Deliberately losing FP2016 after BCE 1 "for the win"?

[JohnB]

@Jabd2001 Mike Rawson in 7Circles tried to work through different crystallisation methods this month, with DBs kicking in but I was unconvinced by his staggered withdrawl arguments. Crystallising it all ASAP and paying no/SRT tax on the lump sum dividends seems best, and delaying the drawdown until its gone. Of course the OP says they are already hitting the HRT threshold on unsheltered dividends alone, but that's a nice problem to have

I'm on target to brush the LTA by 57 with a civil service DB at 60 that reduces by 5.25% a year if taken early. But with the DB index-linked, I hope the numbers will be easier to project for the latter. And of course LTAs might not survive the Budget.

[TedSwippet]

It is indeed something I need to try to understand as I am likely to be in similar position at some point, but complicated by the major part of the LTA being taken by a DB pension, and I do not want to pay any LTA excess charge from the DB. By your reasoning the best course of action is to crystallise as early as possible after I draw the DB pension and then continue to withdraw any (nominal?) growth.

Honestly, I have enough trouble getting my head around my own purely DC situation, so I hesitate to venture a guess at what courses of action might be suitable when DB is added to the mix. My hunch is that crystallising once these two combined hit the LTA would be around optimal, but that is purely a guess based on the logic already explained (that is, tax rates in pensions that have grown above the LTA are always higher than tax rates outside a pension).

Although a further complication arises if the SIPP does not need to be spent and is intended for beneficiaries.

Yup, that's another large complication. Now you have to factor in your chances of survival beyond age 75, along with all of the other known unknowns and any unknown unknowns. It's very hard to accommodate all of this into any form of plan.

Fortunately for me I don't have to contend with that, since I have no children or other needy relatives, and my spouse has her own more than adequate pension. My own pension is planned for spending, then. I may or may not get through it all, but I'll try.

[TedSwippet]

Surely you can avoid all uncertainty over the numbers by selling at the time of your choosing, and then crystallising the cash, which will remain unchanged during the process. But being out of the market is a bigger risk (and having 2 sets of dealing charges) seems more annoying than the slim risk 55% tax on a few% of your pot.

Thanks for the note. This is probably going to be the most straightforward way of managing this transition, I think.

Because I am handling three separate SIPPs sequentially I can reasonably easily neuter some out-of-market risk on the PCLS part by front-running part of the PCLS re-investment by temporarily using a bit of ready cash, perhaps combined with use of some short-term options. My SIPP providers will move the drawdown element 'in specie', so no out of market risks with these. Any extra dealing charges will be a bit of a nuisance, but small in comparison to any losses to the 25% LTA penalty. And handling three approximately equal sized SIPPs in stages means that as each is dispatched through crystallisation, market growth has 1/3 less impact in advance towards the LTA than before any were crystallised.

It would be nice to squeeze a couple of hundred quid extra out of the taxman by cycling some cash through any remaining LTA percentage after crystallising as originally posited -- partly just as revenge for having constructing such a god-awful set of rules and restrictions around the LTA itself -- but the effort and stress of doing that might turn out to be more than it is worth.

[Chrysalis]

@johnb, your situation sounds very like mine, although the relative size of the SIPP and DB may be different (my SIPP is less than £200k). I think I may be very close to LTA already and I am still contributing to the DB pension. I’m 52.
I really find it hard to get my head around and will look at the article you suggest. About the only decision I’ve made is that I should wait until I’m 60 so that I can take the DB pension unreduced and also pay any LTA charge from the SIPP rather than the DB. This is based mainly on my psychological preference for maximising the DB pension, I haven’t done a full calculation to see if it is the optimal solution with regards to the money. The SIPP is going to be completely surplus to requirements, as far as I can see. I have also recently (and reluctantly) decided that I will leave the DB scheme soon. (Decision tied up with other work related decisions)
I do however have an array of other options, from taking the DB pension early and reduced, to crystallising the SIPP at 55, etc etc. If I wait till 60, not sure whether I should immediately crystallise everything, or just let it run on until 75.

At the risk of hijacking Teds thread, I would welcome any thoughts.

[JohnB]

I'm 50, with 80% SIPP, 20% DB, and all my thoughts are tempered with fact that I won't be doing anything until 55 (57?) and by then the rules could have changed. As I'm no longer working the only decision is whether to put the £2880 each year, which I do as I project 95% LTA usage, but who knows how Mr Market will change that.

Strategies like converting SIPP to cash to slow growth wouldn't help you, as you are already de-risked with the large DB, so you might as well push for SIPP growth and its IHT advantages. Better 45% of something than nothing.

[Chrysalis]

Ha yes, every so often I take this problem out, ponder it for a while, and then realise I’m not 55 yet and put it back in the ‘too difficult’ box.
The decisions I could make now include taking my DB pension (very much reduced and currently not needed, so the only advantage would be to dramatically shrink the %LTA and then I could max out the SIPP, subject to earnings, with impunity).
I also have to decide whether to add to the SIPP each year. This year I decided not to (the decision is complicated by trying to predict how much AA will be taken by my DB).
I acould change the AA in my SIPP, currently about one third equities.

Btw I think there is close to zero chance of LTA being abolished in foreseeable future, but of course, anything could happen. I look back over the last 10 years and realise any strategy designed on today’s tax bands is going to be out of date very soon! Which brings me full circle to my original post on this thread, which is not to sweat the tax too much! (Though appreciate that Ted has to make decisions now on current rules)

[TedSwippet]

Mike Rawson in 7Circles tried to work through different crystallisation methods this month ...

Thank you for the pointer to this article. I just read it. Very interesting.

One immediate observation is that in order to get his staggered withdrawals to run over a 20-year period, Mike has apparently had to effectively abandon his protected LTA (because the standard one will overtake it within that period). That seems to waste a chunk of benefit that is captured if you do what I plan and crystallise the whole pension as soon as it reaches the protected LTA. My tax-free element should be 1/4 of £1,250k, making it a full £55k more than 1/4 of the current standard LTA. The other advantage my plan has is that there is no LTA penalty at all in it anywhere. Conversely, Mike's has a chunky LTA penalty at age 75. The quid-pro-quo is that taxable withdrawals under my plan will have to be a fair bit higher than under Mike's if they are to fully drain all the growth in the drawdown part before age 75, and that will push the tax bill on those higher, perhaps into another bracket.

It's by no means intuitively clear to me which approach wins out. My gut feel is that capturing the LTA protection rather than 'abandoning' it should produce an overall win, but sometimes these things surprise.

I may try spreadsheeting both approaches when time permits, to see what the difference is and in which direction. Unfortunately there are many, many assumptions to make here that will probably prove invalid either in the long term or in the short term. Not least because pensions tax rules seem to change more regularly than some folk change their underpants. The government's view for some time now has been that there is no policy which cannot be paid for by simply squeezing pension saving further.