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PENSION LTA allowance has suddenly become an issue !

Including Financial Independence and Retiring Early (FIRE)
Relaxer
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Joined: January 16th, 2020, 5:07 pm

PENSION LTA allowance has suddenly become an issue !

#463763

Postby Relaxer » December 7th, 2021, 10:13 am

LTA allowance has suddenly become an issue !
Does anyone have any tips to minimise the effect of the Lifetime Allowance LTA on past pension contributions?
I just realised THREE things
1) Making pension withdrawals does not “free-up” LTA
2) LTA is currently frozen for 5 years.
3) An investment strategy yielding 7% will mean I hit the LTA in 8 years or so as the DC part continues to grow.

I am 60 have about 500k in DC and not in payment yet. One DB value 130k, in payment and 12% of LTA used). I am no longer working and wont be making further contributions. The miracle of compound interest and the slyness of the LTA freeze means that I could easily hit LTA.

Feels to me that the only step I can take in mitigation would be to take the full 25% lump sum ASAP and then withdraw at least my personal tax allowance (11k) worth of taxable pension EACH YEAR.
This cash can then grow in similar type of investments but outside of the pension wrapper and thus at least this growth wont be adding to my LTA tally. I believe that this will mean in 8 years I will be about 140k shy of the LTA instead of hitting it.
Obviously I will have to deal with capital gains tax on the investment growth of the money I took out but I will use ISAs and CGT allowances.
Does this sound sensible and am I missing anything.

pje16
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Re: PENSION LTA allowance has suddenly become an issue !

#463766

Postby pje16 » December 7th, 2021, 10:23 am

I'm not an expert
but taking it now does not reduce the value for LTA purposes
I have an IFA who has advised me to take my 25%. I have an old section 32 (with a much larger tax free element)
so will be taking that as well and reinvesting both of those
He is trying to minmise the tax I will pay

TUK020
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Re: PENSION LTA allowance has suddenly become an issue !

#463786

Postby TUK020 » December 7th, 2021, 11:16 am

Relaxer wrote:LTA allowance has suddenly become an issue !
Does anyone have any tips to minimise the effect of the Lifetime Allowance LTA on past pension contributions?
I just realised THREE things
1) Making pension withdrawals does not “free-up” LTA
2) LTA is currently frozen for 5 years.
3) An investment strategy yielding 7% will mean I hit the LTA in 8 years or so as the DC part continues to grow.

I am 60 have about 500k in DC and not in payment yet. One DB value 130k, in payment and 12% of LTA used). I am no longer working and wont be making further contributions. The miracle of compound interest and the slyness of the LTA freeze means that I could easily hit LTA.

Feels to me that the only step I can take in mitigation would be to take the full 25% lump sum ASAP and then withdraw at least my personal tax allowance (11k) worth of taxable pension EACH YEAR.
This cash can then grow in similar type of investments but outside of the pension wrapper and thus at least this growth wont be adding to my LTA tally. I believe that this will mean in 8 years I will be about 140k shy of the LTA instead of hitting it.
Obviously I will have to deal with capital gains tax on the investment growth of the money I took out but I will use ISAs and CGT allowances.
Does this sound sensible and am I missing anything.


Not an expert, so the following will need checking. My understanding is as follows:

The % of LTA used is calculated on "crystallization events".
As you are over the minimum age now. you can immediately crystallize your DC pension of 500k. This will result in you using a bit less than 50% more of your LTA, even if these funds remain invested in your SIPP, and grow in value.
There is a further crystallization event when you hit age 75, to see if that growth in value has taken you over the limit.
Unless you are holding the funds in your SIPP for favourable IHT treatment (i.e if your expression of wishes are for this money to go to your offspring rather than your spouse), you are best off withdrawing funds from your SIPP now to make maximum use of your income tax allowances, and stuffing surplus funds into an ISA

ursaminortaur
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Re: PENSION LTA allowance has suddenly become an issue !

#463795

Postby ursaminortaur » December 7th, 2021, 11:32 am

Relaxer wrote:LTA allowance has suddenly become an issue !
Does anyone have any tips to minimise the effect of the Lifetime Allowance LTA on past pension contributions?
I just realised THREE things
1) Making pension withdrawals does not “free-up” LTA
2) LTA is currently frozen for 5 years.
3) An investment strategy yielding 7% will mean I hit the LTA in 8 years or so as the DC part continues to grow.

I am 60 have about 500k in DC and not in payment yet. One DB value 130k, in payment and 12% of LTA used). I am no longer working and wont be making further contributions. The miracle of compound interest and the slyness of the LTA freeze means that I could easily hit LTA.

Feels to me that the only step I can take in mitigation would be to take the full 25% lump sum ASAP and then withdraw at least my personal tax allowance (11k) worth of taxable pension EACH YEAR.
This cash can then grow in similar type of investments but outside of the pension wrapper and thus at least this growth wont be adding to my LTA tally. I believe that this will mean in 8 years I will be about 140k shy of the LTA instead of hitting it.
Obviously I will have to deal with capital gains tax on the investment growth of the money I took out but I will use ISAs and CGT allowances.
Does this sound sensible and am I missing anything.


Using UFPLS does NOT save you from exceeding the LTA since an LTA test is carried out every time you drawdown with UFPLS. However as you mention that isn't the only way to drawdown money from a DC pension. Instead crystallise the pension by taking the 25% tax free lump sum. Withdrawals after that will be taxed at your marginal rate but will NOT be tested against the LTA. There will be a further LTA test at age 75 but that just tests the growth since crystallisation which still remains in the pension pot ie

(Amount in pension pot at age 75) - ( Amount in pension pot when crystallised - (Tax free lump sum taken) )

You can make that age 75 test toothless by withdrawing the growth that has occurred before age 75. Whether withdrawing just an amount equal to your personal allowance will be enough to do this will depend upon how much growth occurs but even if you have to pay tax on the withdrawals it will be better than paying the larger LTA charge.

If you are building up this pension in order to be able to pass it onto your beneficiaries without incurring IHT then you might want to look at gifting the amounts you withdraw to your beneficiaries whilst you are alive.

You can only take the 25% tax free lump sum whilst you are alive which is a good argument for crystallising the pension as that benefit is a use it or lose it proposition. The tax free lump sum though will be treated as capital which means if you gift it (as a PET - potentially exempt transfer) you will need to survive seven years after making the gift for it to completely escape IHT hence the earlier it is done the better.

Drawdowns from the crystallised pension other than the tax free lump sum though are treated as income which means that you can regularly gift them as gifts out of surplus income. You need to keep good records of these and show a regular pattern of gifting. Such gifts out of surplus income escape IHT immediately ie there is no need to survive seven years.

https://www.mercerhole.co.uk/wp-content/uploads/2019/07/bn_Gifts-out-of-income.pdf

Most gifts stay in an estate for seven years after the date of gift. However, provided that a donor satisfies three conditions, gifts out of income can be treated as immediately exempt from IHT.

The qualifying conditions are:

The gift must be made as part of the normal expenditure of the donor

HMRC’s interpretation is that the gifts should form part of a regular pattern of payments. The exemption may be available where it can be shown that the donor had made a firm commitment regarding future expenditure. You should document this intention, possibly by letter.

Examples of regular gifts could include Christmas and birthday gifts, annual family holiday, insurance policy premiums, education costs, private healthcare arrangements, etc.

The donor must retain sufficient income to maintain his (or her) standard of living Whether or not a gift is made out of income is a subjective test. The amount of income needed, and any available surplus will vary depending upon the particular circumstances of the donor at different times. It may be helpful to prepare an income and expenditure analysis each year to clarify the position.

Gifts must be made out of income

The exemption only applies where expenditure is from surplus net taxable income. Examples of income include salary, dividends, interest, pensions, rental income, business profits, etc. Ideally, income should be identified in the year in which gifts are made to demonstrate that there is sufficient income available, before considering earlier years. Income from earlier years does not retain its character as income indefinitely.
There are no set rules about when accumulated income becomes capital but HMRC normally considers this to happen after two years. This may be a problem where income has been accumulated.

hiriskpaul
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Re: PENSION LTA allowance has suddenly become an issue !

#464947

Postby hiriskpaul » December 11th, 2021, 10:28 am

Relaxer wrote:LTA allowance has suddenly become an issue !
Does anyone have any tips to minimise the effect of the Lifetime Allowance LTA on past pension contributions?
I just realised THREE things
1) Making pension withdrawals does not “free-up” LTA
2) LTA is currently frozen for 5 years.
3) An investment strategy yielding 7% will mean I hit the LTA in 8 years or so as the DC part continues to grow.

I am 60 have about 500k in DC and not in payment yet. One DB value 130k, in payment and 12% of LTA used). I am no longer working and wont be making further contributions. The miracle of compound interest and the slyness of the LTA freeze means that I could easily hit LTA.

Feels to me that the only step I can take in mitigation would be to take the full 25% lump sum ASAP and then withdraw at least my personal tax allowance (11k) worth of taxable pension EACH YEAR.
This cash can then grow in similar type of investments but outside of the pension wrapper and thus at least this growth wont be adding to my LTA tally. I believe that this will mean in 8 years I will be about 140k shy of the LTA instead of hitting it.
Obviously I will have to deal with capital gains tax on the investment growth of the money I took out but I will use ISAs and CGT allowances.
Does this sound sensible and am I missing anything.

Provided you do not want to use the IHT saving features I think it would be safest to fully crystallise now, taking your 125k PCLS. Then invest and gradually work into an ISA. With only 125k investment and 20k per year going into an ISA you are unlikely to run into CGT or dividend tax problems. I would suggest contributing £3600 per year into another SIPP as well. That will help run down the 125k. Fully utilising your personal allowance with pension income makes a lot of sense.

ps make sure you are on target for the full state pension and make additional NI contributions if you are not.


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