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    • Alibert
    • By Alibert 11th Mar 18, 9:53 PM
    • 10Posts
    • 1Thanks
    Alibert
    exceeded LTA - next steps
    • #1
    • 11th Mar 18, 9:53 PM
    exceeded LTA - next steps 11th Mar 18 at 9:53 PM
    I am approaching 55 and have exceeded my LTA.
    I'm still working, not intending to retire just yet.

    After a lot of reading around, my conclusion is that, having exceed the LTA, the bet course of action for me when I reach 55 is to crystalise the whole pension, taking the 25% tax-free amount and and moving the rest (after paying 25% in LTA tax) into drawdown,

    Then going forward to draw down any/all growth from the draw down element, to avoid triggering a second LTA charge in the future... when I am 75

    Thoughts on this ? Does it make sense?
Page 1
    • Dox
    • By Dox 11th Mar 18, 10:29 PM
    • 518 Posts
    • 311 Thanks
    Dox
    • #2
    • 11th Mar 18, 10:29 PM
    • #2
    • 11th Mar 18, 10:29 PM
    What would seem to make most sense is for you to take some proper advice - the sort you pay for - just in case there are better options/something you've missed. Answers on this forum, however well informed/intentioned can only ever be based on incomplete information.
    • jkwer521
    • By jkwer521 11th Mar 18, 10:48 PM
    • 29 Posts
    • 6 Thanks
    jkwer521
    • #3
    • 11th Mar 18, 10:48 PM
    • #3
    • 11th Mar 18, 10:48 PM
    That is what I would do based on what I have read, but I would be very interested to hear if anyone has any better ideas!

    One point to note is that I believe the 25% tax free lump sum would be limited to 25% of the LTA, not 25% of the full pot.
    • Thrugelmir
    • By Thrugelmir 11th Mar 18, 11:30 PM
    • 58,504 Posts
    • 51,870 Thanks
    Thrugelmir
    • #4
    • 11th Mar 18, 11:30 PM
    • #4
    • 11th Mar 18, 11:30 PM
    What does your pension fund consist of? No point in being too hasty. If it's subject to the whims of the market.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Liverpoolfc1967
    • By Liverpoolfc1967 11th Mar 18, 11:49 PM
    • 50 Posts
    • 14 Thanks
    Liverpoolfc1967
    • #5
    • 11th Mar 18, 11:49 PM
    • #5
    • 11th Mar 18, 11:49 PM
    I am 50, planning to work to 60. We have just completed a consultation to close our DB scheme. The output of which is 10 years of enhanced pension contributions by my employer. Another output from the consultation is that they have also agreed to keep the AVC open for the DB element.

    My predicament is if i work upto 60, I will exceed the LTA by circa £200k. Going out of the pension, means i lose the company contribution enhancement.

    So my spreadsheet shows i am better off by accepting i go over the LTA (I am also choosing to continue to build the AVC on the DB side to 20% of the overall pot - which keeps me just below the annual allowance).

    When I retire i will leave £200k in the DC side uncristallised until the law changes and i can withdraw without the punitive charge or to be left as an inheritance (I know i will be paying a 25% charge at 75, however i am saving 40% on the way in).
    • ukdw
    • By ukdw 12th Mar 18, 6:08 AM
    • 65 Posts
    • 38 Thanks
    ukdw
    • #6
    • 12th Mar 18, 6:08 AM
    • #6
    • 12th Mar 18, 6:08 AM
    I am approaching 55 and have exceeded my LTA.
    I'm still working, not intending to retire just yet.

    After a lot of reading around, my conclusion is that, having exceed the LTA, the bet course of action for me when I reach 55 is to crystalise the whole pension, taking the 25% tax-free amount and and moving the rest (after paying 25% in LTA tax) into drawdown,
    Originally posted by Alibert
    The only advantages I can think of for paying LTA tax now rather than 20 years time are:
    a) protecting yourself against future changes that might increase the tax penalty beyond the current 25%
    b) helping the current government/nhs etc. rather than a future one.

    Some disadvantages of paying early are:
    a) not being able to take advantage of future beneficial change to or removal of the LTA tax penalty
    b) lowering your overall pension pot size could reduce your ability to qualify for overall lower pension fund or IFA charging bands.
    c) losing the ability (if your pension structure allows it) for gross charges to be skewed towards the non crystallised (above LTA) portion which could reduce the net cost of the charges by 25%
    d) losing the option of using the 55% above LTA lump sum rate in the future which can be cheaper than paying 25% plus marginal tax on drawdowns >£100k (or maybe £45k in Scotland).


    Then going forward to draw down any/all growth from the draw down element, to avoid triggering a second LTA charge in the future... when I am 75
    Originally posted by Alibert
    I donít think you need to withdraw all growth - only growth above any future LTA increases. Also it is may be worth holding off on all taxable drawdowns until you finish working - to avoid triggering the MPAA especially if the drawdowns would be liable for 40% or higher tax.
    • Alibert
    • By Alibert 12th Mar 18, 8:06 AM
    • 10 Posts
    • 1 Thanks
    Alibert
    • #7
    • 12th Mar 18, 8:06 AM
    • #7
    • 12th Mar 18, 8:06 AM
    Thanks for input
    @Dox yes, I am planning to consult an IFA but my experience is that the more research I have done, and the more knowledgeable I can be, the more I will get out of an IFA

    I should have added that I would not be spending the tax free cash, but reinvesting into ISA and wife pension fund over years, subject to maximum contributions. That way the growth of this part of pot escapes LTA

    So then I have two options ..
    1 crystalise £1m
    2 crystalise the lot

    I don't think it makes sense to base this on an expectation that the LTA will go down .. or up . It could do either
    • Alibert
    • By Alibert 12th Mar 18, 8:09 AM
    • 10 Posts
    • 1 Thanks
    Alibert
    • #8
    • 12th Mar 18, 8:09 AM
    • #8
    • 12th Mar 18, 8:09 AM
    One thing though .. if I use 100% of my LTA I don't think I benefit from any future raise is LTA .. ie once you have used it, it's gone
    • HappyHarry
    • By HappyHarry 12th Mar 18, 8:33 AM
    • 603 Posts
    • 880 Thanks
    HappyHarry
    • #9
    • 12th Mar 18, 8:33 AM
    • #9
    • 12th Mar 18, 8:33 AM
    The LTA will increase each year in line with inflation. So, in April, it will be rising to £1,030,000. You can expect further increases.

    How will you take an income in retirement? If you are looking to move to drawdown, and you are close to the LTA, then crystallising all of your pension in one go might not be best.

    e.g.
    If the LTA is £1,200,000 when you start to draw a pension, and you draw at a rate of £60,000 per year, then in the first year, you will use 5% of your LTA, and have 95% remaining.

    Next year, let's say inflation is 5%, and the LTA goes up to £1,260,000. If you took another £60,000 this year, then you would only use 4.76 of your LTA, and have 90.24% remaining, and so on.

    My general thought is that if you are massively over the LTA, then there are no huge advantages to delaying crystallisation, and you can move the tax-free cash elsewhere and use that to derive some tax-efficient income rather than solely relying on taxable pension income.

    However, if you are only marginally over the LTA, it may be more tax-efficient to only draw what you need to from your pension, and delay the LTA charge as long as possible, and have the potential to never need to pay it.

    jkwer521 is correct in his above post. You will only get tax-free cash of 25% of the LTA, not 25% of your whole pot. (Unless your pension has protected tax-free cash).
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • ukdw
    • By ukdw 12th Mar 18, 8:40 AM
    • 65 Posts
    • 38 Thanks
    ukdw
    One thing though .. if I use 100% of my LTA I don't think I benefit from any future raise is LTA .. ie once you have used it, it's gone
    Originally posted by Alibert
    Yes I think you are right based on reading again about BCE 5a.
    • EdSwippet
    • By EdSwippet 12th Mar 18, 10:00 AM
    • 706 Posts
    • 661 Thanks
    EdSwippet
    Next year, let's say inflation is 5%, and the LTA goes up to £1,260,000. If you took another £60,000 this year, then you would only use 4.76 of your LTA, and have 90.24% remaining, and so on.
    Originally posted by HappyHarry
    I have a couple of issues with this approach, and personally it is not something I plan for my own pension withdrawals.

    The first issue is that in this example, for a valid comparison of the spending power of withdrawals the second and subsequent year £60k withdrawals really should be increased by inflation too. This means that the percentage of LTA used is the same in every year, making it mathematically equivalent to an all-at-once crystallisation of 100% of the LTA.

    The second issue is that even a middle-of-the-road set of pension investments should grow at a rate above inflation. And this growth element above inflation stokes up LTA penalties for the future. By contrast, crystallising -- even if not drawing -- the pension to the full LTA earlier allows this future growth to fall outside the LTA penalty region. Tax rates outside a pension or other shelter are virtually all lower than the LTA penalty rates (the exception would be the 60% tax free allowance phaseout band, but most retirees should be able to readily avoid that).

    My own plan, then, is to crystallise my pension to the LTA as soon as it hits it. I am over age 55 so that is feasible for me. If I were under age 55 but over the LTA I would seriously consider crystallising the full LTA as soon as I hit age 55, deferring drawdown and reinvesting the 25% PCLS and drawdown elements in the same things as I held in the SIPP until ready to actually draw on this. Continued pension contributions could still fall into the LTA penalty region, so only worth doing for a decent employer match, but at least the growth on the main part of the pension can no longer push up that penalty further once it has been crystallised.

    With all that said, the LTA is a major planning pain point in pensions. Should we expect the government to 'fix' the problems it has created here? Perhaps, but if they were really interested in fixing it they would have done so already. And any cure that they do come up with will very likely be worse than the disease.
    • marlot
    • By marlot 12th Mar 18, 10:11 AM
    • 3,423 Posts
    • 2,542 Thanks
    marlot
    ...If the LTA is £1,200,000 when you start to draw a pension, and you draw at a rate of £60,000 per year, then in the first year, you will use 5% of your LTA, and have 95% remaining.

    Next year, let's say inflation is 5%, and the LTA goes up to £1,260,000. If you took another £60,000 this year, then you would only use 4.76 of your LTA, and have 90.24% remaining, and so on....
    Originally posted by HappyHarry
    But surely an objective of investing is to beat inflation?

    If you're already over the LTA, surely the best way to minimise tax is either to crystalise ASAP [so any growth over inflation is protected], or wait for a downturn in the market.
    • Alibert
    • By Alibert 12th Mar 18, 10:15 AM
    • 10 Posts
    • 1 Thanks
    Alibert
    Because I am over the LTA already , 100% of future growth will attract a penalty

    I think the main driver to crystalise is to to liberate 250k and to move that into ISA and Wife's pension fund , where there is no penalty .
    I think that trumps every other factor (?)

    BtBtwn your example of taking 60k pa in future , in an environment of 5% inflation the flaw is that because inflation you'd want to take 5% more each year..
    • HappyHarry
    • By HappyHarry 12th Mar 18, 10:31 AM
    • 603 Posts
    • 880 Thanks
    HappyHarry
    But surely an objective of investing is to beat inflation?

    If you're already over the LTA, surely the best way to minimise tax is either to crystalise ASAP [so any growth over inflation is protected], or wait for a downturn in the market.
    Originally posted by marlot
    But growth on the crystallised funds is still liable for the LTA.

    This, together with the fact that funds in the pension plan are exempt from inheritance tax, tend to mean that not fully crystallising up to the LTA is usually better, if you are close to the LTA.

    Obviously each circumstance is different, but I think it rash to assume that crystallising up to the LTA immediately is the best thing to do.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • Alibert
    • By Alibert 12th Mar 18, 10:47 AM
    • 10 Posts
    • 1 Thanks
    Alibert
    Once you have crystalised , into draw down, you can draw out the growth as you go along , making sure you are not subject to LTA penalties a second time.
    • The_Doc
    • By The_Doc 12th Mar 18, 11:01 AM
    • 80 Posts
    • 58 Thanks
    The_Doc
    Have you considered IP2016 (Individual Protection) which allows you to continue pension contributions or FP2016 (Fixed Protection) which doesnt?

    FP2016 wont be available if you have made pension contribution post 5 April 2016.

    IP2016 with give you an LTA of the value on 5 April 2016 if it was over £1m
    Last edited by The_Doc; 12-03-2018 at 11:16 AM.
    • Alibert
    • By Alibert 12th Mar 18, 12:10 PM
    • 10 Posts
    • 1 Thanks
    Alibert
    I don't qualify for either ..

    Back in 2016 i was well under the 1m , and it didn't seem to make sense to decline my employer s contributions.. which were generous and were take it or leave it.
    • marlot
    • By marlot 12th Mar 18, 12:10 PM
    • 3,423 Posts
    • 2,542 Thanks
    marlot
    But growth on the crystallised funds is still liable for the LTA...
    Originally posted by HappyHarry
    My understanding was that I could avoid any further LTA charges by making sure I took the growth as income before my 75th birthday. Have I missed something?
    • The_Doc
    • By The_Doc 12th Mar 18, 12:12 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    My understanding was that I could avoid any further LTA charges by making sure I took the growth as income before my 75th birthday. Have I missed something?
    Originally posted by marlot
    No. That is correct.
    • Alibert
    • By Alibert 12th Mar 18, 12:16 PM
    • 10 Posts
    • 1 Thanks
    Alibert
    Exactly .
    Which is a powerful incentive to crystalise
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