LTA Mitigation Strategy

Albermarle

michaels said:

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?

That is correct and why I took mine 3 years early. Only saved about 3 or 4 % LTA though.

megacatt

Thanks for all of the replies, I appreciate it.  As usual some good points made and I'll feed these into my thoughts.

I'll probably hedge my bets and crystallise half of the DC.  This will potentially hide some from any new LTA whilst leaving enough to cover any charge in the future in preference to taking it from the DB.  I'll also probably take the DB early (depending on what Rachel does) to mitigate the effects if a new LTA is roughly at the current level.

I'm not looking for a perfect answer and certainly not letting the tax tail wag the dog, life's too short to try and be perfect.  I'm very conscious that prudent decisions made in my 20s and maintained since then together with working hard and not really liking expensive things have put us in a comfortable place.  Like most of us, I suppose, I'm just trying to second guess the future and not make any big, daft mistakes.

"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)."

I might quibble with this not being retrospective but it's helpful to know what happened last time an LTA was introduced.  It would probably be adopted as the model again if it worked last time.

"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 will need careful balancing and will be very dependent on what happens with the new Government.  My DB means that any drawdown after I take it will be subject to HR tax.  If no LTA is reintroduced then I would pull lots of cash out of my DC early to pay only BR tax, relying on ISAs to top up.

"Whether crystalising the DC scheme first or second is better might depend on how your DB scheme reduces your pension to take account of the LTA tax that has to be paid.  That conversion rate might be a good deal for you, in which case you'd want to crystallise the DC scheme first.  Or it might be a bad deal, meaning you'd never want the DB scheme to have to pay the LTA tax."

I need to find out how LTA charges are paid in general (and how my scheme commutes in particular).  If it's a straight choice between DB or DC whichever comes last then I would prefer the DC option.  I'm naturally financially conservative (although I will probably vote for the other lot) so maximising the DB baseload feels safe.
I'm ignorant on this point and don't even know if the charge can be paid from cash rather than a pension.

jim8888

Pat38493 said:

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.

This is something I've done this year, taken money from my SIPP and paying 20% today versus possibly needing cash five years from now and paying 40%. It wasn't something I thought about fifteen years ago and, if I had, I might have put more into ISA's than pensions. Or possibly more into stocks and shares outside an ISA - capital gains tax is 10% versus SIPPs at 20% or 40%. But of course there was the tax boost you get when you invest into a pension....

RogerPensionGuy

Below is an article of interest and needs to be considered carefully,  if that 268K figure remains for just ten years with inflation, think it says that 268K spending power reduces to 199K in just them 10 years.
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https://www.investorschronicle.co.uk/news/2024/01/04/what-s-the-catch-with-the-abolition-of-the-pensions-lifetime-allowance/?gad_source=1&gclid=Cj0KCQiA5rGuBhCnARIsAN11vgQZ4PNz5cCjJb2ndWbsswpItBuee8aHpKIi4IrOL6wC-R6wuHqVQFwaAnWZEALw_wcB