Avoiding the 40% tax on pension pot withdrawal

RogerPensionGuy

The link below sort of covers this thread and much more as well.

If I'm remembered correctly, when I reached the then 1M LTA in my 50s as a 40% Income tax payer and getting a nice 10% smart pension uplift I decided to slow my inputs and sort of planned 1.2M as figure when I expected to stop work/inputs and my plan worked out okay.

I would of gone way over the LTA, but the LTA overlimit surcharge was the factor where I felt a limit of 20% over the LTA was appropriate in my head, I'll put a link on here to remind people of that LTA overlimit charge, it wasn't nice and many of my friends colleagues didn't actually understand how it worked, thankfully another goalpost move removed that nasty 25% extra tax/surcharge and I modified my plans to make good that removal, what a game it was in my 50s.

Reference the link at the bottom about the LTA, it was interesting looking on the Internet for an easy link showing that extra 25% LTA penalty charge, but I remember it well.

For me personally it was looking like some withdrawals would of paid a 25% charge and then 40% Income Tax and essentially a 55% removal and therefore I limited LTA over limit to 20% over, looking back I had friends tell me if my pension pot went over the LTA on any day the 25% charge would be applied that day and money removed from pension, this wasn't the case, but the LTA along with all the other pension goalposts moving made it hard to understand, what a mess.

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https://youtube.com/watch?v=LKKfOofqSVw&is=tR7Dt8fre8nlM7Gk

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https://techzone.aberdeenadviser.com/public/pensions/Guide-pension-lifetime-allowance

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https://adviser.royallondon.com/technical-central/pensions/benefit-options/lifetime-allowance/

ali_bear

https://forums.moneysavingexpert.com/discussion/comment/82043242#Comment_82043242

Sorry I was replying to the general idea of withdrawing all of the TFLS when you're at the maximum. In your case at your tender young age I think it's a bit previous to be thinking about the tax issues that far ahead.

But congratulations, by the way, in thinking about pensions now, it will serve you well in the long term. I think in midlife we need to achieve a balance between living for today, saving for the medium-term (or paying down debts), and saving for retirement.

In response to your original question if someone aged 60 retired now with a DC fund of 1.4M and a full state pension they would be borderline paying higher rate tax for all of retirement. But the rules rates and thresholds will always change.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82043242#Comment_82043242

You would get the extra if the LSA was increased - as long as you had not crystallised the whole pension. I think there was a thread on here where someone took the full LSA as TFLS and was asked by their pension provider if they wanted to leave any of their pension uncrystallised. The only reason for doing so would be in case the LSA increased in the future.

And yes there is nothing wrong with keeping the TFLS invested in the same sort of investments once it is outside the pension. If you can do that in an ISA so much the better. If you do it in a GIA be prepared for some tax to pay. You may have to learn about ERI for example if you invest in an ETF. And of course you may want to realise a small amount of capital gain each year so you don't waste the £3k annual allowance which may have you reinvesting into some different ETF (or waiting 30 days to reinvest in the same one). Investing is so much easier inside a pension (or an ISA).

Pipthecat

https://forums.moneysavingexpert.com/discussion/comment/82043345#Comment_82043345

Thanks for the video link. Lots of interesting points clearly explained

RogerPensionGuy

https://forums.moneysavingexpert.com/discussion/comment/82043569#Comment_82043569

For information I removed the full 268K TFLS and the provider was just going to put all the DC SIPP funds under a crystallised blanket.

I said I wanted the maximum possible of funds units remaining to be kept under the uncrystallised blanket or banner.

They were a bit cool to my plan initially and I explained if the LTA was ever to be increased and I had any funds units left I would not be able to get more TFLS and they said, yes of course and sorta agreed the LTA 1.073M/268K could be moved.

My IFA/Broker was also a bit miffed at this item, but they agreed it may hold potential upside.

The DC SIPP provider actually paid out two different CHAPS to the annuity provider, one was from a crystallised pot(totally empty) and the other was the balance from the uncrystallised pot.

Just thinking the insurance company also asked why two CHAPS were used & explained yet again.

I wasn't surprised the 3 outfits were surprised at my preference of keeping units uncrystallised, with all the treatments of the LTA over the years, maybe they should of actually put forward a simple stratagy with only upside possibility for the customer.

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Below is a link for information and I'll live in hope the LTA is increased before I empty my DC SIPP.

Cheers Roger.

https://youtu.be/dc_nYwSuYMw?is=uQgMXZlqK3yehmqy

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