LTA and Fixed Protection 2016

[bdr1000]

Hi All

Seeking some advice to help my understanding of the Lifetime Allowance and Fixed Protection 2016.

Specifically given my circumstances, the chances of FP2016 being of value to me, or not.

age 43 today
pension access from age 58 so 15 years to go
todays pension value £590k
todays LTA £1m (assume will be inflation adj)
previously applied and received FP2016 so fixed LTA at £1.2m
have not contributed to pension since March 2016 to protect FP2016

Question:
Is FP2016 (LTA £1.2m) of any value to me given that it is not inflation adjusted versus standard LTA of £1m which I assume would be inflation adjusted over next 15 years till I reach age 58?

Assuming a 2% per annum inflation adjustment on the standard LTA would mean at age 58 my LTA would have grown from £1m today to £1.35m vs FP2016 at £1.2m.

Is this correct? If so I might as well discard FP2016 and regain flexibility to continue contributing to my pension with tax rebate benefits. Appreciate that should I do this FP2016 is lost forever, and I may find myself above LTA at age 58 and be due punative tax on the amount over LTA at crystalisation. My planned contributions are relatively small, more to offset (on Net Worth basis) income tax I am paying from rental income I am generating from my primary residence whilst I am travelling abroad for next few years.

Appreciate your wisdom / comments.

bdr

[TedSwippet]

Your understanding is correct. The government allows inflation to erode the pension protections, but not the standard LTA.

You don't say what investments you hold in your pension, but on first blush it looks to me like you will handily pass both the non-inflated protected LTA and the inflated standard LTA in 15 years. Assuming 7% growth, comprising 2% inflation and 5% real, your current £590k alone will grow to £1.628mm.

On that basis, you probably want to drop protection and make additional contributions only if you can save more than 40% to 55% tax now by doing so. Of course, projecting out 15 years with pensions is more a leap of faith than anything else given recent government fiddling here.

[Alaric]

My planned contributions are relatively small, more to offset (on Net Worth basis) income tax I am paying from rental income I am generating from my primary residence whilst I am travelling abroad for next few years.

You have to have UK employment earnings to be able to put in more than £ 3600 gross. That may help, but presumably not enough to shelter all your rental income.

[bdr1000]

Thanks for commenting!! Appreciate your insights.

TedSwippet
FYI my SIPP AA is 60/40 globally diversified low cost trackers. I'm being a tad more conservative on projections given the AA and our starting position on valuations and yields but even so I see that getting to 1.2m+ is a possibility by age 58.

It seems I had not really appreciated who FP2016 was most appropriate for when I applied, I assume now it was for those nearing retirement i.e. < 5years in 2016 who would otherwise see their LTA reduce to 1m without much time to benefit from annual inflation increases before their first crystalisation event.

I'm understanding now that with 15 years to go, this is not really an advantage to me....unless the LTA is reduced below 1m and/or the inflation adjustment is removed by future governments. I have no sense of the likelihood of this.

But retaining the option to further contribute (losing FP2016) without seeing a deterioration in anticipated LTA at age 58 is useful flexibility.

I'm no longer a higher rate tax payer so yes I do need to consider the value of a 20% rebate vs the tax I'd get hit with in the future if LTA was breeched.

Alaric

Thanks. My gross rental income is circa 26k p/a, given recent maintenance work and using all allowances I can get my tax bill down to 1.5k ish. I dont have much left to save after all costs are accounted for (includes current living costs) but I was looking to contribute around 3.5k into my SIPP each year and reclaim 20% which would partially offset the income tax I'm paying (albeit in the SIPP so as part of Net Worth rather than annual cash flow).

Its fine detail/tuning I guess rather than a big lever, difficult to know now whether further contributions are a good idea (offset income tax now) or a bad idea (LTA changed or breeched and tax in-efficient at crystalisation)...

Thanks again for comments, helps me think things through.

bdr

[TedSwippet]

FYI my SIPP AA is 60/40 globally diversified low cost trackers. I'm being a tad more conservative on projections given the AA and our starting position on valuations and yields but even so I see that getting to 1.2m+ is a possibility by age 58.

You can indeed get different outcomes depending on the numbers you put into the projections, exceeding the LTA with one set of entirely reasonable assumptions but ducking under it with another set of also entirely reasonable assumptions. It's a frustrating position, since it leaves you in a grey zone with no clear best outcome from either course of action.

One other thought. If you are "travelling for a few years" will you remain a UK tax resident or not? If not then your pension contributions position might become complex, especially if you find yourself a 'tax resident' in another country.

Aside from such 'unknown unknowns' though, your thinking here seems decently spot-on. So at least you have a full understanding of the sheer murkiness of it all.

[Longtermyieldman]

One benefit to fixed protection is if you leave the UK before retirement and move your pension to a QROPS. I believe the value on transfer will be tested against the LTA, and if it's before inflation takes the standard LTA beyond £1.2m, you could be better off with protection.

I believe that LTA protection can be reversed, should you stay in the UK or there be a period of high inflation or low investment returns that causes the £1m+ option to be preferable.

[Alaric]

but I was looking to contribute around 3.5k into my SIPP each year and reclaim 20% which would partially offset the income tax I'm paying (albeit in the SIPP so as part of Net Worth rather than annual cash flow).

The way it works in practice is that you pay £ 2880 into the SIPP. A few months later, you get £ 720 credited to the SIPP by HMRC. Your tax owed isn't altered unless you are a 40% payer.

[Cookie]

Maybe use VCTs to offset the tax rather than pension contributions?

Or look to moving to Portugal where you can receive you pension tax free!

[bdr1000]

Thanks again for the further comments.

TedSwippet
Murkiness indeed!! To whose benefit is that I wonder...not ours. Ps. Plan to remain UK tax resident for now.

Longtrrmyieldman
Thanks, didnt know that, so useful to be aware should I discard FP2016.

Alaric
Thanks for that, confirms my understanding.

Cookie
Thanks. VCT not part of my investment plans but thanks for the suggestion. Ps I remember reading about Portugal in a seperate thread here, worth keeping in mind although for me accessing my SIPP is fifteen years away so plenty could change.