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  • FIRST POST
    • Parking Trouble
    • By Parking Trouble 11th Feb 18, 9:31 AM
    • 572Posts
    • 156Thanks
    Parking Trouble
    Exceeding LTA
    • #1
    • 11th Feb 18, 9:31 AM
    Exceeding LTA 11th Feb 18 at 9:31 AM
    I had a plan to take my active main DB pension (£34k pa) and keep it as a stable, indexed linked (max 5%) income to cover all the mandatory outgoings.
    LTA is running at about 70% so didn't have any concerns.

    I have £120k CETV in a couple of pensions that I plan to transfer to SIPP as a bit of a backup fund.

    DH is currently transferring a deferred DB (£400k) to SIPP

    Out of curiosity and a bit of temptation I got an indicative CETV for the main pension - £1.146m

    That would take me £266k over LTA which I understand would be taxed at 55%.
    The LTA at 5th April 2016 would have something like 62%. Does that remove any chance of protection.

    Is there any justification to take the hit on tax to transfer out?
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

Page 1
    • AnotherJoe
    • By AnotherJoe 11th Feb 18, 10:21 AM
    • 9,612 Posts
    • 10,699 Thanks
    AnotherJoe
    • #2
    • 11th Feb 18, 10:21 AM
    • #2
    • 11th Feb 18, 10:21 AM
    I dont see any real justification to transfer, its about 30x the income after tax but thats without allowing for the index linking. I would guess that would bring you down in the low 20's as a multiple plus means the need to manage those funds (not just now but when you are in your 80's and 90's)

    Given you and partner will have more than £500k in other funds in SIPPs, plus no doubt other money, plus most likely a house you can downsize from, plus at some point 2 state pensions, i dont see any justification for moving 100% to SIPPs unless you really want to go all out on spending ?

    That £34k plus SP is going to give you about £50k guaranteed as a couple as a solid backdrop of income, immune to stock market fluctuations, tinkering with pensions by future governments, etc.. Then you can play with your SIPPs to your hearts content without it really affecting your lifestyle.

    To me the tax issue is minor in the scheme of things and shouldn't affect your decision. There may be other factors, maybe if everyone in your family pegs it before 70 or you have some serious long term medical conditions you may wish to take the money now.
    • Doglegger
    • By Doglegger 11th Feb 18, 7:42 PM
    • 14 Posts
    • 3 Thanks
    Doglegger
    • #3
    • 11th Feb 18, 7:42 PM
    • #3
    • 11th Feb 18, 7:42 PM
    Our circumstances are very similar as far as DB and DC values are concerned except the pot is also mine (hybrid scheme) with my wife having a small LGPS. We will both qualify for full SP.

    I received a CETV from the scheme very recently and contacted an IFA to see if this would be something worth doing. In my one and only conversation with him he pretty much repeated the exact points AnotherJoe said above and also not to be overly concerned with the tax situation but I think this may have been more to do with my employers contribution levels to the scheme. He recommended I didn't even start looking into a transfer and save my money.

    Last week brings the value of decent DB's into sharp focus for me for decoupling stress from the whole process. I may cut and paste the above as a wake-up to myself if markets soar again and I think about lottery win transfer values.
    • cautious investor
    • By cautious investor 11th Feb 18, 7:48 PM
    • 9 Posts
    • 1 Thanks
    cautious investor
    • #4
    • 11th Feb 18, 7:48 PM
    • #4
    • 11th Feb 18, 7:48 PM
    My question is .. "How secure is the DB pension?"
    Is there a shortfall?

    If there is and there is uncertainty that it will pay out for the rest of your life , them the 34X multiple is certainly worthy of consideration.
    • Thrugelmir
    • By Thrugelmir 11th Feb 18, 8:04 PM
    • 58,982 Posts
    • 52,318 Thanks
    Thrugelmir
    • #5
    • 11th Feb 18, 8:04 PM
    • #5
    • 11th Feb 18, 8:04 PM

    Is there any justification to take the hit on tax to transfer out?
    Originally posted by Parking Trouble
    LTA for the DB would be based on a multiple of 20, i.e. £680k.

    Why create a tax liability when none currently exists. Nor giveaway a guaranteed indexed income for life for yourself , and potentially for your partner.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Doglegger
    • By Doglegger 11th Feb 18, 8:06 PM
    • 14 Posts
    • 3 Thanks
    Doglegger
    • #6
    • 11th Feb 18, 8:06 PM
    • #6
    • 11th Feb 18, 8:06 PM
    Cheers Cautious....that'll be another thing to worry about!! :O) Yea, I suppose that brings it's own risk factor to the equation. Can't speak for the OP but our FS part of the scheme closed to new members 20 years ago to go fully DC. If the bumf they send out every year (the last of which is the first I'd read) is to be believed then the DB part is well funded and ring-fenced for the remaining members and pensioners. I'm sure members of failed schemes heard much the same prior to their collapse.
    • Thrugelmir
    • By Thrugelmir 11th Feb 18, 8:08 PM
    • 58,982 Posts
    • 52,318 Thanks
    Thrugelmir
    • #7
    • 11th Feb 18, 8:08 PM
    • #7
    • 11th Feb 18, 8:08 PM
    My question is .. "How secure is the DB pension?"
    Is there a shortfall?

    If there is and there is uncertainty that it will pay out for the rest of your life , them the 34X multiple is certainly worthy of consideration.
    Originally posted by cautious investor
    For companies to fund pension scheme deficits. Then they'll need to increase contributions. Thereby reducing/cutting dividends to shareholders as a consequence. Which will impact investment returns to investors. There's only one cake to be shared out.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
  • jamesd
    • #8
    • 11th Feb 18, 9:24 PM
    • #8
    • 11th Feb 18, 9:24 PM
    active main DB pension (£34k pa) and keep it as a stable, indexed linked (max 5%) income to cover all the mandatory outgoings. ... LTA is running at about 70% so didn't have any concerns. ... The LTA at 5th April 2016 would have something like 62%. Does that remove any chance of protection.
    Originally posted by Parking Trouble
    It appears that you're ineligible for Individual Protection 2016 because you made pension contributions but didn't exceed a million Pounds using the value at the relevant date anyway.

    Out of curiosity and a bit of temptation I got an indicative CETV for the main pension - £1.146m ... That would take me £266k over LTA which I understand would be taxed at 55%.

    Is there any justification to take the hit on tax to transfer out?
    Originally posted by Parking Trouble
    That's not how the lifetime allowance charge works. You pay nothing when you transfer. As you crystallise money you use a percentage of our remaining lifetime allowance each time. The most likely crystallisation events are:

    1. taking a tax free lump sum and placing the remaining 75% into flexi-access drawdown from which taxable lumps or income can be taken with no lifetime allowance check. Take 25% tax free from 400k and that would use 40% of a million Pound allowance, with that 40% not the money amount used later

    2. At age 75 on the increase in value of any flex-access drawdown pots. You avoid this by drawing enough to prevent an increase.

    3. At age 75 on the value of any uncrystallised pots.

    You're not entitled to a tax free lump sum on money above the lifetime allowance.

    When crystallising above the lifetime allowance the lifetime allowance charge is 55% if taken as a lump sum or 25% if taken as income which is then subject to income tax. You can use things like VCT buying to reduce the tax cost.

    £1.146 million vs £34k makes transferring look very attractive, a 33.7:1 ratio, towards the upper end of the range.

    With £63,000 initial income possible using the UK's 5.5% 40 year 90% success rate safe withdrawal rate if the Guyton-Klinger rules are used that's a pretty major jump. The Guyton-Klinger rules normally increase income with inflation but skip it or cut more if investments do badly. The 90% success rate means skipping the 10% worst case historic results, notably the ones affected by the world wars; if you live through something similar you'll know it and need to make some extra cuts. If you live through better times than the 90th% worst one the rules will end up increasing income.

    Unlike a typical DB scheme a spouse gets a 100% pension. If you were to die before age 75% inheriting a 100% tax free pot from which to draw income, an even better deal than you get while alive. Assorted caveats around money above the lifetime allowance. It's not confined to a spouse, you can split some off into the same deal for children. For death after age 75 money from these "beneficiary pensions" is taxable as income when drawn. If a person with a beneficiary pension dies they pass it on as a "survivor pension" and the tax treatment continues. There is no minimum age for taking money out of a beneficiary or survivor pension, it can be done for a toddler or by a teen.

    Given the potential of this big one you might want to leave the others to provide a bit of guaranteed income.

    You could also do something like spending 20k every year or two on a level single-life annuity for each of you, perhaps excluding bad investment years.
    Last edited by jamesd; 12-02-2018 at 2:26 PM.
    • Parking Trouble
    • By Parking Trouble 11th Feb 18, 10:50 PM
    • 572 Posts
    • 156 Thanks
    Parking Trouble
    • #9
    • 11th Feb 18, 10:50 PM
    • #9
    • 11th Feb 18, 10:50 PM
    My question is .. "How secure is the DB pension?"
    Is there a shortfall?

    If there is and there is uncertainty that it will pay out for the rest of your life , them the 34X multiple is certainly worthy of consideration.
    Originally posted by cautious investor
    Large, currently very profitable UK Bank. Nothing is safe though.
    Last edited by Parking Trouble; 11-02-2018 at 10:55 PM. Reason: Reading Jamesd post
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

    • Parking Trouble
    • By Parking Trouble 11th Feb 18, 11:50 PM
    • 572 Posts
    • 156 Thanks
    Parking Trouble
    Thanks Jamesd. I clearly misunderstood the LTA tax process.

    Not sure I understand this, could you explain further?

    1. taking a tax free lump sum and placing the remaining 75% into flexi-access drawdown from which taxable lumps or income can be taken with no lifetime allowance check. Take 25% tax free from 400k and that would use 40% of a million Pound allowance, with that 40% not the money amount used later
    I think I've left this a bit last minute because I was always expecting to take the £34k DB pension. My NRD is in 3 months time. The trustees are waiving the rule about taking CETV in final year before NRD, they seem to be encouraging it.

    I have to come out of the DB scheme to get a guaranteed CETV figure.

    However, it sounds like I can move it all into a SIPP without the initial concern about LTA. It's only as a I start to crystallise it that I work towards the £1m LTA limit and need to focus on not increasing original value at age 75?

    Post 75 all income taken in excess of LTA is taxed at 25%, then whatever my marginal rate will be at the time.

    Once an amount is crystalised is the growth tax free?
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

    • Parking Trouble
    • By Parking Trouble 11th Feb 18, 11:55 PM
    • 572 Posts
    • 156 Thanks
    Parking Trouble
    Is 5.5% income a safe assumption.
    I thought 3 - 3.5% was considered a more realistic percentage.

    Taking £50k+ for the first 10-15 years is certainly an attractive proposition if it's realistic.
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

  • jamesd
    Is 5.5% income a safe assumption.
    I thought 3 - 3.5% was considered a more realistic percentage.

    Taking £50k+ for the first 10-15 years is certainly an attractive proposition if it's realistic.
    Originally posted by Parking Trouble
    Yes, it's realistic. A read of Drawdown: safe withdrawal rates should be helpful. The difference between 3.5% and 5.5% comes from how it's worked out.

    1. 3.5% would be using the original Bengen 4% rule or maybe his later 4.5% one that included some small cap equities. The rule was start at 4% of the original pot and increase with inflation each year regardless of how the investments do. It's for a 30 year retirement and has to work for 100% of the historic years. No deduction for charges and no UK adjustment in the original rules. Later work found that charges reduce the withdrawal rate for this type of plan by 30% of the charge level and the UK adjustment is a deduction of 0.3%. So 3.5% could be 4% minus 0.3% UK adjustment minus another 0.2% to allow for 0.6% in charges. There are also potential adjustments for starting year market conditions buy Guyton came up with a way to greatly reduce that issue. In general this rule is very wasteful of potential income, with 96% of the historic cases producing a higher nominal ending pot than the starting one, while two thirds of the time the ending wealth was at least twice the starting wealth.

    2. 5.5% is using the more modern Guyton-Klinger rules, for UK investment performance and a 40 year retirement. Because the rules make adjustments every year based on how the investments do you can start a lot higher and only reduce a lot if you live through bad times. The 90% success rate skips the worst ten percent of cases and trusts you to make extra adjustments if you live through something that bad. 90% is still very cautious, Blanchett criticised US advisers for using 75% and gave some suggestions for how to determine the success rate to use.

    So, the difference is better rules and a less pessimistic starting point that gets adjusted if the bad things do turn up.
  • jamesd
    it sounds like I can move it all into a SIPP without the initial concern about LTA. It's only as a I start to crystallise it that I work towards the £1m LTA limit and need to focus on not increasing original value at age 75? ... Post 75 all income taken in excess of LTA is taxed at 25%, then whatever my marginal rate will be at the time.
    Originally posted by Parking Trouble
    That's right.

    Once an amount is crystalised is the growth tax free?
    Originally posted by Parking Trouble
    Yes, for the 75% left inside the pension until drawn on. The 25% tax free lump sum could have CGT or income tax due if it was invested outside an ISA.

    The trustees are waiving the rule about taking CETV in final year before NRD, they seem to be encouraging it.
    Originally posted by Parking Trouble
    Sensible trustees. It reduces the variability in scheme costs and makes it easier for them and the sponsoring company to manage.

    I have to come out of the DB scheme to get a guaranteed CETV figure.
    Originally posted by Parking Trouble
    That's normal enough, don't want to guarantee until they must.

    Not sure I understand this, could you explain further?
    Originally posted by Parking Trouble
    Say you wanted to start drawing an income from the pension. You might start by taking a 25% tax free lump sum of £100,000. Since that's 25% the bit you're not crystallsiing is three times that, £300,000 and the combined total being crystallised is £400000. £400,000 is 40% of a million so this crystallisation would use 40% of a million Pound lifetime allowance. The lifetime allowance changes so it's the 40% that's carried forward for later checks.

    From that £100k tax free and 300k taxable you might take 45k from the taxable 75% to use all of your basic rate band and top up your spending to 63k using 18k from the tax free lump sum.

    Of course you could crystallise less than 400k to start, I just picked as an example. In general you'd look to take out enough taxable to use your basic rate band and crystallise enough to fully fund you ISAs plus top up your income.

    Given the amount of money it'll actually be challenging to prevent it growing between now and age 75.
    • Parking Trouble
    • By Parking Trouble 12th Feb 18, 8:37 PM
    • 572 Posts
    • 156 Thanks
    Parking Trouble
    So the next question is where do I put this £1.27m?
    What should I invest it in?
    How much will it cost me in charges?
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

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