Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • markw12
    • By markw12 6th Aug 18, 2:13 PM
    • 9Posts
    • 0Thanks
    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 2
    • MK62
    • By MK62 9th Aug 18, 1:37 AM
    • 197 Posts
    • 139 Thanks
    MK62
    170k of this 200k is above the LTA. It is worth 158k after LTA penalty if crystallised today.
    Can you explain your maths here......with a quick reckon up I get much different figures to you.....how did you work out that 170k of the 200k is above the LTA?

    EDIT....I see now....I think you are posting more in answer to haf63 from post#4, rather than the OP's original post, whereas my post#14 (and I believe Judwin's post#16) were in response to the OP's post#13.

    The two cases are quite different.........
    Last edited by MK62; 09-08-2018 at 1:48 AM.
    • MK62
    • By MK62 9th Aug 18, 9:37 AM
    • 197 Posts
    • 139 Thanks
    MK62
    170k of this 200k is above the LTA. It is worth 158k after LTA penalty if crystallised today. Long term risk-free interest rates are about the same as inflation currently, so 2.5% over 10 years would bring 158k back to 200k. By comparison, if left entirely idle in a pension, the uplift in the LTA decreases the LTA penalty by inflation each year, equivalent to increasing what this sum is worth by the same amount. After 10 years, the LTA penalty disappears so that the full 200k can now be extracted.

    I'm still not sure I follow your logic on this, even using the case in post#4 of 1M in pot1, and 200k in pot2.

    If you crystallised the 1M pot today, you'd use 97.08% of the 1,030,000 LTA (1,000,000/1,030,000), leaving just 2.92% of the LTA for use in future years.
    How could you then extract the full remaining 200k 10years later with no LTA charge?
    • Judwin
    • By Judwin 9th Aug 18, 11:08 AM
    • 206 Posts
    • 87 Thanks
    Judwin
    But it gets better. If this 200k is not crystallised but also not left entirely idle, but instead invested in anything offering a positive risk-free interest rate, no matter how slight, you effectively get an inflation uplift plus that interest. Some or all of the gain above inflation might fall into a 55% LTA penalty tax bracket, but that still leaves you ahead relative to crystallising and paying the LTA penalty now.
    Originally posted by EdSwippet

    Yes, but say we leave the 200K not crystallised and invested in something "risky" that returns CPI+5% p/a. The LTA increases by CPI, so we can ignore CPI from both LTA and growth sides of the equation. After 10 years the 200K is worth 325K. You've only got 170K LTA remaining, so 155K is subject to the 25% LTA tax. Hence your 200K if left invested is worth 286K after 10 years.

    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.
    Originally posted by EdSwippet

    I've been pondering that one. If we accept that the balanced portfolio in drawdown needs to have some very low risk/return cash, plus some high(er) growth/income giving higher risk assets, is it better for the low or high risk stuff to be inside the LTA affected pension, or outside?


    If you leave the low risk, low growth stuff in the pension, then the LTA increasing by CPI each year may eventually overtake it and allow you to get it all out LTA free. However that means the high(er) risk stuff is outside the pension, which means the growth is potentially subject to CGT/IT if you can't get it into ISA's quickly enough.


    Or conversely you leave the high risk stuff inside the pension, and keep the low risk outside. Less CGT/IT liability, but LTA remains an issue. The plus side is that you can crystallise during any market crashes if/when they occur and potentially get more of your money out LTA free.



    I *think* it's probably better for the high risk to be inside the pension up until you've actually crystallised 100% of the LTA, but I'm not sure.

    You are in danger of straying into the realms of fantasy. :-)
    Originally posted by EdSwippet
    You're the one that brought up Alice Through the Looking Glass :-)
    • EdSwippet
    • By EdSwippet 9th Aug 18, 11:38 AM
    • 758 Posts
    • 722 Thanks
    EdSwippet
    I'm still not sure I follow your logic on this ...
    Originally posted by MK62
    You're right, and the maths is faulty. I managed to conflate details from the original post with numbers from a later and unrelated question, as you suggested earlier.

    I have removed the offending section. Thanks for persisting.
    Last edited by EdSwippet; 09-08-2018 at 11:49 AM.
    • MK62
    • By MK62 9th Aug 18, 6:07 PM
    • 197 Posts
    • 139 Thanks
    MK62
    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 by inflation as a result of the LTA penalty liability reducing by inflation.
    Actually it doesn't - the LTA charge won't decrease in line with inflation.....the LTA is more ingenious/insidious than that (delete as you feel appropriate ).
    Don't take my word for it though, run some numbers and check.....

    If the LTA in 10 years is 1320000 (having increased by 2.5% pa) and you still have the 200000 in cash sat in uncrystallised pension, (having crystallised 1000000 this year with an LTA of 1030000), what would the LTA charge be if you crystallised the 200000 after said 10 years?
    • EdSwippet
    • By EdSwippet 9th Aug 18, 8:54 PM
    • 758 Posts
    • 722 Thanks
    EdSwippet
    If the LTA in 10 years is 1320000 (having increased by 2.5% pa) and you still have the 200000 in cash sat in uncrystallised pension, (having crystallised 1000000 this year with an LTA of 1030000), what would the LTA charge be if you crystallised the 200000 after said 10 years?
    Originally posted by MK62
    Crystallise the 200k now would be 30k below the LTA and 170k over the LTA, for a 42.5k LTA penalty. Leaving the 200k preserves 30k/,1030k = 2.9% of the LTA. In 10 years, 2.9% of 1,320k is 38,447, so that amount is below the LTA and 161,553 above for a 40,338 LTA penalty. 40,338 is less than 42.5k.

    So the LTA penalty doesn't decrease in line with inflation, agreed. It does decrease with inflation though, just more slowly. On the OP's numbers you would (I think!) get a better outcome, as more than just a minimal couple of percent of the LTA is retained and the LTA 'overhang' is a lot smaller.

    "Insidious" probably covers this just fine. I doubt anyone who put this stuff in place was "ingenious" enough to figure something like this out. Occam's razor.

    ( Now please mark my homework :-) )
    Last edited by EdSwippet; 09-08-2018 at 8:59 PM.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

152Posts Today

1,340Users online

Martin's Twitter
  • Ta ta... for now. This August, as I try and do every few yrs, I'm lucky enough to be taking a sabbatical. No work,? https://t.co/Xx4R3eLhFG

  • RT @lethalbrignull: @MartinSLewis I've been sitting here for a good while trying to decide my answer to this, feeling grateful for living i?

  • Early days but currently it's exactly 50 50 in liberality v democracy, with younger people more liberal, older more? https://t.co/YwJr4izuIj

  • Follow Martin