Already Crystallised LTA - what now?

[Myfyr]

I am in the (first world problem) position of having crystallised 100% LTA as two small DB pensions, a full Youinvest SIPP plus part of a Hargreaves Lansdown SIPP to use up the LTA residue.

I have not retired, am 57, but have gone down to a 3 day week since 2019.

No drawdown income has been taken from either SIPP, just the PCLS benefits.

I have remaining an uncrystallised SIPP worth about 20% LTA (*) with Hargreaves Lansdown.

Now for this uncrystallised SIPP, I see there are two options here.

(1) Crystallise it now and pay LTA tax, drawing down enough income before age 75 to avoid a further charge at age 75.

(2) Leave the SIPP uncrystallised until age 75 (or earlier if needed) and pay the tax then.

As I have 0% LTA left then any future change in LTA level will not impact me, apart from its unlikely abolition.

(*) I have allowed for 3 small pots of exactly £10,000 on top of LTA in my 20% remaining figure above - one already taken, two left to take. Hargreaves Lansdown make that bit easy!

There is probably no difference in the end result. I am inclined to go for (1) just to get it done. LTA will not be abolished.

Does anyone have any thoughts on this?

Thanks

[ursaminortaur]

I am in the (first world problem) position of having crystallised 100% LTA as two small DB pensions, a full Youinvest SIPP plus part of a Hargreaves Lansdown SIPP to use up the LTA residue.

I have not retired, am 57, but have gone down to a 3 day week since 2019.

No drawdown income has been taken from either SIPP, just the PCLS benefits.

I have remaining an uncrystallised SIPP worth about 20% LTA (*) with Hargreaves Lansdown.

Now for this uncrystallised SIPP, I see there are two options here.

(1) Crystallise it now and pay LTA tax, drawing down enough income before age 75 to avoid a further charge at age 75.

(2) Leave the SIPP uncrystallised until age 75 (or earlier if needed) and pay the tax then.

As I have 0% LTA left then any future change in LTA level will not impact me, apart from its unlikely abolition.

(*) I have allowed for 3 small pots of exactly £10,000 on top of LTA in my 20% remaining figure above - one already taken, two left to take. Hargreaves Lansdown make that bit easy!

There is probably no difference in the end result. I am inclined to go for (1) just to get it done. LTA will not be abolished.

Does anyone have any thoughts on this?

Thanks

With option 2) you will pay a larger charge if you have any further growth in the SIPP between now and age 75 whereas, as you yourself say, with option 1) you can withdraw that growth before age 75 though of course the drawdowns will incur tax at your marginal rate.

[TedSwippet]

There is probably no difference in the end result. I am inclined to go for (1) just to get it done. LTA will not be abolished.

Aren't they strictly mathematically equivalent? That is, 75% of (growth x pot) = growth x (75% of pot).

Personally, even where there is even the slightest chance of the LTA being abolished(*), I might be inclined to wait just in case it is. Only if the amount involved were very small would I opt for get-it-done-now tidiness. That said, forking over £50k of £200k in LTA penalty now, while painful, might not feel as bad as £200k of a £800k pot in a couple of decades. Psychology?

I take it you've looked into the IHT aspects of this? Also, no longer qualified for FP2016? Just checking.


(*) If it is abolished, the govt will no doubt replace it with something even worse. So there's that.

[Myfyr]

There is probably no difference in the end result. I am inclined to go for (1) just to get it done. LTA will not be abolished.

Aren't they strictly mathematically equivalent? That is, 75% of (growth x pot) = growth x (75% of pot).

Personally, even where there is even the slightest chance of the LTA being abolished(*), I might be inclined to wait just in case it is. Only if the amount involved were very small would I opt for get-it-done-now tidiness. That said, forking over £50k of £200k in LTA penalty now, while painful, might not feel as bad as £200k of a £800k pot in a couple of decades. Psychology?

I take it you've looked into the IHT aspects of this? Also, no longer qualified for FP2016? Just checking.


(*) If it is abolished, the govt will no doubt replace it with something even worse. So there's that.

I thought they were mathematically the same but if i withdraw any growth as income at 20% tax (per ursaminortour above) then maybe crystallising now is mathematically better.

No protection, didn’t qualify for any!

Not bothered about IHT.

[PhaseThree]

It’s worth considering what happens if you don’t make it to 75. (1 in 4 ish chance IIRC)
Dying below this age can be significantly more tax efficient. You get to leave the uncrystallised pot to whomever without the LTA tax being extracted.

[hiriskpaul]

There is probably no difference in the end result. I am inclined to go for (1) just to get it done. LTA will not be abolished.

Aren't they strictly mathematically equivalent? That is, 75% of (growth x pot) = growth x (75% of pot).

Personally, even where there is even the slightest chance of the LTA being abolished(*), I might be inclined to wait just in case it is. Only if the amount involved were very small would I opt for get-it-done-now tidiness. That said, forking over £50k of £200k in LTA penalty now, while painful, might not feel as bad as £200k of a £800k pot in a couple of decades. Psychology?

I take it you've looked into the IHT aspects of this? Also, no longer qualified for FP2016? Just checking.


(*) If it is abolished, the govt will no doubt replace it with something even worse. So there's that.

I thought they were mathematically the same but if i withdraw any growth as income at 20% tax (per ursaminortour above) then maybe crystallising now is mathematically better.

No protection, didn’t qualify for any!

Not bothered about IHT.

No, Ted is right. If you crystallise now and don't withdraw the growth you will face another LTA charge on that growth at 75, which will make you worse off. So either don't crystallise or crystallise and make sure you withdraw all the growth.

[Myfyr]

Aren't they strictly mathematically equivalent? That is, 75% of (growth x pot) = growth x (75% of pot).

Personally, even where there is even the slightest chance of the LTA being abolished(*), I might be inclined to wait just in case it is. Only if the amount involved were very small would I opt for get-it-done-now tidiness. That said, forking over £50k of £200k in LTA penalty now, while painful, might not feel as bad as £200k of a £800k pot in a couple of decades. Psychology?

I take it you've looked into the IHT aspects of this? Also, no longer qualified for FP2016? Just checking.


(*) If it is abolished, the govt will no doubt replace it with something even worse. So there's that.

I thought they were mathematically the same but if i withdraw any growth as income at 20% tax (per ursaminortour above) then maybe crystallising now is mathematically better.

No protection, didn’t qualify for any!

Not bothered about IHT.

No, Ted is right. If you crystallise now and don't withdraw the growth you will face another LTA charge on that growth at 75, which will make you worse off. So either don't crystallise or crystallise and make sure you withdraw all the growth.

That is what I said, or at least tried to say.

Holding on for LTA abolition is a bit like waiting for Godot!

[Myfyr]

It’s worth considering what happens if you don’t make it to 75. (1 in 4 ish chance IIRC)
Dying below this age can be significantly more tax efficient. You get to leave the uncrystallised pot to whomever without the LTA tax being extracted.

Think that is wrong.

On death before 75, crystallised funds do not have an LTA test. However uncrystallised funds do. Hence better to crystallise the lot. Probably.

[Kantwebefriends]

Wait for the market crash. Prob solved.

[Myfyr]

Wait for the market crash. Prob solved.

Godot again?

[hiriskpaul]

Wait for the market crash. Prob solved.

Actually that is not a bad suggestion!

Right now I would be nervous about bringing money into my estate prior to knowledge of what new taxes and tax rises will be introduced to pay for Covid.

[PhaseThree]

It’s worth considering what happens if you don’t make it to 75. (1 in 4 ish chance IIRC)
Dying below this age can be significantly more tax efficient. You get to leave the uncrystallised pot to whomever without the LTA tax being extracted.

Think that is wrong.

On death before 75, crystallised funds do not have an LTA test. However uncrystallised funds do. Hence better to crystallise the lot. Probably.

Sorry - missed a key point. The LTA test is not triggered if the uncrystalised funds are not "designated" within two years of death. Instead funds designated after two years are subject to income tax at the beneficiary's marginal rate. This effectively trades a LTA tax of 55% paid by the deceased for income tax paid by the beneficiary.

https://www.ftadviser.com/pensions/2019 ... on/?page=2

[TUK020]

It’s worth considering what happens if you don’t make it to 75. (1 in 4 ish chance IIRC)
Dying below this age can be significantly more tax efficient. You get to leave the uncrystallised pot to whomever without the LTA tax being extracted.

Think that is wrong.

On death before 75, crystallised funds do not have an LTA test. However uncrystallised funds do. Hence better to crystallise the lot. Probably.

Sorry - missed a key point. The LTA test is not triggered if the uncrystalised funds are not "designated" within two years of death. Instead funds designated after two years are subject to income tax at the beneficiary's marginal rate. This effectively trades a LTA tax of 55% paid by the deceased for income tax paid by the beneficiary.

https://www.ftadviser.com/pensions/2019 ... on/?page=2

thanks.
any clues on what 'designated' means?

[PhaseThree]

Think that is wrong.

On death before 75, crystallised funds do not have an LTA test. However uncrystallised funds do. Hence better to crystallise the lot. Probably.

Sorry - missed a key point. The LTA test is not triggered if the uncrystalised funds are not "designated" within two years of death. Instead funds designated after two years are subject to income tax at the beneficiary's marginal rate. This effectively trades a LTA tax of 55% paid by the deceased for income tax paid by the beneficiary.

https://www.ftadviser.com/pensions/2019 ... on/?page=2

thanks.
any clues on what 'designated' means?

In this case I understand that the funds are deemed to be "designated" when the ownership is transferred into the beneficiary's name.

[ursaminortaur]

Sorry - missed a key point. The LTA test is not triggered if the uncrystalised funds are not "designated" within two years of death. Instead funds designated after two years are subject to income tax at the beneficiary's marginal rate. This effectively trades a LTA tax of 55% paid by the deceased for income tax paid by the beneficiary.

https://www.ftadviser.com/pensions/2019 ... on/?page=2

thanks.
any clues on what 'designated' means?

In this case I understand that the funds are deemed to be "designated" when the ownership is transferred into the beneficiary's name.

Isn't it the pension provider who designates who is to get the funds in accordance with the expression of wishes ? How would you ensure that that process takes more than two years ? Since it is entirely at the discretion of the pension provider in the worst case scenario where a nominated beneficiary wasn't co-operating could they not either choose to designate just the other beneficiaries who were co-operating or the deceased estate if they were running out of time. My understanding is that the two year limit is meant to force the penion provider to deal with things quickly not as a get around for the LTA test.

[PhaseThree]

The link I posted above indicates that postponing designation would require the co-operation and agreement of the recipient and the trustees of the SIPP. I have no idea how this would work in practise but I don't see any particular reason for the trustees to refuse such a request if it came from the intended beneficiary.
The legislation is clearly written in such a way as to make this option available otherwise there would be no 2-year limit on the crystalisation event.
The HMRC pensions manual states :-

BCE 5C
Where a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are designated, on or after 6 April 2015 but before the end of a two-year period, to provide a dependants’ flexi-access drawdown pension or a nominees’ flexi-access drawdown pension.

I would be interested if anyone here has direct experience of this situation as it seems to provide a method of mitigating LTA tax on early death.

[parallellines]

I don't think we've got the full picture here.

My recollection is that failure to pay out death benefits within 2 years means that the payment fails to fall within the range of "authorised payments" that schemes are permitted to make, and as a consequence would attract a scheme sanction charge of 40% on top of the income tax at marginal rate already noted. (potentially worse if it's more than an error). The scheme can reclaim that from the benefit paid out. In the overall reckoning, this trumps any gain from avoiding testing against the LTA.

As ursaminotaur states the express intention is to make sure death benefits gat paid out promptly.

[Myfyr]

Just to let people know, I am crystallising most of the uncrystallised funds and paying the 25% LTA tax.

At least Rishi will be happy.

Keeping enough uncrystallised to take my remaining 2 small pots allowance of £10,000

The remainder will be crystallised once i finally retire.

As long as i have less at age 75 there is no more LTA tax to consider.

Will be annoyed if LTA is abolished though. Highly unlikely as it is bedded in to legislation now and any increase in it won’t help.