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Am I in danger of exceeding the LTA

Including Financial Independence and Retiring Early (FIRE)
MartynC27
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Am I in danger of exceeding the LTA

#281675

Postby MartynC27 » February 1st, 2020, 11:18 pm

I will be 66 years old in June 2020 and wondering if I am in danger of reaching the LTA and can I allow my SIPP to further increase in value?
I am married and I receive a DB pension of £25,025 pa which is index-linked and due to be increased by RPI in April. I originally started receiving my DB pension following redundancy at the age of 53 in 2007 and I took a 25% lump sum from the scheme at that time.
I have just started receiving the Full State pension of £8767 pa from January so I will receive £2195 up until 5th April 2020.

I have been freelancing for the last twelve years, but now winding down and managed to save £ 335,000 invested in a SIPP as well as a substantial amount in ISAs.

As I was considering taking any extra income I require from my ISAs and leaving the SIPP invested - am I in danger of reaching the LTA limit if I allow the SIPP to increase in value ?

Chrysalis
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Re: Am I in danger of exceeding the LTA

#281687

Postby Chrysalis » February 2nd, 2020, 8:42 am

So, to start with what I know. State pension doesn’t contribute to LTA and can be ignored.
DB pension value is calculated as 20 times annual pension plus any cash lump sum (at the time it commenced).

What I don’t know (but I’m sure another fool will): how your DB which started in 2007 will be calculated for the purposes of LTA. You could ask your scheme to do this - what you need is the percentage of the LTA that your DB uses up.

Another thing I know - it’s better to overshoot than undershoot the LTA, it’s only a tax, not a penalty. Assuming you’re not adding to it now, I don’t think you need to worry too much.

TUK020
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Re: Am I in danger of exceeding the LTA

#281688

Postby TUK020 » February 2nd, 2020, 9:00 am

You could crystalize the SIPP and withdraw the 25% tax free lump sum (and gradually feed into your ISA). This would use up a % of your LTA, but wold allow the remainder of the SIPP to increase in value without any further penalty (until reassessment at age 75).

The bit that confuses me is that I thought if you were receiving taxable pension benefits (i.e your DB payments for the last 12 years) you would not be eligible for tax relief on SIPP contributions. Perhaps someone more knowledgeable can clarify

Chrysalis
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Re: Am I in danger of exceeding the LTA

#281691

Postby Chrysalis » February 2nd, 2020, 9:30 am

@TUK, the restrictions to future contributions (MPAA) only apply when taxable withdrawals are made from a DC pension. DB pension payments don’t have any effect.

MartynC27
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Re: Am I in danger of exceeding the LTA ?

#281714

Postby MartynC27 » February 2nd, 2020, 11:43 am

Chrysalis wrote:So, to start with what I know. State pension doesn’t contribute to LTA and can be ignored.
DB pension value is calculated as 20 times annual pension plus any cash lump sum (at the time it commenced).

What I don’t know (but I’m sure another fool will): how your DB which started in 2007 will be calculated for the purposes of LTA. You could ask your scheme to do this - what you need is the percentage of the LTA that your DB uses up.

Another thing I know - it’s better to overshoot than undershoot the LTA, it’s only a tax, not a penalty. Assuming you’re not adding to it now, I don’t think you need to worry too much.


Thankyou for the reply

I have just found the old LTA calculation when I originally took my DB Pension back in May 2007.
The Lifetime allowance (LTA) in 2007/8 was £1.6 million. The proportion of the LTA I used was 25%.

The current LTA 2019/20 is now smaller £1,055,000.
So based on my current SIPP value (£ 335K) using the current LTA the proportion used is 32%

So I assume I just add the two Percentages together = 57%

Does this mean I have 43% of the current LTA headroom if I wanted the SIPP to grow ?

There appears to be plenty of headroom in the SIPP even if I left the SIPP invested.

Now I am retiring, I was considering initially topping up my existing DB pension by withdrawals from my ISAs. The value of my ISAs are roughly twice the value of the SIPP.

Are there any advantages/ disadvantages to draw from ISAs first or SIPP or both together? (If I took an income from my SIPP I estimate I could take £16,200 pa before hitting the 40% tax Band)

Chrysalis
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Re: Am I in danger of exceeding the LTA

#281731

Postby Chrysalis » February 2nd, 2020, 1:23 pm

Yes, you’ve answered your own question and yes, add the two percentages together and you have an idea of your headroom.

In relation to ISA vs SIPP withdrawal. The key issues to consider are:
1. Tax. ISA withdrawals are completely tax free. SIPP withdrawals will be taxable after the first 25%, so with your DB and SP you would definitely pay basic rate tax and would I’m sure want to avoid higher rate tax if possible. There are different ways of taking your SIPP flexibly, do some research on ‘flexi acccess drawdown’ vs ‘uncrystallised funds pension lump sum (UFPLS)’ to understand the tax implications.

2. Inheritance. I don’t know if you have a spouse you need to provide for in the event that you die first, or if you have offspring you’d like to leave assets to. ISAs can be inherited by a spouse and retain their tax privileges, but if they are passed to other beneficiaries they lose the tax wrapper (technically, a spouse inherits an enlarged ISA allowance equivalent to the value of ISA assets at the deceased’s date of death). SIPP inheritance benefits are considerable. If you die before the age of 75, your nominated beneficiary (or beneficiaries) inherit what is in your pot completely tax free. If you are over 75, they pay tax at their income tax rate. If you want to pass a drawdown arrangement to a spouse or other beneficiary after death (you can pass them to children for example), you should make sure that your provider allows beneficiary drawdown, as if they don’t, it can’t be done.

If inheritance/death benefits for a spouse are important, read up about the rules to ensure you understand.

Then you should be able to decide how to sequence the withdrawals in the optimum way for your desired outcomes.

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Re: Am I in danger of exceeding the LTA ?

#282886

Postby Pheidippides » February 7th, 2020, 8:13 am

MartynC27 wrote:Now I am retiring, I was considering initially topping up my existing DB pension by withdrawals from my ISAs. The value of my ISAs are roughly twice the value of the SIPP.
.
Are there any advantages/ disadvantages to draw from ISAs first or SIPP or both together? (If I took an income from my SIPP I estimate I could take £16,200 pa before hitting the 40% tax Band)


You are correct that the key to minimising your HRT liability is to move that £16,200 into your ISA. you have ~21 years of withdrawal at that rate....any growth in your SIPP will get hit by HRT should you need to tap into it.

I am asking a connected question on the Pensions board and have yet to hear a compelling reason why one would NOT take the maximum you could out of a SIPP (£50K for non-income earner) and transfer the residual into ISA’s

In your position I would be taking your TFLS from your SIPP and using your ISA allowance to reinvest this and next tax year. If you are married then nearly your full TFLS could be moved across by April....

Regards

Pheid

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Re: Am I in danger of exceeding the LTA

#282894

Postby JohnB » February 7th, 2020, 8:45 am

The main arguments for not draining your pension as fast as possible are avoiding IHT and using your annual allowances. You want to always be able to top up your taxable income to 12500 even after DB and state pensions are being paid. Even if your ISA is fully subscribed, it can be worth keeping a few hundred k unsheltered because of the £2k dividend allowance and 7.5% tax is better than having the asset in a pension, though I think the Chancellor will remove both soon.

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Re: Am I in danger of exceeding the LTA

#282911

Postby scrumpyjack » February 7th, 2020, 9:35 am

One option also to consider is that you can defer the state pension, even though you have started drawing it. You could then draw more from your SIPP to help avoid going over the limit.


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