When to crystallise pension funds in relation to the Lifetime Allowance

[Jim9999]

I have a question in relation to the Lifetime Allowance (LTA) and the timing of the crystallisation of pension funds.

I am 60 and have pension funds that are just exceeding the LTA - most of this is in Defined Contribution funds. Assuming that these funds will continue to grow, then so will my tax liability under the LTA up until the age of 75 Does it therefore make sense to crystallise ALL my DC funds up to the LTA limit as soon as possible, taking the 25% tax free lump sum and putting the remainder into drawdown - and then take off any growth from the funds in drawdown up until the age of 75? This means that any growth in the funds can be taken at my 20% tax rate rather than leaving the funds uncrystallised and paying 25% plus marginal tax rate on any continuing growth in the funds.

This strategy would provide a large sum of tax free money which I don't really need at this time.
Therefore, should I adopt an alternative approach to phase the crystallisation of the funds year on year thereby producing smaller but regular amounts of tax free money, whilst the remainder is moved into drawdown. Assuming that the funds grow, this would probably result in a higher overall LTA tax liability at 75 though, as the growth in the uncrystallised funds would be subject to LTA tax.

Your thoughts are welcome!

[TUK020]

Hi Jim,
I am not quite in the same position. I have a DB scheme, which accounts for about 70% of my pension assets, and then the remainder in a SIPP, predominantly in HY shares & ITs.
I am approaching LTA, so pension saving is much less attractive than it was.

Soon after I turned 55, there was a market correction, and I crystallised all on my SIPP, took 25% tax free, and left the rest in a drawdown account, but otherwise untouched.

Reasons:
a) I see the capping of the tax free element as a likely easy target in the future for governments, so I wanted to get my tax free lump sum out before that happened.
b) Crystallisation is a one time event, so you want to time it for adverse market conditions
c) I have been busy recycling my TFLS into the same investments in my ISA, and also funding my kids ISAs (their future house deposits). So I have wouold up with the same funds, also in a tax free wrapper, but one where I won't get taxed on withdrawal.
d) As long as you don't take taxable benefits from your drawdown account, then you can keep contibuting to a SIPP (it goes into a different account with the same provider)

Overall, I have very little trust that the exchequer won't go and screw around with the pension rules, so I took the very simple view that the sooner I got my hands on the money out of the pension scheme the better. You may not be as cynical as me.

[hiriskpaul]

You are probably better off crystallising the whole lot now, even though you don't really need the cash. The PCLS is only tax free up to 25% of the LTA. This page has some of the background: https://www.pruadviser.co.uk/knowledge- ... free-cash/

Even if you end up paying some tax on the investment of the lump sum, I doubt it would be as much as you may lose on exceeding the LTA, which will be tested against on every crystallisation.

p.s. you should probably draw down each year as well, but only if you can stay within basic rate tax. The LTA should, under current legislation, grow each year according to inflation.

[Jim9999]

Thanks for your responses - I have another question on this regarding when to crystallise pension funds

The LTA will increase with CPI each year - so if you have say 15 years until your final benefit crystallisation event at 75, the LTA could have risen to over £1.3 million (say assuming CPI increase of 2% year on year). This could have a big impact on whether to decide to crystallise funds now and take out the growth to avoid the current £1.03M LTA threshold, or leave the funds alone to hopefully grow on the assumption that the LTA at 75 will have risen significantly.....

Thoughts.....is the Government likely to change its mind in linking the LTA to CPI!!

[pochisoldi]

Thanks for your responses - I have another question on this regarding when to crystallise pension funds

The LTA will increase with CPI each year - so if you have say 15 years until your final benefit crystallisation event at 75, the LTA could have risen to over £1.3 million (say assuming CPI increase of 2% year on year). This could have a big impact on whether to decide to crystallise funds now and take out the growth to avoid the current £1.03M LTA threshold, or leave the funds alone to hopefully grow on the assumption that the LTA at 75 will have risen significantly.....

Thoughts.....is the Government likely to change its mind in linking the LTA to CPI!!

It's not a question of if, it's a question of when will the government (1) decide to cancel the CPI linkage ab initio, or (2) substitute next year's CPI increase with a one off change, and 0% thereafter.

PochiSoldi

[hiriskpaul]

Thanks for your responses - I have another question on this regarding when to crystallise pension funds

The LTA will increase with CPI each year - so if you have say 15 years until your final benefit crystallisation event at 75, the LTA could have risen to over £1.3 million (say assuming CPI increase of 2% year on year). This could have a big impact on whether to decide to crystallise funds now and take out the growth to avoid the current £1.03M LTA threshold, or leave the funds alone to hopefully grow on the assumption that the LTA at 75 will have risen significantly.....

Thoughts.....is the Government likely to change its mind in linking the LTA to CPI!!

Over 15 years I am sure that pension legislation will not stand still. You just have to plan for what you know, but keep up to date with changes and react accordingly. You don't know what growth you are going to get over 15 years either, so keep an eye on that as well. It is not at all inconceivable you will not get any growth, or just track inflation, even with income reinvested and no withdrawals.

If you can make any tax free withdrawals within your personal allowance, I would certainly do that.

[ursaminortaur]

Thanks for your responses - I have another question on this regarding when to crystallise pension funds

The LTA will increase with CPI each year - so if you have say 15 years until your final benefit crystallisation event at 75, the LTA could have risen to over £1.3 million (say assuming CPI increase of 2% year on year). This could have a big impact on whether to decide to crystallise funds now and take out the growth to avoid the current £1.03M LTA threshold, or leave the funds alone to hopefully grow on the assumption that the LTA at 75 will have risen significantly.....

Thoughts.....is the Government likely to change its mind in linking the LTA to CPI!!

Over 15 years I am sure that pension legislation will not stand still. You just have to plan for what you know, but keep up to date with changes and react accordingly. You don't know what growth you are going to get over 15 years either, so keep an eye on that as well. It is not at all inconceivable you will not get any growth, or just track inflation, even with income reinvested and no withdrawals.

If you can make any tax free withdrawals within your personal allowance, I would certainly do that.

Although it didn't happen in this years budget it was expected that Hammond would do something to cut the cost of pensions

https://www.dailymail.co.uk/news/article-6270709/Philip-Hammond-plots-raid-pension-pots-says-tax-breaks-eye-wateringly-expensive.html

Phillip Hammond has given his strongest signal yet that he is preparing to raid pension pots to fund extra health spending.

Speaking on a trip to Bali, the Chancellor said that tax breaks given to those saving for retirement had become ‘eye-wateringly expensive’.

The comments fuelled speculation that he is planning yet another attack on pensions as he scrabbles for cash in this month’s Budget.

It didn't happen in this budget but it is just a matter of time and stopping the LTA increases is an easy change for the Chancellor to make.
He might even lower it back to £1 million or even lower.

And the lifetime allowance – the amount that can be saved tax free over a lifetime – has been reduced from £1.8million to £1million. This is also under threat.

If, as is expected tax receipts fall after brexit, such moves might well be seen as a simple way to raise extra money by the government.