / VCTs

At 75 (next BCE) if the crystallised pot is still worth £2.55m then no more LTA tax charge.

If more then pay the 25% charge on the excess or buy a short term annuity. 2. Crystallise £1.5m and take the maximum TFLS of £375,000.  Leave the remaining £1.9m as uncrystallised so no initial LTA excess charge. I am left with £1.125m in my crystallised pot. I drawdown the high rate tax band limit (currently £50,271) every year and I pay the relevant income tax on that (approx. £7,500) Any shortfall in income can be taken tax free from our ISA's / VCTs At 75 (next BCE) the crystallised pot is likely to be below £1.125m so no LTA excess charge there. However, the uncrystallised pot could be worth £5m assuming 5% annual compound growth. I could pay £2.75m LTA tax charge (£5m * 55%) and have £2.25m left in cash or pay £1.25m LTA tax charge (£5m*25%) and have an additional £3.75m in my crystallised pot. The obvious advantage of a bigger pension pot is that it falls out of my estate for inheritance tax purposes (Though as I have said I am aware this tax break could be an easy target for future governments). So the key difference between 1 and 2 is that in 2 the SIPP value past 75 is a lot higher but the ISA/VCT  amount will be lower. From my calculations the net result favours option 2 by approx. 10% in absolute value at past 75 though I am very much of the thinking that the ISA/VCT bird in the hand is worth more than the SIPP in the bush. (i.e. easier to spend and gift rather than the less flexible and taxable SIPP) All the above calculations are subject to future inflation, income tax rates and brackets changing. Can you see any flaws in either 1 or 2 and which would you choose?

gm0

Impossible to say. Chance of rules being the same at 75 is close to nil.

There is a good case to be made assets permitting - in my view - for extraction and gifting away to dependents.  So that all family members are equipped if appropriate for UK property market and yet at the same time the peak net worth of members drops.

Reducing the single tall poppy target for the treasury and increasing the political cost of lowering any wealth tax related threshold to bail the dependents and that money back into scope.  If nothing happens - not much is lost.  Bar the seven year PET rule IHT exposure.  If a 5% - 10% "one off" wealth tax (one off ha ha - yes I would like to buy london bridge) happens then that's the size of the potential win right there if private pensions are counted as wealth in the design.  Asymmetric risk.

Basic stuff for a UK taxpayer who isn't international rich and not set up to be more nuanced about where they are a dom and pay taxes.  The treasury can't easily get at those families who own property via companies and use non-dom exemption and arbitrage tax rules for their wealth spread around the world. i.e. the actual rich. The 50m - 100m crowd and up. 0.1%ers

The UK house owning, private pension and ISA crowd - traditional executive and senior public sector PAYE have always been the target group for a good hard shoeing for more money when we get a tax and spend government of necessity or of choice.  And nothing has really changed. Starmer can't do anything that Sunak can't do via global economic constraints without giving a lot of us a good tax spanking to move the curve and make room.  So explicitly declared pre-election or not we have the NewLabour "living within the spending plans" scenario from 1997 playing out again.  And he will want to do some reasonably large term one problem solving (this is a good thing given the incumbent neglect).  So there *will* be a tax spanking coming.  The only way that doesn't happen is if the economy and the flow of war/peace/energy and other events happens to deliver a significant near term economic boost vs predictions.  Or the Biden investments and how USA plays out cause the borrowing costs to change because the Fed ends tightening and loosens policy earlier and more sustainably than expected. And we blow along behind.  In which case the tax and spend splurge will come from borrowing and we will again fail to fix the UK's roof in the sunshine. So it goes.  After a couple of terms.  Back to Tory "cuts" (not actual cuts just sub inflation rises as usual).

2nd best is clearly optimisation on current rules - pension outside estate.

Taking money out and having it sat exposes it to treasury chicanery that goes after money for UK tax doms that isn't primary residence, pension etc. Cash is cash.  It may be your income buffer and have come from a pension but don't expect a subtle treatment on it.  Political costs of including all pensions and people's homes in a new form of tax grab are indeed high.  Including property held additionally, ISAs and savings - not so much.

Going after BTL, holiday homes and financial assets is an easier "broadest shoulders should pay the most sell" working with the grain of people's fundmental and widely held belief that "the rich" (who clearly should pay more for all the nice things society needs" starts with people who have just a bit more money than me.  Oh and my house and my pension should not count etc.

All subjective.  It's their job to design changes to the rules to grab your already taxed deferred gratification money.  It's your job to make that as difficult as possible for them using the current rules.  There isn't much opportunity that is simple and easy to execute without other actors taking a drink.  I put VCTs in that latter category.  I dislike opacity, illiquidity, and other actors taking a big drink on the way in or worse - out. Clearly they have a tax planning place for some people. @jamesd used to post about them here - you can look up the threads. Not an area that falls within my knowledge. A gift of house deposit under PET to a child passes the transparency test by comparison.

xxx75

Thanks More_compliated_than-that.

I don't see 1 as sensible as you'll pay LTA tax at 75 on the growth on amounts that have already suffered the earlier LTA charge.

Surely if I am drawing down the growth every year then at 75 there is no further LTA tax charge.


Edited to say that your 2 alone won't work for you if you spend £100,000 per year as you'd run out of savings.

My wife and I have other assets (ISAs, VCTs, Cash, her pension etc) totalling approx. £1.5m.
I would have thought the income from these would mean we wouldn't run out of savings.

Fermion

I think M . C . T .Ts strategy of making small VCT investments each year ( say £10-15k) makes sense as you are a higher rate tax payer although I would go for lower risk VCTs and in particular those with a good track record of regular annual VCT buy back after 5 years. 

I also would tend to favour your option 1 ( a bird in the hand approach) as you can’t predict future Chancellors will do regarding the taxation of future pension. 

One think I certainly would do is make sure your crystallised £2.55M pot is held as income rather than accumulation funds (if you haven’t done this already) - makes it a lot easier to manage and calculate the growth. 

xxx75

Thanks for your good suggestions Fermion and a vote for option 1.