LTA Mitigation Strategy

megacatt

I understand that no-one (probably not even Rachel) knows the definitive answer so I'm not looking for one.  I'm looking for obvious pitfalls in my LTA mitigation strategy below.

I have a mix of DB and DC pots.  Neither on its own breaches the LTA but they do when combined. 

After 06/04/24 when the LTA is abolished why wouldn't I crystallise the DC pots, taking only the tax free cash (so not triggering the MPAA)?  In my head this removes the DC sum from future consideration in any future LTA.  This leaves just the DB and future DC accrual which will remain below the current LTA.

I understand that an incoming Government can legislate as they wish so there remains a risk of retrospectively doing something.  However, this is generally seen as bad practice and avoided.

 I am 55.  Thanks for your thoughts.

MallyGirl

It would shift the TFLS from being outside your estate to being inside and therefore liable to IHT. Unless you spent it of course

Marcon

megacatt said:

I understand that no-one (probably not even Rachel) knows the definitive answer so I'm not looking for one.  I'm looking for obvious pitfalls in my LTA mitigation strategy below.

I have a mix of DB and DC pots.  Neither on its own breaches the LTA but they do when combined. 

After 06/04/24 when the LTA is abolished why wouldn't I crystallise the DC pots, taking only the tax free cash (so not triggering the MPAA)?  In my head this removes the DC sum from future consideration in any future LTA.  This leaves just the DB and future DC accrual which will remain below the current LTA.

I understand that an incoming Government can legislate as they wish so there remains a risk of retrospectively doing something.  However, this is generally seen as bad practice and avoided.

 I am 55.  Thanks for your thoughts.

What are you going to do with the cash when you draw it? If it's a significant amount, you won't be able to put that much of it into an ISA.

Also bear in mind that it will fall inside your estate for IHT purposes once you've drawn it, unless of course you spend the lot pronto!

megacatt

With regards to IHT I'm a bit gung-ho.  I take the view that if I'm leaving that amount of cash the recipient should be grateful!  

If I crystallise, say, 400k then the 100k TFLS goes in two years.  40k in year 1 into my and my wife's ISAs.  40k in year 2.  20k back into pensions over 2 years. (5 in hers as a non-earner and 15 into mine to avoid recycling rules).

megacatt

Or pay it into only child's SIPP and ISA to avoid IHT that way (he's 9 so a few years of this still available).

zagfles

megacatt said:

I understand that no-one (probably not even Rachel) knows the definitive answer so I'm not looking for one.  I'm looking for obvious pitfalls in my LTA mitigation strategy below.

I have a mix of DB and DC pots.  Neither on its own breaches the LTA but they do when combined. 

After 06/04/24 when the LTA is abolished why wouldn't I crystallise the DC pots, taking only the tax free cash (so not triggering the MPAA)?  In my head this removes the DC sum from future consideration in any future LTA.  This leaves just the DB and future DC accrual which will remain below the current LTA.

I understand that an incoming Government can legislate as they wish so there remains a risk of retrospectively doing something.  However, this is generally seen as bad practice and avoided.

 I am 55.  Thanks for your thoughts.

It wouldn't really be retrospective taxation if they accounted for previously taken pensions/crystallisations when working out how much LTA you have for the future, if it were reintroduced. After all when the LTA was first introduced in 2006, they accounted for previously taken pensions (pre-commencement pensions as they called them).

RogerPensionGuy

megacatt said:

With regards to IHT I'm a bit gung-ho.  I take the view that if I'm leaving that amount of cash the recipient should be grateful!  

If I crystallise, say, 400k then the 100k TFLS goes in two years.  40k in year 1 into my and my wife's ISAs.  40k in year 2.  20k back into pensions over 2 years. (5 in hers as a non-earner and 15 into mine to avoid recycling rules).

I'm very like this post here, IHT is OK, but I know too many people who worked hard much of their lives being prudent to hopefully ensure later life would be more relaxed and easy choices on all various stuff. 

Then too many of these folks get very paranoid about trying to possibly protect maximum wealth for others and often disregard their own best interests in so much, like putting up will fixable health issues because they won't spend any cash.

On the other side, I see plenty of offspring only too happy for the oldies not to spend cash as it has often been earmarked for offspring.

If I or we leave any cash, happy daze, but shouldn't be expected. 

RogerPensionGuy

For information, various LTA protections that were designed and remain. 
.
https://www.gov.uk/guidance/losing-your-lifetime-allowance-protection#:~:text=Lifetime allowance protections protect your,protections and how to apply.

leosayer

Given the size of your pensions one thing to consider by taking all your TFC upfront is that you don't leave yourself paying 40% tax on drawdowns in the future.

Pat38493

leosayer said:

Given the size of your pensions one thing to consider by taking all your TFC upfront is that you don't leave yourself paying 40% tax on drawdowns in the future.

This is actually a good point - maybe not directly LTA related but this is where long term financial planning can help a lot.  I was recently doing some modelling and I realized that if want to give our kids money towards a house deposit or suchlike some time in the next 10 years or so, I actually need to draw money out to the maximum level of 20% tax in some of the preceding years, otherwise I'll incur a huge tax bill to get the money out of my pension as I am already quite close to the HR tax limit in my planning each year.  This is where optimising your short term tax situation might not be helpful in the long run.

Other than that, as others have said you might end up paying tax on investment income as you won't be able to get the money into ISAs quick enough, and there is the change in IHT situation.

Personally I am not going to make any decisions driven by a fear that a new government might re-introduce the LTA< because I think the chance of them re-introducing it at the exact same level and process as before is pretty minimal - whatever they do it will be different enough that I can't predict what the effect will be on me personally.

michaels

My understanding is that the LTA calc was a simple DB x 20 so taking DB early with an actuarily fair reduction would help mitigate LTA as opposed to using DC to bridge the gap and taking DB at normal pension age?