Reaching the Life Time Limit

[Minesadouble]

I'm now tantalisingly close to my life time limit.
I have no particular need for the cash lump sum or to drawdown at present.
However I'd like to avoid the 55% tax for breaching the LTA and I'm also concerned that Government may find a way to revoke the 25% PCLS (unlikely I know).
My strategy is to take the 25% cash and reinvest it (probably in the same shares but obviously outside the SIPP).
I'm assuming I should take a further drawdown though to prevent my dividend stream immediately breaching the LTA again.
I'm interested to know how others have tackled this and would welcome your comments.

MAD

PS I've approached Hargreaves Lansdown about taking an in specie transfer of shares as the 25% cash lump sum but they won't allow this, so I do recognise that there will be fairly substantial frictional costs in selling within the SIPP and repurchasing outside it, stamp duty being the main one but also HL fees both ways and spreads.

[TedSwippet]

If you take the 25% PCLS and move the remainder of your pension into 'deferred drawdown', this 'crystallizes' a given percentage of your LTA. So assuming you hold no protections, if you took £250k PCLS and deferred drawdown on £750k, you crystallize 100% exactly of the LTA.

There would be no need to take further drawdowns immediately. Once you've crystallized for the LTA, your next 'benefit crystallization event' is at age 75, when the drawdown element is again tested against the LTA. By this point, though, you would normally have drawn down enough of it at normal income tax rates to duck under the LTA penalty. And if not, at worst draw a big chunk out the day before your 75th birthday -- income tax on that is unlikely to exceed the LTA penalty rates.

With that said, what you should do depends on circumstances you haven't revealed. Are you still employed? If yes, still paying into a pension, with/without salary sacrifice and/or company match? If not employed, are you nevertheless contributing to a SIPP or other pension using MPAA? Do you have any lifetime allowance protections? And critically, are you aged over 55?

As for how I'm handling it... my SIPP will grow inexorably through dividends and capital gains to (hopefully) reach my LTA -- I have FP2016 -- in around three to five years. At that point, I will crystallize all of it, use 100% of the LTA, defer drawdown on the non-PCLS part, and then make sure I draw enough from that before age 75 to again avoid LTA penalties. I am over age 55, not working, and not contributing to any pension schemes (because of holding FP2016). My non-pension savings should fund me until my pension grows to my protected LTA level.

[Minesadouble]

Ted

Thanks very much for response.
I'm confident that this is what I should do.
The point I'm pondering is that once I've taken the 25% cash lump sum, then the next dividend I receive would push me over my LTA.
If I was to take the cash lump sum and then say another £50K OR £100K that would allow the remainder to grow beneath the LTA, in other words it would give the remainder some head room.
Otherwise I get clobbered with the 55% tax?

MAD

[TedSwippet]

Once you've 'crystallized' your pension for LTA purposes -- that is, taken the 25% PCLS and moved the remainder to deferred drawdown -- you don't need to make any further withdrawals to remain under the LTA. Well, at least, not for some years, maybe decades. After your initial crystallization, there are no more LTA tests until you reach age 75.

There's an example of this, "Simon", on page 2 of this paper from Scottish Widows. The numbers may be different for you, but the principle is the same. Note that this means that in practice you should never need to pay any LTA penalty at the age 75 test. In (almost) every circumstance it will be better to draw down from the pension at normal income tax rates, even in higher brackets, rather than pay the LTA penalty.

The full gory detail of all of the 'benefits crystallization events' can be found in this paper from Prudential. The relevant ones for you (and me) will be BCE1 when the pension reaches the magic £1mm (or higher if protected), and then BCE5A on reaching age 75. Between these two, the drawdown part of the pension can grow unmolested to any amount; it's just that it needs to be trimmed back to the relevant LTA test value before BCE5A, in order to avoid an LTA penalty.

Oh, and just to be clear (or maybe not!), the LTA tax is not always a flat 55%. It is a 25% penalty, and then normal income tax on the balance. If you are in the 40% band, this is 25%+0.4*75%=55%. If in the 20% band though, it's 25%+0.2*75%=40%. If in the 45% band, 25%+0.45*75%=58.75%. And out at the (rather unlikely?) extreme, in the personal allowance phaseout and effective 60% band, 25%+0.6*75%=70%. So as you see, the outcome here depends a lot on what tax rate/bracket you inhabit in retirement and/or drawdown.

Basically, a quagmire. Pension "simplification", eh?

[Minesadouble]

Ted

Now I get it!
BCE1 and then BCE5A
In view of these crystallisation events then I will take the 25% cash and leave the remainder to roll up, reinvesting dividends.
This strategy means I can access the PCLS and keep the remainder outside of my estate, at least until I reach 75.
That is very helpful, thank you.

MAD