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Lifetime Allowance Options

RockRabbit
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Lifetime Allowance Options

#421230

Postby RockRabbit » June 21st, 2021, 6:12 pm

So according to the press today, the Government is considering a number of changes to pensions including the reduction of the lifetime allowance to £800K.

https://www.cityam.com/analysts-treasur ... ely-risky/

Leaving aside the rights and wrongs of this, I have an uncrystalised SIPP (which I no longer contribute to) and I am a member of a defined benefit pension (also, which I no longer contribute to and have not taken any benefits from). These pensions are below the current LTA, but likely above the £800K threshold. I am over 55 and could take either (or both) of these pensions at any time (my taxable income this year is minimal).

Originally I had planned to take the SIPP cash free lump sum this year, but defer taking the defined benefits pension until 2023/24 or later. However I’m now concerned that this may not be a good idea, if the LTA is reduced even further going forward.

I understand in the past that some degree of LTA protection has been offered, but there is no guarantee that this would happen again or be on acceptable terms.

I’m assuming that if the LTA is reduced, this would be from April 2022 at the earliest. Therefore is there any benefit in crystalising my SIPP and/or starting to take benefits from my defined benefits pension this current tax year in order to utilise the 2021 LTA?

TIA

Adamski
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Re: Lifetime Allowance Options

#421286

Postby Adamski » June 21st, 2021, 9:54 pm

I'm not a pensions expert but my initial reaction is to take your pensions early, thereby use up your LTA now rather than future. Being at risk of breaching the proposed new limit I would have thought you could afford professional advice for your individual circumstances. Cheers adam

Kantwebefriends
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Re: Lifetime Allowance Options

#421287

Postby Kantwebefriends » June 21st, 2021, 10:00 pm

Also get out your 25% TFLSs before anyone's tempted to put a cap on that/those. Fill up your ISAs before those are capped.

Put otherwise, is there any good argument for not drawing now irrespective of fear-mongering headlines?

RockRabbit
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Re: Lifetime Allowance Options

#421330

Postby RockRabbit » June 22nd, 2021, 8:25 am

Thank you Adam and Kantwebefriends.

I guess you're right about the 'why wait' - things can only get worse! As for Adam's point about professional advice, why I agree in principle, in practice I have found previous professional tax advice very hit and miss, Its amazing how poor some of these tax advisors, are even when you have to pay several hundred pounds per hour. Some of the thinking and advice I've seen here on LF (and TMF) is way better.

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Re: Lifetime Allowance Options

#421334

Postby scrumpyjack » June 22nd, 2021, 8:56 am

These stories come out so often in the papers but then never come to anything. I suppose there must be a faction in the Treasury that wants to do this and keeps pushing it forward but the government does not want to do it so nothing happens. There are so many problems opening this can of worms (in particular they would have to change the DB multiplier of 20 x, which is ludicrously low when actuarial buyouts are done at getting on for twice that multiple.)

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Re: Lifetime Allowance Options

#421336

Postby RockRabbit » June 22nd, 2021, 9:09 am

scrumpyjack wrote:These stories come out so often in the papers but then never come to anything. I suppose there must be a faction in the Treasury that wants to do this and keeps pushing it forward but the government does not want to do it so nothing happens. There are so many problems opening this can of worms (in particular they would have to change the DB multiplier of 20 x, which is ludicrously low when actuarial buyouts are done at getting on for twice that multiple.)


Agreed, I think some of the 'proposals' are nuts. Pension planning is supposed to be 'long term' but the constant chop and change in the rules every year is chipping away at confidence in the system.

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Re: Lifetime Allowance Options

#421351

Postby Spet0789 » June 22nd, 2021, 10:35 am

The LTA is just an appalling policy. By all means limit the amount that can be contributed. By all means alter the amount of tax relief. Both of those can be planned for. But the LTA is just unmanageable. How can one manage one’s future investment returns? If it is lowered, the situation will become even worse.

The policy penalises the prudent and those in DC schemes.

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Re: Lifetime Allowance Options

#421370

Postby ursaminortaur » June 22nd, 2021, 11:49 am

I can't see the government lowering the lifetime allowance below £1 million. They already had to give into the doctors over the annual allowance taper because they were refusing to work overtime. A lot of doctors are already retiring early because of the LTA lowering that below £1 million would see that turn into a massive hemorrhage of senior doctors from the NHS.

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Re: Lifetime Allowance Options

#421383

Postby Freshwater » June 22nd, 2021, 12:32 pm

In my view the best we can hope for here is that the Chancellor sticks with his current plan of freezing the LTA at £1,073,100 until April 2026 - let's face it he just isn't going to raise it before then. Worst case he sees 'rich pensioners' as an easy target and lowers it. Personally I think that's unlikely as he will be inclined to stick with his 'freezing allowances' plan but (after the year we've just had) nothing would surprise me.

So in your situation you have to wonder - why wait to crystallise your pension? The LTA is as high as it's going to be for the next 5 years, your DB pension is (presumably) only going to get bigger with inflation increases, you DC pension is (probably) only going to get bigger with investment returns, all of which will use up an increasingly large proportion of the frozen LTA. Plus, as discussed, if the LTA does get reduced there's a chance you'll be above it, with no guarantee that you'll be able to claim any sort of protection.

Personally I'd take the DB pension asap. The DC pension decision is not quite so straightforward as crystallising means moving it to drawdown and taking your tax free cash, so you need to have a plan for what you do with it. It also brings a lot of money inside your estate for IHT purposes which may be something you want to avoid. Those things wouldn't worry me so I would crystallise my DC pot by putting it into drawdown and feed the tax free cash into Stocks & Shares ISAs (over a few years) whilst keeping a large enough cash buffer to supplement my income and keeping drawdown in the Basic Rate tax band.

Of course none of us can predict the future but it seems to me the LTA situation is as good as it's going to get over the next 5 years, or at least that's going to be my planning assumption.

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Re: Lifetime Allowance Options

#421386

Postby scrumpyjack » June 22nd, 2021, 12:49 pm

You really need to consider this in the light of your overall finances, family and intentions, rather than simply consider your pension on its own. For example if you have children and sufficient other assets, you may wish to leave drawing on your pension as long as possible because your pension assets will usually be outside your estate and go free of IHT to your nominated beneficiaries.

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Re: Lifetime Allowance Options

#421417

Postby ursaminortaur » June 22nd, 2021, 3:37 pm

scrumpyjack wrote:You really need to consider this in the light of your overall finances, family and intentions, rather than simply consider your pension on its own. For example if you have children and sufficient other assets, you may wish to leave drawing on your pension as long as possible because your pension assets will usually be outside your estate and go free of IHT to your nominated beneficiaries.


There are ways around that though. The tax free lump sum is capital so could be gifted as a PET to your beneficiaries whist you are still alive - so long as you survive 7 years that would escape IHT (and obviously the younger you are the more chance there is of you surviving 7 years).

Any further drawdowns would be regarded as income and could be gifted to beneficiaries as regular gifts out of surplus income again escaping IHT.

Note though that immediately you start drawing down something more than just the tax free lump sum the MPAA kicks in which would restrict any future contributions to any DC schemes to £4000 per year - hence you wouldn't want to do that if you were still working and contributing to a DC scheme or thought you might want to do that in the future).

https://www.gabyhardwicke.co.uk/briefing-notes/inheritance-tax-exemption-for-gifts-out-of-surplus-income/

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Re: Lifetime Allowance Options

#421427

Postby RockRabbit » June 22nd, 2021, 5:00 pm

scrumpyjack wrote:You really need to consider this in the light of your overall finances, family and intentions, rather than simply consider your pension on its own. For example if you have children and sufficient other assets, you may wish to leave drawing on your pension as long as possible because your pension assets will usually be outside your estate and go free of IHT to your nominated beneficiaries.


Absolutely, and I intend to retain a proportion of my SIPP for that purpose. However one must also consider:

1. The test at 75 against the LTA, which could mean a substantial tax charge if the LTA does not increase from here (or is reduced).

2. While pension assets are currently outside IHT, will that be the case when I die? Who knows, the legislation may have changed multiple times by then.

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Re: Lifetime Allowance Options

#421464

Postby Freshwater » June 22nd, 2021, 9:28 pm

RockRabbit wrote:1. The test at 75 against the LTA, which could mean a substantial tax charge if the LTA does not increase from here (or is reduced).
.

Remember the test at 75 is on any remaining uncrystallised funds (if there are any), plus any growth in crystalised funds. If you make sure you take enough income from the crystallised funds in your drawdown account, there won't be a 2nd LTA charge to pay on these.

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Re: Lifetime Allowance Options

#421521

Postby moorfield » June 23rd, 2021, 9:45 am

RockRabbit wrote:So according to the press today, the Government is considering a number of changes to pensions including the reduction of the lifetime allowance to £800K.

https://www.cityam.com/analysts-treasur ... ely-risky/




Whether the LTA is 800k, 900k, or £1m I will very likely be exceeding it by early 2030s anyway. I am one of the last who will be able to access my pot at age 55 before that increases to 57, so I'll settle for that. I've read enough this time to stop contributing to my own DC now (other than employer's contribution). From here on it's likely to be only contributions into my wife and childrens' pots, increased contributions into VCTs, and - possibly - some conservative use of leverage using long rolling spread bets or CFDs on plodding ITs (£100 of exposure for every £60 in, say).


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