Dilemma: SIPP & LTA & FP2016

[bdr1000]

Seeking wisdom and opinions - revisiting a dilemma.

The dilemma is whether to restart contributing into my SIPP to offset some income tax on rental income.

Quick background:
Age 48
UK citizen and tax resident
Net Worth £3m of which 1m is principle property and £2m SIPP+ISA+Taxable
All pensions consolidated into one SIPP
Current value of SIPP just under £1m allocated 65/35 in VWRL/VAGP
Previously applied for Fixed Protection 2016 (£1.25m) for pension and stopped contributions
Currently not working, instead full time travelling around Europe pursuing a passion (EU passport holder), no work income, not drawing down portfolio, instead
Renting principle property for income £36k pa before tax which covers living costs but generates a self assessment tax bill.

My Dilemma:

Current pension LTA is £1,073,000m and frozen for three more years till April'26.
I have nine years before I can access my pension, a possible six years of LTA increases.
I have FP2016 which gives me £1.25m LTA so long as I don't contribute to my pension, a difference of £176k LTA allowance which is about six years of 3% LTA increases (or equivilent).
By retaining the FP2016 I secure the higher LTA but miss opportunities to contribute to the pension over the next nine years (or more) for example currently to offset some of the income tax I pay on rental income.
Whilst no one has a crystal ball, and with the LTA having been reduced a lot over the past 15 years, currently frozen, and now a period of inflation, its possible we will see some increases in the LTA over the next nine years which could easily reach £1.25m or surpass it.

I'm inclined to start contributing again, to help offset some tax.

Welcome your opinions on whether this logic makes sense, or whether I am giving up a valuable protection (FP2016) which I'll regret.

Thank you for reading and/or commenting.

[SebsCat]

You can only put £3k gross of unearned income a year into a SIPP - I'm pretty sure that rental income doesn't count as earned. So it's hardly going to make a difference. Also, on a £1m+ SIPP, you'll be paying at least basic rate income tax on withdrawals so you won't be making any net savings if you are only claiming BR tax on the contributions. Seems like a non-issue unless you return to employment and are earning at higher rate.

FWIW, I expect there will be some announcements about pension reform in the spring budget. Might just be an increase in the LTA, but could be more far reaching with some aspects that aren't as favourable (eg increase LTA but reduce amount of tax free cash that can be taken out).

[ursaminortaur]

You can only put £3k gross of unearned income a year into a SIPP - I'm pretty sure that rental income doesn't count as earned. So it's hardly going to make a difference. Also, on a £1m+ SIPP, you'll be paying at least basic rate income tax on withdrawals so you won't be making any net savings if you are only claiming BR tax on the contributions. Seems like a non-issue unless you return to employment and are earning at higher rate.

FWIW, I expect there will be some announcements about pension reform in the spring budget. Might just be an increase in the LTA, but could be more far reaching with some aspects that aren't as favourable (eg increase LTA but reduce amount of tax free cash that can be taken out).

Just to confirm

https://hartleypensions.com/pensions/sipp/contributions/#:~:text=Relevant%20Earnings%20are%3A,Dividends%20and%20other%20investment%20returns

Pension income, Capital Gains, rental income and investment income is not classed as earnings and cannot be included in the definition of relevant UK earnings.

[bdr1000]

Thank you for this information re: property income.

Do you know if this is a recent change (after 2020)?

[ursaminortaur]

Thank you for this information re: property income.

Do you know if this is a recent change (after 2020)?

No, it isn't a recent change rental income hasn't ever been regarded as relevant income for pension contributions as far as I am aware.
(Someone will now probably popup and tell me that you could use it ages ago, eg before A-day in 2006, when I was paying less attention to such things)

Note. This is the general position for rental income. However there is a potential exception for income from a holiday lettings business.

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/tax-relief-members-contributions

* Rental income is generally not relevant earnings but some rental income may be included if it is in respect of UK or EEA* furnished holiday lettings business

[hiriskpaul]

If you contribute more and the amount contributed ends up being over the LTA when you crystallise you will lose 40% on withdrawal. 25% LTA charge, then 20% income tax at basic rate. If the contributed amount ends up being below the LTA you will be able to take 25% as a tax free PCLS and draw the rest at 20% tax, net result 15% tax. Given you will only get 20% tax relief on the contribution and you are very close to your LTA I would say it was not worth the risk.

[bdr1000]

No, it isn't a recent change rental income hasn't ever been regarded as relevant income for pension contributions as far as I am aware.
[/i]

Thanks for taking time to reply - much appreciated.

[bdr1000]

If you contribute more and the amount contributed ends up being over the LTA when you crystallise you will lose 40% on withdrawal. 25% LTA charge, then 20% income tax at basic rate. If the contributed amount ends up being below the LTA you will be able to take 25% as a tax free PCLS and draw the rest at 20% tax, net result 15% tax. Given you will only get 20% tax relief on the contribution and you are very close to your LTA I would say it was not worth the risk.

Thanks for taking time to spell out the detail like that - its really helpful!

[bdr1000]

If you contribute more and the amount contributed ends up being over the LTA when you crystallise you will lose 40% on withdrawal. 25% LTA charge, then 20% income tax at basic rate. If the contributed amount ends up being below the LTA you will be able to take 25% as a tax free PCLS and draw the rest at 20% tax, net result 15% tax. Given you will only get 20% tax relief on the contribution and you are very close to your LTA I would say it was not worth the risk.

A related question.

Let's say I reach pension access age (58), the LTA is still £1.073m, I crystalise/withdraw a years worth of living expenses, as an example £50k.

i. Is this recorded as 50k against a now fixed LTA of 1.073m? Or as a percentage of LTA e.g. 4.66%?

ii. Let's say the following year the LTA rises to 1.2m. Do I still benefit from this and future rises in LTA, or, am I now stuck with a frozen LTA at first crystalisation event e.g. 1.073m LTA? If I benefit, is it based on the remaining % for example I used 4.66% so now have 95.34% remaining of the new 1.2m LTA so 1.144m?

[TedSwippet]

i. Is this recorded as 50k against a now fixed LTA of 1.073m? Or as a percentage of LTA e.g. 4.66%?

A percentage. You use up your LTA in percentages, measured against the larger of the standard LTA in effect at the time and any protected LTA.

(In your specific case, you have FP2016, so assuming you've done nothing that would mean you lose protection, crystallising 50k would release 12.5k tax-free, 37.5k taxable, consume exactly 4.00% of your protected LTA, and leave you with 96% LTA for future use.)

ii. Let's say the following year the LTA rises to 1.2m. Do I still benefit from this and future rises in LTA, ...

Yes, to the extent that you still have some unused LTA percentage.

(As for your specific numbers though ... again, assuming you continue to hold FP2016 you would actually not benefit from any rises in the standard LTA until it exceeds your protected 1.25m LTA. At that point, and assuming you still have some unused LTA percentage, FP2016 becomes irrelevant.)

[bdr1000]

i. Is this recorded as 50k against a now fixed LTA of 1.073m? Or as a percentage of LTA e.g. 4.66%?

A percentage. You use up your LTA in percentages, measured against the larger of the standard LTA in effect at the time and any protected LTA.

(In your specific case, you have FP2016, so assuming you've done nothing that would mean you lose protection, crystallising 50k would release 12.5k tax-free, 37.5k taxable, consume exactly 4.00% of your protected LTA, and leave you with 96% LTA for future use.)

ii. Let's say the following year the LTA rises to 1.2m. Do I still benefit from this and future rises in LTA, ...

Yes, to the extent that you still have some unused LTA percentage.

(As for your specific numbers though ... again, assuming you continue to hold FP2016 you would actually not benefit from any rises in the standard LTA until it exceeds your protected 1.25m LTA. At that point, and assuming you still have some unused LTA percentage, FP2016 becomes irrelevant.)

Thank you for taking time to read and reply, esp with the detail.

From your commentry, let's assume I void my FP2016 by making a new contribution to my SIPP at some time before turning 58 and then proceed as per the scenario to withdraw 4% at age 58? the following year the LTA is increased to 1.2m and I have 96% available (equivilent to £1,152,000).

If this is the case, then I think the FP2016 I currently hold is not so valuable to me with a further ten years before access, although the LTA is currently frozen for a further three years, there is a reasonable chance it will be increased over the next ten years (would only need 3% for six years to match the FP2016 figure).

Even if it doesnt catch up in ten years then if it takes a couple more years I'll still benefit from the subsequent changes (after age 58) so long as I don't take a big lump sum upfront.

Or unless the pension LTA policy is changed radically, scrapping it or very long periods of no indexation (real terms reducation).

I may consider contributing and voiding the FP2016 which does not feel that valuable.

Thank you all again for reading and sharing your wisdom. It helps.

[ursaminortaur]

i. Is this recorded as 50k against a now fixed LTA of 1.073m? Or as a percentage of LTA e.g. 4.66%?

A percentage. You use up your LTA in percentages, measured against the larger of the standard LTA in effect at the time and any protected LTA.

(In your specific case, you have FP2016, so assuming you've done nothing that would mean you lose protection, crystallising 50k would release 12.5k tax-free, 37.5k taxable, consume exactly 4.00% of your protected LTA, and leave you with 96% LTA for future use.)

ii. Let's say the following year the LTA rises to 1.2m. Do I still benefit from this and future rises in LTA, ...

Yes, to the extent that you still have some unused LTA percentage.

(As for your specific numbers though ... again, assuming you continue to hold FP2016 you would actually not benefit from any rises in the standard LTA until it exceeds your protected 1.25m LTA. At that point, and assuming you still have some unused LTA percentage, FP2016 becomes irrelevant.)

Thank you for taking time to read and reply, esp with the detail.

From your commentry, let's assume I void my FP2016 by making a new contribution to my SIPP at some time before turning 58 and then proceed as per the scenario to withdraw 4% at age 58? the following year the LTA is increased to 1.2m and I have 96% available (equivilent to £1,152,000).

If this is the case, then I think the FP2016 I currently hold is not so valuable to me with a further ten years before access, although the LTA is currently frozen for a further three years, there is a reasonable chance it will be increased over the next ten years (would only need 3% for six years to match the FP2016 figure).

Even if it doesnt catch up in ten years then if it takes a couple more years I'll still benefit from the subsequent changes (after age 58) so long as I don't take a big lump sum upfront.

Or unless the pension LTA policy is changed radically, scrapping it or very long periods of no indexation (real terms reducation).

I may consider contributing and voiding the FP2016 which does not feel that valuable.

Thank you all again for reading and sharing your wisdom. It helps.

One complication if you want to contribute again to a DC pension is that the moment you take anything out of the pension post 58, currently post 55, other than the tax free lump sum you will be restricted to making contributions of £4000 gross or less in the future - this is known as the MPAA limit.

So if at age 58 you took out £50,000 using UFPLS ( the first 25% of which is tax free but the other 75% of which is taxed) or you partially crystallised your pot and crystallised £50,000 ( again likely taking 25% of that as a tax free lump sum and then taking the rest which would be taxed) then the MPAA would apply and restrict future contributions to £4000 gross per year. You could avoid this by crystallising £200,000 and just taking the 25% (£50,000) tax free lump sum without then drawing down anything more - that way you can still use the full annual allowance of £40,000 for future contributions.

Note. Not all providers will allow you to partially crystallised your pension pot some will require that you crystallise the whole pot. Also those that do allow partial crystallisation handle it in different ways. A J Bell for instance handles it behind the scenes and just presents you with a view of all your holdings crystallised or not whereas some other providers physically split your pot in two and may charge you extra for handling two pots.

[bdr1000]

Well, this all became easier after yesterday's budget announcement!

[moorfield]

Well, this all became easier after yesterday's budget announcement!

Well Yes, and No.

While the LTA announcement yesterday was eye-catching, behind that the "25%" tax free rate has been effectively dropped, replaced by a maximum limit of £268,275 which of course now becomes another threshold that can be raised or lowered at whim in the future, in many wonderful ways. So the problem of tax efficient withdrawal remains for those who answer the siren call to continue working and accumulate even larger pots, £2m, £3m etc. now find that tax free rate is 12.5%, 8.3% and so on. What a Canny Hunt.

In my FIRE planning the optimal (tax) use of pensions is to contribute at 40% income tax relief then withdraw at the lower rate, or 4/3* the lower rate using ufpls. In practice that means accumulating a portfolio of roughly £1.25m as "just enough" that can sustain a natural yield of £50,270-£67,026pa over 15-20 years of an "active" retirement (and keep up with any changes in that threshold).

Seeking wisdom and opinions - revisiting a dilemma.

The dilemma is whether to restart contributing into my SIPP to offset some income tax on rental income.

Quick background:
Age 48
UK citizen and tax resident
All pensions consolidated into one SIPP
Current value of SIPP just under £1m allocated 65/35 in VWRL/VAGP

We have similar numbers. I'd suggest your SIPP is large enough already to generate a decent (lower rate tax) income without straying into excessive tax withdrawal territory. My suggestion from here would be to start building a VCT portfolio alongside, although I'm not sure if you can claim the 30% tax relief against your rental income - you might have to ask on that board.

[ursaminortaur]

Well, this all became easier after yesterday's budget announcement!

Well Yes, and No.

While the LTA announcement yesterday was eye-catching, behind that the "25%" tax free rate has been effectively dropped, replaced by a maximum limit of £268,275 which of course now becomes another threshold that can be raised or lowered at whim in the future, in many wonderful ways.

As far as I am aware the 25% tax free limit still remains per pension scheme. All that has changed is that the maximum overall limit used to be 25% of the LTA limit and with the abolition of the LTA is now a separate limit with the same value as it had under the final LTA limit.

[Alaric]

As far as I am aware the 25% tax free limit still remains per pension scheme. All that has changed is that the maximum overall limit used to be 25% of the LTA limit and with the abolition of the LTA is now a separate limit with the same value as it had under the final LTA limit.

Presumably they will write the limit into legislation somewhere, which gives future Chancellors the ability to change it. Even leaving it the same effectively reduces it over time given the continuing Government policy to force devaluation of the currency with inflation of at least 2%.

[taken2often]

LTA was proof that MP's are really dumb. No doubt proposed by Civil Servants as fair and equitable, so that the MP's would go along with it. Then complaints that it was too generious at 1.8m so reduced to 1.5m. Thats where I locked in. Then down to 1m. This was a tax that only damaged people who could be Conservative leaning. Control Input is fine but to punish success was really dumb. Unintended results, hundreds perhaps thousands of Professionals changed to early retirement or part time.

I was lucky and the markets dropped a few month before my 75 birthday so I just scrapped through without paying tax.

It appears that it is not coming into effect till April 2024 so if you are 75 during 2023/24 you are to be punished.Foolish or what.

Bob

[ursaminortaur]

LTA was proof that MP's are really dumb. No doubt proposed by Civil Servants as fair and equitable, so that the MP's would go along with it. Then complaints that it was too generious at 1.8m so reduced to 1.5m. Thats where I locked in. Then down to 1m. This was a tax that only damaged people who could be Conservative leaning. Control Input is fine but to punish success was really dumb. Unintended results, hundreds perhaps thousands of Professionals changed to early retirement or part time.

I was lucky and the markets dropped a few month before my 75 birthday so I just scrapped through without paying tax.

It appears that it is not coming into effect till April 2024 so if you are 75 during 2023/24 you are to be punished.Foolish or what.

Bob

The LTA excess charge is being dropped in April 2023 though so noone will be punished after that. The fact that the LTA itself isn't being abolished until April 2024 is probably just to give brokers time to alter their systems.

https://www.hl.co.uk/news/articles/lifetime-and-annual-allowance-spring-budget-changes-what-they-mean-for-you

The lifetime allowance itself is set to be abolished from April 2024, in the meantime the lifetime allowance charge will be removed from 6 April 2023 meaning no-one will incur the charge. This will be welcomed by many who see this allowance as a tax on investment growth and unnecessary in a regime where there is already an annual allowance in play.

The upper limit on the tax free cash someone can take from their pensions is being capped at 25% of the current LTA (£268,275) from 6 April 2023 unless you have protections that entitle you to a higher level, but this remains a significant benefit.

The LTA made some sense when the Annual Allowance was £215,000 (as introduced in 2006) or £255,000 (as it was in 2010). However the only reason for cutting it when the Coalition and Conservative governments drastically cut the Annual Allowance was as a tax grab.

[taken2often]

Thanks for the correction. The reporting I saw poor

Bob

[Jam1]

I would be interested to know whether anyone is incentivised to add more to their pension now, given Labour’s intent to reverse this. The only beneficiaries likely to be people able to take pensions that would otherwise be higher than the LTA before the next election?