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    • markw12
    • By markw12 6th Aug 18, 2:13 PM
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    markw12
    Question on crystallizing my pension
    • #1
    • 6th Aug 18, 2:13 PM
    Question on crystallizing my pension 6th Aug 18 at 2:13 PM
    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?
Page 1
    • EdSwippet
    • By EdSwippet 6th Aug 18, 2:48 PM
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    EdSwippet
    • #2
    • 6th Aug 18, 2:48 PM
    • #2
    • 6th Aug 18, 2:48 PM
    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?
    Originally posted by markw12
    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.

    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?
    Originally posted by markw12
    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.)
    Last edited by EdSwippet; 06-08-2018 at 4:26 PM.
    • markw12
    • By markw12 6th Aug 18, 3:19 PM
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    markw12
    • #3
    • 6th Aug 18, 3:19 PM
    • #3
    • 6th Aug 18, 3:19 PM
    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
    • haf63
    • By haf63 6th Aug 18, 3:40 PM
    • 207 Posts
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    haf63
    • #4
    • 6th Aug 18, 3:40 PM
    • #4
    • 6th Aug 18, 3:40 PM
    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
    • By EdSwippet 6th Aug 18, 4:17 PM
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    EdSwippet
    • #5
    • 6th Aug 18, 4:17 PM
    • #5
    • 6th Aug 18, 4:17 PM
    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?
    Originally posted by haf63
    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
    • By EdSwippet 6th Aug 18, 4:24 PM
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    EdSwippet
    • #6
    • 6th Aug 18, 4:24 PM
    • #6
    • 6th Aug 18, 4:24 PM
    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.
    Originally posted by markw12
    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.

    I intend to finish work within 2 months and I am on 3 months notice. My employer contributions are at the minimum allowed ...
    Originally posted by markw12
    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
    • By Triumph13 6th Aug 18, 4:32 PM
    • 1,353 Posts
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    Triumph13
    • #7
    • 6th Aug 18, 4:32 PM
    • #7
    • 6th Aug 18, 4:32 PM
    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
    Originally posted by markw12
    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
    • By EdSwippet 6th Aug 18, 4:48 PM
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    EdSwippet
    • #8
    • 6th Aug 18, 4:48 PM
    • #8
    • 6th Aug 18, 4:48 PM
    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.
    Originally posted by Triumph13
    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% ...)

    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.
    Originally posted by Triumph13
    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
    • By Triumph13 6th Aug 18, 5:29 PM
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    Triumph13
    • #9
    • 6th Aug 18, 5:29 PM
    • #9
    • 6th Aug 18, 5:29 PM
    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% ...)
    Originally posted by EdSwippet
    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
    • By kidmugsy 6th Aug 18, 8:11 PM
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    kidmugsy
    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
    Originally posted by markw12
    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.
    Free the dunston one next time too.
    • EdSwippet
    • By EdSwippet 6th Aug 18, 8:52 PM
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    EdSwippet
    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.
    Originally posted by kidmugsy
    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?
    • kidmugsy
    • By kidmugsy 6th Aug 18, 9:26 PM
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    kidmugsy
    If not, why not?
    Originally posted by EdSwippet
    (i) I have no idea how to use futures, and
    (ii) If they were to need me to get the timing right, I don't think I'd want to punt on that. (Though I did get the timing quite brilliantly right in late 1999.)
    (iii) I assume that futures carry counterparty risk. That was what put me off trying derivatives in 2007/08 when it was all obviously about to go belly up. Not much use being right if the counterparty goes bust and can't pay up. I wasn't to know that the taxpayer would stump up for every sizeable bank bar Lehman Bros.
    Free the dunston one next time too.
    • markw12
    • By markw12 7th Aug 18, 9:02 AM
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    markw12
    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.


    I agree looking historically this strategy would have more often than not resulted in a higher LTA charge


    The fact that OP was considering keeping 200k in cash for a significant period suggested they were very concerned about downside risk.


    Not at all. Including all investments I am over 70% in equities.
    Last edited by markw12; 07-08-2018 at 9:04 AM.
    • MK62
    • By MK62 7th Aug 18, 3:07 PM
    • 279 Posts
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    MK62
    I have to ask......is it worth tying up a 200k pension as cash for c.7 years earning next to nothing, just to avoid a relatively small LTA charge?.....wouldn't the inflation effect alone dwarf the very LTA charge you want to avoid?
    • Triumph13
    • By Triumph13 7th Aug 18, 3:22 PM
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    Triumph13
    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.


    I agree looking historically this strategy would have more often than not resulted in a higher LTA charge


    The fact that OP was considering keeping 200k in cash for a significant period suggested they were very concerned about downside risk.


    Not at all. Including all investments I am over 70% in equities.
    Originally posted by markw12
    My mistake. I was assuming there was some logical basis for your idea. Clearly not
    • Judwin
    • By Judwin 7th Aug 18, 4:14 PM
    • 207 Posts
    • 88 Thanks
    Judwin
    I have to ask......is it worth tying up a 200k pension as cash for c.7 years earning next to nothing, just to avoid a relatively small LTA charge?.....wouldn't the inflation effect alone dwarf the very LTA charge you want to avoid?
    Originally posted by MK62


    Have to say, that's my thinking too. You're waiting for CPI to get 100% of nothing, rather than 45% of something? Isn't that the very definition of the tax tail wagging the dog?


    I'd probably crystallise the 860K, and leave the 200K invested in something high risk/high return. If the 200K balloons out of all control then you'll get to keep 140K+
    CPI plus 45% of any additional growth at age 75. If the 200K goes belly up then you can still take out 140K (+N years CPI).


    And you never know, in the mean time the Govt might realise how barking mad the LTA is when combined with the AA, and remove it.
    • markw12
    • By markw12 8th Aug 18, 11:49 AM
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    markw12
    I also have investments outside my pension (ISAs etc ) and my strategy involves holding some cash
    I attempt to keep as much risk as possible outside the pension as any growth will be taxed on withdrawal
    Of course the market could fall over the next few years but hoping for that to mitigate the LTA charge seems a pointless when I am carrying 70% equities


    Thank you for the comments I only really intended this thread to involve answering the original enquiry regarding the initial BCE. I have spent time researching asset allocations and SWR and am happy with my choices.
    • Thrugelmir
    • By Thrugelmir 8th Aug 18, 3:54 PM
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    Thrugelmir
    I always find this argument a bit unpersuasive. What if the crash is 25% but doesn't materialise until after a 30% rise?
    Originally posted by EdSwippet
    What if markets simply stagnant or drift downwards. There's a far greater chance of a 10% downward movement in any 12 month period than a sudden crash. The likelihood of another round of QE is receding. Likewise actual company performance needs to catch up with investors expectations. Far too much focus on violent swings than real market volatility. Which is far more mundane yet has a significant impact, depending on ones own circumstances at the time.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • EdSwippet
    • By EdSwippet 8th Aug 18, 4:40 PM
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    EdSwippet
    What if markets simply stagnant or drift downwards. There's a far greater chance of a 10% downward movement in any 12 month period than a sudden crash.
    Originally posted by Thrugelmir
    Oh, sure. But this is just another rehash of market timing arguments.

    Vanguard's Global All Cap index fund, a decent barometer of 'markets', has risen 10% in the past 9 months. Anyone waiting since Nov last year for a crash, dip, retreat, correction, or whatever to help them duck under the LTA, and where 10% would have done the trick then, will now be disappointed if the downturn isn't 20% or more. Each increase in markets is an additional headwind for those waiting for a crash.

    And because markets generally drift upwards over the long term, the longer you wait, the lower the statistical chance that the hoped-for crash will have enough depth to allow the LTA penalty to be dodged.

    Crystallising before or ideally at the LTA is best, if you can. If that's not possible -- exceeded the LTA before age 55, say -- then waiting for a market dip to let you dodge the LTA penalty is a gamble that might pay off, but the odds seem somewhat stacked against you overall.

    The question then becomes, what else to do if/when this option starts to move out of reach?
    Last edited by EdSwippet; 08-08-2018 at 5:40 PM.
    • EdSwippet
    • By EdSwippet 8th Aug 18, 10:04 PM
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    EdSwippet
    Have to say, that's my thinking too. You're waiting for CPI to get 100% of nothing, rather than 45% of something? Isn't that the very definition of the tax tail wagging the dog?
    Originally posted by Judwin
    It seems so intuitively obvious that inflation would erode a cash holding that it could hardly be worth questioning. Yet in the Alice Through the Looking Glass world of life beyond the LTA, it actually turns out that this can be a winner. Weird, but true.
    ETA: There were a bunch of wrong numbers here that I have removed. The gist of what they tried convey is that the value to the holder of the part of an uncrystallised pension that is above the LTA effectively increases (at a rate lower than inflation) as a result of the LTA penalty liability reducing by inflation.
    To the extent that one wants a cash element in a portfolio then, this may be one of the least tax-inefficient ways to accomplish that.

    I'd probably crystallise the 860K, and leave the 200K invested in something high risk/high return. If the 200K balloons out of all control then you'll get to keep 140K+ CPI plus 45% of any additional growth at age 75. If the 200K goes belly up then you can still take out 140K (+N years CPI).
    Originally posted by Judwin
    Yup, that's an option too. Go for broke, on the basis that at this point you are gambling more with the government's money than your own. I suspect it is one that many folk will take. I would certainly consider it carefully myself too, if in that position.

    And you never know, in the mean time the Govt might realise how barking mad the LTA is when combined with the AA, and remove it.
    Originally posted by Judwin
    You are in danger of straying into the realms of fantasy. :-)
    Last edited by EdSwippet; 09-08-2018 at 8:57 PM.
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