Crystallisation / Drawdown Options

[Blagdon]

I have 6 different DC pensions (GPPs + SIPPs) which together add up to just above my remaining fixed protection lifetime allowance. We are maximising ISAs and wife's pension contributions, but still have a reasonable amount of taxable unprotected investments, such that we are paying tax on interest and dividends each year, despite using both of our allowances. We are not fully using CGT allowances. Both myself and my wife are still working part-time. I have been using all of my 20% tax band, but my wife does have 20% tax band unused. I am aware of VCTs and EISes and have used them. I am 57 and my wife is 55. If it makes any difference the GPPs have pretty advantageous charges - I used to work for a bigger employer with negotiating clout. I have clear 'rules' on not having everything in one basket - ie I would not want a single pension plan.

My strategy to date has been to crystallise enough from one of my pension plans to keep me just below higher rate income tax - ie to maximise the use of my 20% tax band. However, this is not enough to stop my pensions plans from starting to exceed my lifetime allowance.

Option 1 - continue as is, accepting that I will increasingly exceed my fixed protected lifetime allowance.

Option 1B - as option 1 but crystallise more and pay 40% tax.

Option 2 - crystallise all or at least most of my pensions, withdrawing the 25%+ tax free cash and then draw down up to my 20% tax band each year. Means the 25%+ tax free cash sum will have to be invested in taxable unprotected investments. Then I think the only issue will be assessing growth at 75 years old has not exceeded the rate at which I am withdrawing.

Option 2B - as option 2 but withdraw more and pay 40% tax.

Questions...
1. Any corrections to my thinking?
2. Other options?
3. I think option 2 is usually recommended, but is it really that clear cut?

Grateful for any input as I suspect that I may be putting off the aggro of having to sort out re-investing the 25%+ tax free lump sum.

[Chrysalis]

I’ll leave others to help with the maths around LTA excess charge vs income tax...
Couple of questions.
Why aren’t you using your CGT allowances? Not big enough gains or just not doing the transactions?
What are your objectives for the money in your pensions? What would you do with the tax free cash if you crystallised the whole lot?

[TedSwippet]

I'm in a similar situation, and I chose your option 2, with a move to 2B later and before age 75. In practice, I am crystallising my pensions in chunks as growth in them closes in on the LTA, so that I overrun the LTA by as little as possible. They are currently 67% crystallised in total, with headroom for just 8% future growth on the remaining uncrystallised element before I hit the LTA, so perhaps around a year or two to completion.

My logic is simply that the 55% LTA rate I would pay on withdrawal of gains and income occurring inside the SIPP exceeds by a decent margin both 32.5% income tax on dividends and 20% capital gains tax that I would pay on gains occurring outside the SIPP. There is an offset to these superficial figures that occurs from letting gains roll-up inside the SIPP tax-deferred, but even on conservative projections it seems like I would be 97 years old before the advantage of tax deferral overcomes the LTA penalty tax rate. More likely, I will be long dead before that could happen, not least because my projections assume 20% capital gains tax annually, whereas in practice I hold tracker funds long-term and so will be able to defer this for an extended period (for a bit of extra tax-deferred roll-up).

My strategy for the 25% PCLS has been to sell stocks in the SIPP, and buy the exact same assets outside -- it's not actually that much 'aggro', when you get down to it, just a bit more spreadsheet record-keeping. That way, the SIPPs become gilt-heavy, and this should slow long-term growth there somewhat and so help to mitigate the withdrawals I will need to make to avoid any LTA penalties at age 75. It's also more efficient to hold stocks rather than gilts outside the SIPP, since stocks provide most of their return as capital gain whereas gilts provide most of theirs as dividends, and in unsheltered accounts capital gains are taxed less heavily than dividends. And it helps with using capital gains tax allowances, too. Optimally, the 25% PCLS can transition into an ISA over time.

The trick to avoiding the LTA penalty at age 75 is to withdraw enough by age 75 so that all the nominal growth is taken. In simple terms, again 40% tax paid on above-LTA withdrawals before age 75 is lower than 55% on above-LTA withdrawals afterwards. So option 2B at some point. Doesn't have to be immediate, but you do want to leave yourself enough time before age 75 to draw the nominal growth without going into the 60% or 45% tax bands, at least to the best of your ability.

For me, the inheritance tax bypass feature of a pension is not a consideration. You might want to bear it in mind though, depending on your circumstances. That might argue for a different approach.

Anyway, that's my thinking on this. I fully expect the whole LTA nonsense to be uprooted at some point in the future, but for now we can only plan for the knowns, not the unknowns (and certainly not the unknown unknowns). And even if/when uprooted, I get the sense it will be replaced with something more troublesome rather than less so. That's certainly been the trajectory of pension tax rules over the past decade and a bit.

[Blagdon]

Why aren’t you using your CGT allowances? Not big enough gains or just not doing the transactions?
What are your objectives for the money in your pensions? What would you do with the tax free cash if you crystallised the whole lot?

Good questions...

1. Not big enough gains - because I have used the allowances in the past

2. I don't need the money at the moment - so investment and rolling up gains/dividends.

[Blagdon]

Anyway, that's my thinking on this.

Many thanks - that is really helpful. I probably need to start crystallising a pension plan at a time.

Inheritance tax feels a long way off at 57 and the kids are going to get more than enough money anyway, especially as we haven't yet inherited from our parents (when we do we may well pass it straight on through via will variation).

[BusyBumbleBee]

Inheritance tax feels a long way off at 57 and the kids are going to get more than enough money anyway, especially as we haven't yet inherited from our parents (when we do we may well pass it straight on through via will variation).

Don't forget that any money left in a pension when you pop it, is free of IHT.

[TUK020]

Questions...
1. Any corrections to my thinking?
2. Other options?
3. I think option 2 is usually recommended, but is it really that clear cut?

Grateful for any input as I suspect that I may be putting off the aggro of having to sort out re-investing the 25%+ tax free lump sum.

Blagdon,
I think you may need to separate the issues of crystallisation and drawing down/tax rates.

I am also in a position of trying to juggle LTA and tax rate thresholds.
A big portion of my pension is a DB scheme, which I am not touching, as I am still working.

I chose to crystallise my SIPP when I turned 55 for 2 reasons:
- I did so on a market dip, and so used up less of my LTA
- I withdrew the 25%TFLS on the suspicion that limiting this might be an easy target for a Chancellor with limited pots to raid.
I have been feeding the TFLS money into my + family ISAs.

I haven't drawn any taxable benefits from my pensions, and intend to manage the drawdown from my SIPP to stay just within the lower rate tax band, and that will take priority over any drawings from my ISA.

tuk020