Question on crystallizing my pension

markw12 · 6 August 2018 at 2:13PM

I am 55 in 1 months time and looking to crystallize my DC pension pots:
Pot 1: £450,000
Pot 2: £ 410,000
Pot 3: £200,000

As I am through the Lifetime Allowance (no protections applied) I think I need to crystallize Pot 1 and Pot 2 (LTA used 83.5%) and move remainder after taking TFLS into flex drawdown (my providers offer flex access)
Pot 3 I intend to remain uncrystallized invested in cash ie virtually no growth of pot (I have other investments in equities outside my pension) and crystallize in coming years taking advantage of the index linking of the LTA

Are my assumptions correct and this is possible?

Also after entering flex access but not taking an income ( I am looking to access next tax year 2019/20)
can I still contribute to my pension?

EdSwippet · 6 August 2018 at 2:48PM

markw12 wrote: »

Pot 3 I intend to remain uncrystallized invested in cash ie virtually no growth of pot (I have other investments in equities outside my pension) and crystallize in coming years taking advantage of the index linking of the LTA. ... Are my assumptions correct and this is possible?

I can't see anything hugely wrong here, but you might be being somewhat optimistic about how long you have to wait to fully duck under the LTA.

If you crystallise pots 1 and 2 that leaves you 16.5% unused LTA, and a cash fund of £200k, so £30k to wait for the LTA index linking to soak up. Remember though that you in effect now only benefit from 16.5% of the annual LTA uplift, so the LTA would need to rise to £1,212k before 16.5% of it is your £200k in 'idle' cash. At 3% inflation that will be six years; at 2% inflation, a decade. That's a long time to leave money doing nothing.

markw12 wrote: »

Also after entering flex access but not taking an income ( I am looking to access next tax year 2019/20) can I still contribute to my pension?

Crystallising and taking the PCLS but not drawing any taxable income from the pension does not trigger the £4k/year MPAA. So yes, you could still contribute fully to a pension (although do check this carefully before proceeding).

Whether you should is a different question. Once above the LTA, a pension is a tax millstone rather than a tax benefit. If you get a spectacular employer match that you simply cannot receive any other way -- your employer will not pay salary in lieu, say -- then it may be worth continuing, but otherwise you should look at alternatives to pensions. (Or just give up work early, which is what I did in response to the last LTA reduction-- and I can thoroughly recommend it.)

markw12 · 6 August 2018 at 3:19PM

Thanks for the very helpful response much appreciated

I am aware that pot 3 may remain uncrystallized for over 7 years but this is the cash portion of my portfolio in effect gaining by not having to pay LTA charge

I intend to finish work within 2 months and I am on 3 months notice. My employer contributions are at the minimum allowed and just needed to know if I needed to actually opt or not and you have kindly
answered that

fizio · 6 August 2018 at 3:40PM

Similar question if i may.. with no LTA protection..
pot 1 = £1m
pot 2 = 200k

Can i take the full 25% cash from just pot 1 and then nothing from pot 2 as its all excess ? Or do i need to split the 25% per pot?

EdSwippet · 6 August 2018 at 4:17PM

haf63 wrote: »

Can i take the full 25% cash from just pot 1 and then nothing from pot 2 as its all excess ? Or do i need to split the 25% per pot?

Each crystallisation event 'uses up' a percentage of the LTA, until there is eventually nothing left.

So for example, you could fully crystallise £1mm from pot 1, take £250k PCLS and move £750k into taxable drawdown, using 97.09% of the current LTA. Then crystallise £30k from pot 2, £7.5k PCLS and £22.5k taxable drawdown, and you have used 100% of the current £1,030k LTA.

If you were to then crystallise the remaining £170k of pot 2 you would get no PCLS, an eye-watering £42.5k LTA tax penalty, and see £127.5k go into taxable drawdown.

I take it that for you, taking out FP2016 is no longer an option? If it is, that would gain you back that £42.5k in full. The LTA, and particularly its recent and repeated reduction, is a unique form of sleazy tax law.

EdSwippet · 6 August 2018 at 4:24PM

markw12 wrote: »

I am aware that pot 3 may remain uncrystallized for over 7 years but this is the cash portion of my portfolio in effect gaining by not having to pay LTA charge.

Right. It is nuts that idle cash can in some cases effectively keep up with inflation when held in a pension that is above the LTA, but that's the reality here. Similar to an index-linked bond with a 0% coupon.

markw12 wrote: »

I intend to finish work within 2 months and I am on 3 months notice. My employer contributions are at the minimum allowed ...

I assume you meant employee above. Did you ask about receiving employer pension contributions as simply salary instead? Some companies offer it, but others do not. You might be lucky, and it is worth it unless you are sitting in the effective (and scandalous) 60% tax band.

Triumph13 · 6 August 2018 at 4:32PM

markw12 wrote: »

Thanks for the very helpful response much appreciated

I am aware that pot 3 may remain uncrystallized for over 7 years but this is the cash portion of my portfolio in effect gaining by not having to pay LTA charge

I intend to finish work within 2 months and I am on 3 months notice. My employer contributions are at the minimum allowed and just needed to know if I needed to actually opt or not and you have kindly
answered that

I'm not sure I can see the logic behind your asset allocation here. That's a lot of money to hold as cash. If the idea is that you will draw from that in the event of markets taking a dive then it might make more sense to have the cash in the crystallised portion and equities in the uncrystallised so that when that crash occurs you can crystallise them at a lower value avoiding the LTA charge.
If the whole purpose of you plan is solely driven by a desire to avoid the LTA charge then it rather looks as if you may be letting the tail wag the dog.

EdSwippet · 6 August 2018 at 4:48PM

Triumph13 wrote: »

If the idea is that you will draw from that in the event of markets taking a dive then it might make more sense to have the cash in the crystallised portion and equities in the uncrystallised so that when that crash occurs you can crystallise them at a lower value avoiding the LTA charge.

I always find this argument a bit unpersuasive. What if the crash is 25% but doesn't materialise until after a 30% rise? Even if deeper, there is no guarantee it will arrive when you need it, or if it does, that you can time it correctly. And if it doesn't work out then the outcome is somewhat worse than if you didn't gamble on it happening at all in the first place.

That said, this could be just me. I've seen this suggested around here several times by some entirely reasonable folk whose views I respect. (Although since I first saw it suggested, I am pretty sure some markets have indeed risen by more than 30% ...)

Triumph13 wrote: »

If the whole purpose of you plan is solely driven by a desire to avoid the LTA charge then it rather looks as if you may be letting the tail wag the dog.

Indeed. Rather than 'idle' cash, a really safe but boring interest-bearing something would be a better bet. Similar to an inflation-linked bond but with a modest positive coupon, I guess. Capturing 45% of even that small amount of interest beats nothing at all.

Triumph13 · 6 August 2018 at 5:29PM

EdSwippet wrote: »

I always find this argument a bit unpersuasive. What if the crash is 25% but doesn't materialise until after a 30% rise? Even if deeper, there is no guarantee it will arrive when you need it, or if it does, that you can time it correctly. And if it doesn't work out then the outcome is somewhat worse than if you didn't gamble on it happening at all in the first place.

That said, this could be just me. I've seen this suggested around here several times by some entirely reasonable folk whose views I respect. (Although since I first saw it suggested, I am pretty sure some markets have indeed risen by more than 30% ...)

It all comes down to your attitude to risk I suppose. If you are aiming for a minimax approach then delaying crystallisation does cushion you from 25% of the impact of an early crash so might make sense in that context. You trade a reduced upside risk for reduced downside risk. The fact that OP was considering keeping £200k in cash for a significant period suggested they were very concerned about downside risk.

Personally I'm much more of your kidney and I will be crystallising on my 55th birthday as having the highest likelihood of a positive outcome.

kidmugsy · 6 August 2018 at 8:11PM

markw12 wrote: »

I am 55 in 1 months time and looking to crystallize my DC pension pots:
Pot 1: £450,000
Pot 2: £ 410,000
Pot 3: £200,000

You crystallise £940k, leaving £120k in equities. When the Wall St bubble bursts and your £120k becomes worth about £40k, you crystallise that. Bingo, you've even got a nice little margin of safety.

EdSwippet · 6 August 2018 at 8:52PM

kidmugsy wrote: »

You crystallise £940k, leaving £120k in equities. When the Wall St bubble bursts and your £120k becomes worth about £40k, you crystallise that. Bingo, you've even got a nice little margin of safety.

Since you are so certain of an upcoming 67% crash here, I assume you have already short-sold S&P 500 futures yourself to cover? If not, why not?

Question on crystallizing my pension

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