Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Dipping under the LTA - what should I do?

whenyouresmiling
Posts: 7
Joined: June 27th, 2017, 12:53 pm
Been thanked: 3 times

Dipping under the LTA - what should I do?

#173228

Postby whenyouresmiling » October 12th, 2018, 10:32 am

I have had a SIPP for many years with A J Bell, I now work part time and my employer still contributes into the SIPP, I'm 64.

In the last year or so I have gone over the LTA level, now with the dip in the market this week I have fallen to just within the LTA.

Can I/should I crystallise the SIPP while I can get under the LTA? I don't want to withdraw from it yet and may not need to for a few years, I'd like contributions to continue but this isn't critical - and I realise that the contributions would create another pot somehow that could take me back over the LTA. The IHT protection of funds within the SIPP are valuable to me.

If I could tell A J Bell to put my SIPP into drawdown without withdrawing anything and then carry on as I am now that seems that it could protect my SIPP from the LTA? Is it that simple? Is there a downside?

Any thoughts or guidance would be welcome please!

Urbandreamer
Lemon Quarter
Posts: 3120
Joined: December 7th, 2016, 9:09 pm
Has thanked: 347 times
Been thanked: 1025 times

Re: Dipping under the LTA - what should I do?

#173261

Postby Urbandreamer » October 12th, 2018, 12:23 pm

whenyouresmiling wrote:If I could tell A J Bell to put my SIPP into drawdown without withdrawing anything and then carry on as I am now that seems that it could protect my SIPP from the LTA? Is it that simple? Is there a downside?


I suspect that the market recovery today may make the question moot.

However there are a number of things that you should take into account.
The LTA is calcultaed upon significant events. You starting drawdown would be one. An existing DB pension starting to pay would be another. I'm not in your situation, but if I were then the LTA would be re-calculated in 10 years time anyway.

Another thing is that your anual pension contribution limit would drop to £4k. I'm unsure if your emplyers contributions count towards that limit. I believe that they don't and that the employer could (provided it was considered part of remuneration for your services) pay in what they want. However I wouldn't be too surprised to find that others disagree.

Were you to decide that it makes sense to crystalise your position I believe that you would actually HAVE to take sone taxed drawdown to do so. Of course the amount could and should be a small sum (ie £10). In that way HMRC would assume that you were taking £10pcm and tax accordingly. The tax situation would be corrected next tax year. I believe that A J Bell would charge you a significant sum this year and future years because you move to drawdown.

vrdiver
Lemon Quarter
Posts: 2574
Joined: November 5th, 2016, 2:22 am
Has thanked: 552 times
Been thanked: 1212 times

Re: Dipping under the LTA - what should I do?

#173271

Postby vrdiver » October 12th, 2018, 1:05 pm

whenyouresmiling wrote:If I could tell A J Bell to put my SIPP into drawdown without withdrawing anything and then carry on as I am now that seems that it could protect my SIPP from the LTA? Is it that simple? Is there a downside?

Any thoughts or guidance would be welcome please!

I believe you lose the right to the tax-free PCLS if you haven't taken it within 12 months of becoming entitled to it. I.e. if you put your SIPP into drawdown, you'd have 12 months to take the 25% tax-free lump sum from the amount that you've crystallised.

Whether this is a factor in your situation I don't know, but for others considering a similar action it's a point to consider!

VRD

swill453
Lemon Half
Posts: 7962
Joined: November 4th, 2016, 6:11 pm
Has thanked: 984 times
Been thanked: 3643 times

Re: Dipping under the LTA - what should I do?

#173275

Postby swill453 » October 12th, 2018, 1:18 pm

vrdiver wrote:I believe you lose the right to the tax-free PCLS if you haven't taken it within 12 months of becoming entitled to it. I.e. if you put your SIPP into drawdown, you'd have 12 months to take the 25% tax-free lump sum from the amount that you've crystallised.

With AJ Bell I don't think it's even an option to crystallise all or part of a SIPP and not immediately take the PCLS - it's intrinsic to the process*.

So that would imply liquidating to cash 25% of the pension right now - quite a scary thought in this market.

* - I suppose they might be able to do it on request, but the standard forms don't cater for it.

Scott.

TedSwippet
Lemon Slice
Posts: 577
Joined: November 4th, 2016, 12:57 pm
Has thanked: 134 times
Been thanked: 299 times

Re: Dipping under the LTA - what should I do?

#173277

Postby TedSwippet » October 12th, 2018, 1:31 pm

whenyouresmiling wrote:If I could tell A J Bell to put my SIPP into drawdown without withdrawing anything and then carry on as I am now that seems that it could protect my SIPP from the LTA? Is it that simple? Is there a downside?

It's not exactly simple, but nor it is rocket science, and your logic is running along the right tracks. If you crystallise your pension now you will use some percentage of your LTA, perhaps high 90s from your description. Once you have cleared that LTA hurdle though, you have nothing else relating to it until age 75, by which time it is best to have withdrawn all the real and nominal growth from it so as to avoid a(nother) LTA penalty.

The downside, such that it is, is that on crystallising you release your 25% PCLS, and to 'carry on as now' would mean you would need to invest that in the same funds/assets as they are in now, but outside the SIPP. This exposes them to annual tax on dividends and potentially also capital gains tax, to the extent that you cannot put them into ISAs except over time. As a general rule though, these tax rates would ordinarily be lower than the punitive LTA excess tax rate you would face if you left this money inside the SIPP. This motivates crystallising below the LTA, as you have discerned.

Urbandreamer wrote:Another thing is that your annual pension contribution limit would drop to £4k. ...

Only if you take taxable income in excess of the 25% PCLS. You can fully crystallise a pension, take the 25% PCLS, and put the remainder immediately into deferred drawdown (that is, not drawing from it at all), and retain the full pension annual allowance. Taking the 25% PCLS alone does not trigger the MPAA. Be sure to choose flexi-drawdown and not any form of UFPLS.

Urbandreamer wrote:Were you to decide that it makes sense to crystallise your position I believe that you would actually HAVE to take some taxed drawdown to do so.

Not so where you use flexi-drawdown rather than UFPLS. If you are going to take some taxable income it makes sense to do as you suggest and use a small initial withdrawal to avoid HMRC assuming you will have an annual income of £12MM or whatever, but you don't have to take any taxable income on crystallising a pension.

vrdiver wrote:I believe you lose the right to the tax-free PCLS if you haven't taken it within 12 months of becoming entitled to it. I.e. if you put your SIPP into drawdown, you'd have 12 months to take the 25% tax-free lump sum from the amount that you've crystallised.

As a general rule, 'crystallising' a pension would mean taking the 25% PCLS as a matter of course. Outside of weirdness of some DB schemes I cannot think of any case where a pure DC pension saver would be better off by not taking the full 25% PCLS.

scrumpyjack
Lemon Quarter
Posts: 4811
Joined: November 4th, 2016, 10:15 am
Has thanked: 605 times
Been thanked: 2675 times

Re: Dipping under the LTA - what should I do?

#173287

Postby scrumpyjack » October 12th, 2018, 2:18 pm

TedSwippet wrote:
whenyouresmiling wrote:Outside of weirdness of some DB schemes I cannot think of any case where a pure DC pension saver would be better off by not taking the full 25% PCLS.


Well the pension fund is outside your estate for IHT purposes so if you take the PCLS that 25% then becomes part of your estate. If you don't take it, the whole pension fund remains outside the estate. That could be relevant in some unusual circumstances.

As for going into drawdown, as far as I'm aware you don't need to take a penny of income. I went into drawdown on one of my personal pensions 5 years ago and still have not drawn any income from it. I do have the advantage of enhanced protection so it doesn't matter how large my pension funds become as long as I don't make any payments into them.

Urbandreamer
Lemon Quarter
Posts: 3120
Joined: December 7th, 2016, 9:09 pm
Has thanked: 347 times
Been thanked: 1025 times

Re: Dipping under the LTA - what should I do?

#173290

Postby Urbandreamer » October 12th, 2018, 2:32 pm

TedSwippet wrote:If you crystallise your pension now you will use some percentage of your LTA, perhaps high 90s from your description. Once you have cleared that LTA hurdle though, you have nothing else relating to it until age 75, by which time it is best to have withdrawn all the real and nominal growth from it so as to avoid a(nother) LTA penalty.


As I think I said, that is NOT always the case.
https://www.gov.uk/hmrc-internal-manual ... /ptm088100

We don't know if the OP has an existing DB scheme in addition to his DC scheme(s). Those that do will wind up with a BCE at the time that their DB scheme starts paying out in addition to when they first start into drawdown.

Upon further investigation there would also be a BCE when the OP increases their drawdown by more than 5% (or RPI) for example to use the funds to live upon.

Reading the pensions manual it would seem that the rules were carefully written to prevent the OP's original intent.

*BCE "benefit crystallisation event" requiring a new calculation to see if the life time allowance has been breached.

TedSwippet
Lemon Slice
Posts: 577
Joined: November 4th, 2016, 12:57 pm
Has thanked: 134 times
Been thanked: 299 times

Re: Dipping under the LTA - what should I do?

#173330

Postby TedSwippet » October 12th, 2018, 5:03 pm

Urbandreamer wrote:We don't know if the OP has an existing DB scheme in addition to his DC scheme(s). Those that do will wind up with a BCE at the time that their DB scheme starts paying out in addition to when they first start into drawdown.

We don't. One would hope that the OP would have mentioned this upfront, but perhaps not.

Urbandreamer wrote:Upon further investigation there would also be a BCE when the OP increases their drawdown by more than 5% (or RPI) for example to use the funds to live upon. ... Reading the pensions manual it would seem that the rules were carefully written to prevent the OP's original intent.

BCE 3? That applies only to defined benefits pensions. From HMRC:
Pension entitlements that are not covered by BCE 3
BCE 3 is the only BCE that deals with an increase in a pension in payment, and only scheme pensions are covered. This is because increases in other forms of pension provision (annuities and drawdown) are dealt with for lifetime allowance purposes at the outset, under BCE 1 and BCE 4.

So for DC pension investors, using a market dip, crash, correction or whatever as a way to limbo under the LTA bar and so reduce or eliminate any LTA penalty is an entirely usable strategy. Making lemonade out of lemons for sure, but still worthwhile.

scrumpyjack wrote:Well the pension fund is outside your estate for IHT purposes so if you take the PCLS that 25% then becomes part of your estate. If you don't take it, the whole pension fund remains outside the estate. That could be relevant in some unusual circumstances.

I suppose, but then why crystallise the pension at all under these circumstances? If you plan to use a pension purely as an IHT bypass mechanism, it seems like simply leaving it alone and entirely uncrystallised would be the better course.

whenyouresmiling
Posts: 7
Joined: June 27th, 2017, 12:53 pm
Been thanked: 3 times

Re: Dipping under the LTA - what should I do?

#173421

Postby whenyouresmiling » October 13th, 2018, 7:58 am

Thank you to all who replied for some very useful and helpful information and thoughts.

Im going to think it through but my inclination at the moment is to leave things as they are.

I had not realised that I would need to take the 25% tax free sum out of my SIPP within 12 months, there are costs involved in this and it loses a very simple IHT protection that is important to me. Staying as I am now might mean additional tax is payable for exceeding the LTA but this is some way off, there may be ways to mitigate this at that time and I live in hope that the rules on LTA will change as they seem very odd to me!

Many thanks again to everyone who contributed.

ursaminortaur
Lemon Half
Posts: 6943
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1717 times

Re: Dipping under the LTA - what should I do?

#173673

Postby ursaminortaur » October 14th, 2018, 12:41 pm

whenyouresmiling wrote:Thank you to all who replied for some very useful and helpful information and thoughts.

Im going to think it through but my inclination at the moment is to leave things as they are.

I had not realised that I would need to take the 25% tax free sum out of my SIPP within 12 months, there are costs involved in this and it loses a very simple IHT protection that is important to me. Staying as I am now might mean additional tax is payable for exceeding the LTA but this is some way off, there may be ways to mitigate this at that time and I live in hope that the rules on LTA will change as they seem very odd to me!

Many thanks again to everyone who contributed.


It probably won't happen in this budget but there is already talk about lowering the LTA again

https://www.thetimes.co.uk/edition/news/tory-rebels-vow-to-block-hammond-pension-raid-xzl6f32qv

The recriminations began after Mr Hammond briefed reporters on the sidelines of the IMF annual meeting in Bali that he intended to cut the £40,000 annual saving limit or the £1 million lifetime allowance for a total pension pot at some point. Asked about reforms to pensions tax relief, Mr Hammond said: “My general feeling on pensions tax relief is that it is eye-wateringly expensive.” The tax break costs the Treasury £39 billion a year.

Whitehall sources have played down the chance of the change coming this month, although the chancellor insisted that nothing was being ruled out before the October 29 budget. Tory MPs have seen off similar pension-raid attempts in previous budgets.

Howard
Lemon Quarter
Posts: 2178
Joined: November 4th, 2016, 8:26 pm
Has thanked: 885 times
Been thanked: 1017 times

Re: Dipping under the LTA - what should I do?

#174156

Postby Howard » October 16th, 2018, 2:44 pm

TedSwippet wrote: If you crystallise your pension now you will use some percentage of your LTA, perhaps high 90s from your description. Once you have cleared that LTA hurdle though, you have nothing else relating to it until age 75, by which time it is best to have withdrawn all the real and nominal growth from it so as to avoid a(nother) LTA penalty.


Could I ask a subsidiary question arising from your comment above, which hopefully is not too off-topic and may be interesting to readers who are a little older?

I’m 71 and lucky enough to have two Defined Benefit pensions from previous employers as well as a SIPP. These came just below the headroom limit when I took the Tax Free lump sums out around 15 years ago. I believe this limit was higher than it is now.

The SIPP provides a valuable IHT benefit which I am hoping to pass on to my Son after I have gone, however, I am taking a taxed income from it to minimise any Pension tax implications at age 75.

I understand when I’m 75 my SIPP provider, AJ Bell, will have to do a headroom check again. Assuming the legislation doesn’t change, will this be whatever the limit is in 4 years, or will it have some relationship to the higher limit years ago when the Sipp was crystallised?

Thanks in advance if you can shed some light on this.

Howard

TedSwippet
Lemon Slice
Posts: 577
Joined: November 4th, 2016, 12:57 pm
Has thanked: 134 times
Been thanked: 299 times

Re: Dipping under the LTA - what should I do?

#174188

Postby TedSwippet » October 16th, 2018, 4:45 pm

Howard wrote:I’m 71 and lucky enough to have two Defined Benefit pensions from previous employers as well as a SIPP. These came just below the headroom limit when I took the Tax Free lump sums out around 15 years ago. I believe this limit was higher than it is now.

Puzzled. The Pensions Lifetime Allowance did not exist until "Pension Simplification" -- yeah, right! -- in 2006.

That said, in general the Lifetime Allowance consumption works on percentages. Crystallising a pension uses up a given percentage of your LTA, but the remaining unused percentage part becomes worth less (or more) in actual £ terms as the LTA reduces (or increases). This article looks like it might get close to covering what you need to know. It's a bit elderly, so the numbers will (of course) be off, but you should be able to extract the gist:

https://www.retirement-planner.co.uk/23 ... wance-test

As for pre-2006 pension withdrawals and interaction with the LTA, I found this. Again elderly and the numbers are off, but might be useful:

https://www.moneymarketing.co.uk/case-s ... allowance/

Unless disqualified, you might want to look into taking Fixed Protection 2016, as there might be some mileage in that for you. I think you may now be too late for Fixed Protection 2014.

Aside from this, Defined Benefits pensions are really not my thing at all. I don't have one and never have. And pre-2006 pension rules are things I have never had to try and untangle either. So, sorry, I can't really be much more definite -- all I could do is speculate, and that might well be worse than useless. Definitely take all of this with a large pinch of salt, then. Perhaps someone with more direct experience in this area will chime in later.

The LTA really is a retirement planning nightmare, and a self-defeating one at that. One might have hoped that by now the government would have seen sense and given it a well-deserved bullet to the head, but not so far.

Howard
Lemon Quarter
Posts: 2178
Joined: November 4th, 2016, 8:26 pm
Has thanked: 885 times
Been thanked: 1017 times

Re: Dipping under the LTA - what should I do?

#174211

Postby Howard » October 16th, 2018, 5:56 pm

TedSwippet wrote:
Howard wrote:I’m 71 and lucky enough to have two Defined Benefit pensions from previous employers as well as a SIPP. These came just below the headroom limit when I took the Tax Free lump sums out around 15 years ago. I believe this limit was higher than it is now.

Puzzled. The Pensions Lifetime Allowance did not exist until "Pension Simplification" -- yeah, right! -- in 2006.



Ted,

Thank you very much for the information. As a 71 year old, forgive me, I think I crystallised my SIPP in late 2006 - not 15 years ago when I first "retired". Must be getting old. :D

So your comments are very valid and appreciated.

regards

Howard


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 6 guests