£780k pot how much would you drawdown each year

GSP wrote: »

Pot was c£800k, took a lump sum out but it has already grown back again to the £780k figure. We must be in a very good period of pension growth given my fund has only been going 4 months.

We've been in a good - bull - market for most of the time since early 2009. A great time to be invested. That growing back partly illustrates the challenge you have to stay clear of the lifetime allowance charge in the future.

GSP wrote: »

I have an end year pension statement which says I have used 10.6% LTA. Do you know if this okay at this stage, or needs addressing.

Needs addressing to ensure you never go above 100%. £26.5k is a quarter of the crystallised amount so yes, £106k was the crystallised amount and that's 10.6% of the million Pound lifetime allowance that applied at the time. 89.5% to go before you start paying an extra 20% or 40% tax on later withdrawing, with no tax free lump sum when above it either.

The current £780k would include about £106k - £38k = £68k of crystallised money unless you have a split out value for that part. So about £712k uncrystallised and that would use 71.2% of a million Pound lifetime allowance, taking you to 10.6% + 71.2% = 81.8% of the lifetime allowance. That's perilously close.

Say you crystallised no more and saw 5% growth. You'd go over the 89.5% you have left in just over five years (25.7% growth to go over). I assume you're planning to live a lot more than five years and it's fairly urgent to act fairly soon to avoid that.

Say you crystallised half of the £712k now. That'd be £356k crystallised using 35.6% of the lifetime allowance. Uncrystallised you'd have £356k (35.6% of the lifetime allowance) and 53.9% unused lifetime allowance. That's a much healthier position. ( 53.9 / 35.6 - 1 ) * 100 = 51.4% growth to go over. At 5% a year that takes 9 years instead of 5 years to go over. Still pretty close, though.

What if you crystallised three quarters instead, £534k? That would use 53.5% more lifetime allowance and leave you with £178k uncrystallised and 100% - 10.6% - 53.5% = 36% of the lifetime allowance available. ( 36 / 17.8 -1 ) * 100 = 102% growth to go over. That takes 15 years at 5%. Still looking like you'll eventually go over and that's before allowing for any growth on the crystallised part for the age 75 check.

So, what to do?

1. US stock markets are at a cyclically adjusted price/earnings ratio that's correlated with a one in four chance of a big drop. Drops are good for lifetime allowance calculation because each allowance percentage gets out a bigger percentage of your money. You're not selling low because you just buy outside the pension what you sold inside.

2. But you don't want to wait a long time because growth will take you over if you give it time.

So I suggest that you consider crystallising with 25% of the lifetime allowance each year. That gives a fair chance for a handy big drop but doesn't wait too long if one doesn't come along. If a big drop comes along, exploit it by crystallising all that remains.

Next posts cover the tougher challenge of the growth in the crystallised money and tax effects of the money outside the pension.

Now the money outside the pension. Lots of tools for this.

1. Give money to a spouse, they have their own tax allowances to benefit from.
2. Annual capital gains tax allowance. Use it every year by selling something that went up and buying something almost identical. That wayyou don't accumulate huge gains.
3. Two ISA allowances, fully use them every year.
4. Dividend allowance.
5. Personal savings allowance and for your wife, starter rate for savings. Your income will be too high for the starter rate.
6. VCT dividends are tax exempt, a handy feature. No CGT either.
7. VCT and maybe EIS buying if there is any tax due.

This takes more thinking about than when the money is in a pension but using ISAs and the allowances and reliefs you should be able to keep to a tax cost that's almost zero.

Inheritance planning comes into play as well. Pensions are normally outside the estate and treated well at death. At least under current rules. But you have to be dead to give and it's hard to enjoy others benefitting from your generosity when you're dead. I trend to prefer the idea of giving while alive.

westv wrote: »

jamesd, do you sleep?

I suspect that none of the three or four jamesds sleep.

GSP wrote: »

Sorry just bumping this thread one time as had a couple of questions in my last post and in case jamesd is around as he has been nocturnal lately.
Thanks

To follow on from my post. The simple/safe approach is to take your 25% PCLS now which crystallises your entire pot. Then bleed off from the SIPP all the fund growth each and every year. That way you avoid the issue on the LTA test at 75.
This applies to people with 'large' funds like yourself.

How to shelter the withdrawn monies and how to withdraw tax efficiently every year are secondary to the need to withdraw.

The more complex option involves annual withdrawals (25% PCLS is always taken) to balance the 220k left below the £1m, guessing future CPI increases to the LTA and future fund growth - way too high risk/complex for here.