Post for those close, or exceeding the current Life time allowance

[Shelford]

Hi all

This post is aimed squarely at readers who have exceeded the pension LTA (or are about to) and is a consequence of the latest lifting of the LTA by the government with effect from this April, and the lowering of the CGT threshold.

Please save yourself time by ignoring the message otherwise if the above does not apply to you!

I suspect I’m not the only poster scratching my head over what to do in the next couple of years over these two issues. I’d welcome any constructive criticism and/or answers to my questions at the bottom of this post.

Shelford

Essential facts:

Age: 58
Work: gone part time and ‘plural’: income next financial year to fall to £25K
Status: married, slightly younger wife in part-time employ c. £50K pa
My SIPP: £1.15m, not crystallised
Defined benefits pension current value, not crystallised: £220,000 (at current projection for age 60), so total pension value is a notional £1.37m. I’d not taken fixed income protection because I (by mistake) made some contributions after the deadline for the 2016 protection scheme set at £1.25m. I’ve otherwise made no pension contributions for 4 years.
Her SIPP: £600K
My ISA: £220K
Her ISA: £300K
Share account: £500K, virtually all in one company’s shares where I previously worked
No mortgage
BTL income of £12K
Cash: £60K
3 kids, higher education provided for, or already paid

My current financial strategy is:
• sell down the equities in the share account to reduce my exposure to a single share (which currently comprises 36% of my total pension by value) each year, using both our CGT allowances
• use revenue from these sold shares to pay for both our ISAs in full, for next 4-5 years
• build the Cash position to £100K by 2025 by investing £40K in Cash ISAs. £60K is roughly one year’s expenditure, but that doesn’t include sufficient margin for larger one-off spends viz a car, building works etc.
• leave my SIPP and DB pension alone till I’m 60, by which time I should have recycled or spent all of the unprotected equities in the Share account

The questions I’m currently mulling are:
--given the lifting of the LTA limit, and the stated Labour position to lower it again, a sane response might be to pay in as much cash as I can in the next two years, then crystallise a large part of my TFLS from my SIPP before the election to avoid a future government reintroducing the LTA limit and a fairly punitive tax. Or is the tax tail wagging the investment dog here?
-instead, should I use spare money to supplement my wife’s pension which won’t hit the LTA before she stops work
-what other vehicles (I don’t think VCTs appropriate given I will be a basic rate tax payer next year) might I consider, if any?
-I was hoping to sell down the single company shares in my share account sooner. However the lower CGT limits make this less tax advantageous. On the other hand, to have over a third of your pension by value in a single share is by any yardstick, high risk. A strategy therefore might be to cash in these shares within the limits of basic rate tax which I calculate to be 10%.

[TedSwippet]

--given the lifting of the LTA limit, and the stated Labour position to lower it again, a sane response might be to pay in as much cash as I can in the next two years, then crystallise a large part of my TFLS from my SIPP before the election to avoid a future government reintroducing the LTA limit and a fairly punitive tax. Or is the tax tail wagging the investment dog here?

Just focusing on this item ... I'm not sure I see a compelling case for making much if any future pension contributions. At least, nothing beyond an amount that would capture the maximum employer match.

Your pensions are already above the current LTA, which means that you are at the limit of 25% tax-free PCLS, £268,275 (unless protected, but you say you have none). So future pension contributions will be fully taxable on withdrawal. Given your income numbers, it looks likely that you can squeak into basic rate tax, in which case you'd get 20% relief on contributions. Once you start drawing pensions though, and in particular with state pension on top (admittedly some years off), you could easily be in 40% tax, or worse. Taking 20% tax relief now but paying 40% tax on withdrawal is not a winning strategy. Even paying 20% on withdrawal only leaves you level-pegging, unless there's a valuable employer match or salary sacrifice NI uplift.

If you are however in higher rate tax now, 40% tax relief at least beats 20%. You might still be in higher rate tax on withdrawals though, so even in this case then (aside from any employer match and/or salary sacrifice NI uplift) a pension is simply neutral; neither detriment nor benefit. The only time there's a fairly clear benefit from future pension contributions once past the £268,275 PCLS limit is when you're stuck in the spiteful 60% tax bracket from £100k to £125k or so. Provided of course you can avoid that rate on withdrawals, and that a future government doesn't jack rates up so that you pay more in tax on the way out than you got in relief on the way in even outside this ridiculous 60% rate.

As for crystallising to get the maximum tax-free PCLS, there may be a case for doing that now rather than waiting. The logic is that as you've hit the limit on this already, growth inside your pension on that untaken chunk will be taxable as income when taken, so 20% or 40%. By contrast, if taken and reinvested outside the pension, tax rates on both dividends and capital gains are lower.

All this with the caveat that a mix of DB and DC pensions creates added complications over which is optimal to use as the source of PCLS versus source of income. That is, which to start taking first. I don't have any DB pension, so I have no intelligent comment on that aspect. Also, if IHT is a concern, a pension shelters you from that, but if you take the PCLS you lose IHT sheltering on that element. Potentially yet another tricky decision factor.

Tax doesn't have to be taxing. Yeah, right.

[Shelford]

Superb response - many thanks

[Boots]

I'll leave others better qualified to comment on the bulk of your post, but this comment caught my eye...

I don’t think VCTs appropriate given I will be a basic rate tax payer next year

I think VCTs can have a place for a Basic Rate taxpayer. I'm one, and I use them.

[ayshfm1]

My gut feeling is the LTA will not be re-introduced, even though Kier says he will (was disappointed when he said it as either he is stupid or playing to the gallery, not ideal prime minister material which ever way you look at it).

As we all know, it's very complicated in practise and drives undesirable behaviours. The money lost by the change is likely small, since people were planning to avoid it. Moreover the only reason the change was made was to protect highly paid doctors and as Ken Clarke ruefully observed doctors have the public on their side coupled with the BMA being unscrupulous, utterly ruthless and would not hesitate to make attacks personal. In short Kier would be in for a fight that would be extremely damaging and he doesn't to me anyway look like he's got the iron in him for that.

Anyway the smart move is to make them part of the estate and clean up during probate. Get all the money and more and don't get into the firefight.

[y0rkiebar]

I would guess that the LTA will be re-introduced if Labour get elected. They've already said that they would exempt certain professions from it however (doctors included). I could also see legal challenges if they were to go down that two-tier route.

[JohnB]

I think we need to wait for the Finance bill that will abolish it, presumably for the 2024/5 tax year. This year any BCEs are recorded even if no tax is due, and could be used in a reintroduced LTA, but once the obligation to record them is removed, no pension company will keep records in 24/5, so how could a Labour government being elected in late 24, having a budget and voting on a finance bill stop the cat getting out of the bag before it becomes law.

I don't know why the OP is considering a cash ISA when premium bonds open a £50k extra option and tax free returns. The return is poor, but little worse than a cash ISA.

I squeezed in a £48k withdrawal in 22/23, but will wait until the end of 23/24 to decide my next move.

[LostInSpace]

I think we need to wait for the Finance bill that will abolish it, presumably for the 2024/5 tax year. This year any BCEs are recorded even if no tax is due, and could be used in a reintroduced LTA, but once the obligation to record them is removed, no pension company will keep records in 24/5, so how could a Labour government being elected in late 24, having a budget and voting on a finance bill stop the cat getting out of the bag before it becomes law.

I don't know why the OP is considering a cash ISA when premium bonds open a £50k extra option and tax free returns. The return is poor, but little worse than a cash ISA.

I squeezed in a £48k withdrawal in 22/23, but will wait until the end of 23/24 to decide my next move.

BCEs recorded this year will pay the tax due, which is 0%. It is unclear what will happen in the 2024/25 tax year as BCEs will still need to be be recorded to ensure that the individuals PCLS allowance (£268K) is not exceeded.

The date of the next election is still an unknown with the latest being January 2025 but I would not discount a return to normal operation with a giveaway budget in March 2023 followed by an election in early May before people forget about the giveaways. This would give a very small window between the Finance bill abolishing the LTA becoming law and the Labour "emergency budget" that would reinstate it.

I am in very much the same situation as the OP and considering early retirement either this year or next. Personally I am seriously considering crystallising my DC and DB schemes this year and paying the 0% tax charge rather than trying to squeeze out another year.

[moorfield]

Top up your own pension last. I'd suggest, in the following order,

-instead, should I use spare money to supplement my wife’s pension which won’t hit the LTA before she stops work

1. Wife's pension first, up to a gross contribution of ~£37K (am assuming she also makes some contributions), which will zap the income tax she pays on c. £50K

-what other vehicles (I don’t think VCTs appropriate given I will be a basic rate tax payer next year) might I consider, if any?

2. Don't overlook VCTs, up to a gross investment of ~£16K, which will zap the income tax you pay on £25K work + £12K btl.
Do a bit of research on this, look at wealth club and the VCT board here. As a (rough) guide you should expect ~£1K pa dividend income (tax free of course).

3. Left field suggestion - contribute into LISAs for your children. 3 x £4K will be grossed up £15K by the govt.

[JohnB]

Don't forget that even if you crystalise now, with a £1m pot you might not be able to withdraw fast enough within BRT to avoid the drawdown pot continuing to grow so it hits the age 75 BCE with no spare LTA, especially if a reintroduced LTA is lowered or stranded without inflation proofing. My modelling showed that it would be the age 75 BCE that would catch me out.

While lump sum accounting may be required, new Tory laws can be written in terms that don't call that a BCE, so subsequent Labour laws could struggle to capture the data. And while Labour might well have a 100 days plan with emergency budgets, they would struggle with implementation part way through a tax year, with people racing them. Its much easier to change a number in existing legislation, with a mechanism encoded to do so, like fuel duty, than bring new legislation in.

The devil will be in the detail of Tory finance bills and Labour manifestos.

[wanderer]

It might be worth making a modest contribution to your own SIPP in case Labour only offer new LTA fixed protection to those who made a contribution in the time between Hunt's budget and the Labour reversal.

I remember when Alastair Darling introduced taper relief restrictions mid tax year and you got a useful exemption if you had made contributions prior to the budget announcement.

[hiriskpaul]

I would not want to look this particular gift horse in the mouth if I was in your position. Crystallise 100% of your SIPP as soon as the 0% charge kicks in. You might want to wait for the finance bill first though, just in case. Only continue to contribute if your contributions are matched by your employer. That way you should not be out of pocket even if you have to pay an LTA charge when you crystallise.

After that, load up Mrs Shelford's SIPP. £50k per year (max out any employer contributions first though). She will get tax relief on the whole lot even though she will not pay tax on her personal allowance.

Don't waste valuable ISA space with cash ISAs. If you want something similarly safe, buy low coupon gilts trading below par. eg Treasury 0.125% 31/01/2024, Treasury 0.25% 31/01/2025, Treasury 0.125% 30/01/2026. The reason to do that is capital gains on gilts are not subject to tax, so the after tax return you get will beat cash ISAs (or be very close).

As Warren Buffett once said, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble".

As for the £500k in one share, it may not be so bad, but that is a matter for you to judge. I have a friend who took up all his stock options and invested entirely in the shares of the company he worked for (and nowhere else). I regularly told him he was crazy, but that company was Microsoft and his plan worked out well. If the company is good though, your plan to draw down without paying CGT is unlikely to work. Think about it, £40k per year into ISAs is only 8% of £500k. Chances are you will not live long enough to draw this down without paying CGT. If the company is not good, you may be better off getting out and into something else even if you do end up paying some CGT. Also, you might want to bite the bullet sooner and pay only 10% CGT on some of the gain before a chancellor comes along and "normalises" the taxes on capital gains and income.

Edit: just to add, if you do max out Mrs Shelford's SIPP, put any income generating assets outside SIPPs/ISAs into her name to utilise her personal allowance.

[Snakey]

I have to watch this one from the sidelines because by the time I can crystallise (March 2027) this will all be a done deal one way or the other.

I also get to wait and see whether they're going to accelerate the State pension increase from 67 to 68 - if they do, I'm caught by that too. My cynical side suspects the only thing they've postponed until after the election is telling us.

I am at least quite good at it now, having had to wait about seven years to find out whether the 55 to 57 change would catch me.

If Labour literally reverse the LTA changes, this has to be in conjunction with bringing in something else otherwise all those lovely doctors and surgeons will need to retire overnight (both of the "classic" protections involve making no further contributions, IIRC). Targeted legislation isn't as easy as it sounds, so I predict the return of the LTA but at a level set high enough to get the surgeons picking their scalpels back up. Since the problem's only come up in the last few years, it was presumably the fall of the LTA to £1m wot done it. By definition they were happy with it being £1.25m, so you'd think £1.5m would do the trick, maybe a little higher if you weren't going to index it.

Since this is all solely pragmatic on both sides of the House - nobody thinks certain individuals deserve preferential treatment post-retirement at the taxpayers' cost, it's just the means to an end - there's no additional hypocrisy in letting a few hard-saving bean-counters through the gates at the same time, if their calculations show that this is cheaper than funding HMRC to police more complex legislation (gut feel is it'd be similar to IR35 and we all know how that went).

Like the OP, I'm mulling the pros and cons of making a contribution under the new (LTA-less) regime, although for a different reason. My pot is £1.2m with four years before I can touch it, so initial crystallisation is only an issue if LTA comes back in at less than (say) £1.5m. But suppose they do roll it back to £1.073m. There may be a valid argument that if, during the period between Budget introduction speech and Budget reversal speech, you had neither made contributions nor been in a position to crystallise, there is no retrospective taxation for you personally... in which case the question of being entitled to "protection" from it does not arise... and back you go to £1.073m. All very hypothetical of course - I'd be doing something that benefits me only if things go down exactly as I fear, and may even be to my detriment otherwise (albeit that I'd only be putting in a small amount - but I want to repay my mortgage next year which wasn't in my Grand Plan, and I don't want to sell my investments while the markets are down, so cash flow could become tricky!).