Share this page:
Stay connected:
Welcome to the Citywire Money Forums, where members share investment ideas and discuss everything to do with their money.

You'll need to log in or set up an account to start new discussions or reply to existing ones. See you inside!

Notification

Icon
Error

Mitigating impact of LTA
Steve KT
Posted: 11 March 2018 15:18:49(UTC)
#1

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
So I have £1,200,000 in my DC pension pot and no protection. I am a high rate tax payer, still employed, no plans to retire , but just about to turn 55 so some options are now available to mitigate the LTA which I have breached

So I am thinking that to minimise the tax take - I should do this :

Crystalise the whole amount, taking £250,000 tax free, 900,000 into drawdown , and pay £50,000 tax

Then for the cash amount

1 drip feed into my and my wife's ISAs. (Over next 3 years going forward 3 x £40k = £120k)

2 make maximum contributions to wife's pension (she is a basic rate payer) last three years allowance is 3 x£ 40k = £120k, generating a £24k tax rebate

Then for the drawdown amount .. ‎over the next years take income as and when with objective that if/when I come to crystalise again . ie age 75 or purchasing annuity , pot remains £900,000 so no further LTA liability

Anything wrong with this plan? What am I missing ? Comments welcome. Anything that would work better?

Specifically any advantage in crystallising £1m and leaving £250 uncrystalised , which I think is possible.
gary s
Posted: 12 March 2018 16:57:19(UTC)
#2

Joined: 10/03/2012(UTC)
Posts: 2

Thanks: 2 times
The other option which is worth consideration is only crystallize a proportion of the LTA each year, e.g. Yr 1 20%, Yr 2 20% etc. This allows you to gain of any future increases of the LTA. The risk is obviously the government changes the rules!

Good Luck.
Brock
Posted: 13 March 2018 11:05:52(UTC)
#3

Joined: 08/08/2017(UTC)
Posts: 8

Thanks: 3 times
Was thanked: 2 time(s) in 2 post(s)
Worth checking but I thought that each and every w/d would use up a further % of your LTA, this would then be taken into account on the calculation for the final time at age 75.

I have a very similar problem, my plan was to move into drawdown at 55, reducing the drawdown fund to £0 by age 75 so there isn't a further tax liability when the final check is completed at age 75.

The down side seems to be the amount of income tax payable on the w/ds and IHT if the fund ends up in my estate and is not spend during my lifetime.

I would also welcome any suggestions if anyone has any.

Many thanks
Steve KT
Posted: 13 March 2018 12:15:56(UTC)
#4

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
To avoid a second LTA event
You don't need to reduce the drawdown to zero by 75 .. you just have to withdraw all the growth , so that the fund is the same size as it was when you started it
1 user thanked Steve KT for this post.
Brock on 13/03/2018(UTC)
Peter Young
Posted: 13 March 2018 14:29:02(UTC)
#5

Joined: 11/12/2006(UTC)
Posts: 21

Thanks: 1 times
Was thanked: 11 time(s) in 7 post(s)
Suppose you crystallise £1m and take the £250k tax-free cash. There would be no tax to pay at that point.

You then have a remaining fund of £950k. Although only £750k of this remaining fund is crystallised it's still all in the same pot. If you then begin to draw down from this fund what mechanism, if any, will there be in place to distinguish between the uncrystallised and the crystallised?

If the remaining fund is down below 75% of the LTA by the time you reach 75 how can it be determined whether there is any more tax to pay?

1 user thanked Peter Young for this post.
Steve KT on 13/03/2018(UTC)
markus
Posted: 13 March 2018 16:23:12(UTC)
#6

Joined: 02/11/2015(UTC)
Posts: 102

Thanks: 18 times
Was thanked: 92 time(s) in 58 post(s)
Peter Young;58642 wrote:
Suppose you crystallise £1m and take the £250k tax-free cash. There would be no tax to pay at that point.

You then have a remaining fund of £950k. Although only £750k of this remaining fund is crystallised it's still all in the same pot. If you then begin to draw down from this fund what mechanism, if any, will there be in place to distinguish between the uncrystallised and the crystallised?

If the remaining fund is down below 75% of the LTA by the time you reach 75 how can it be determined whether there is any more tax to pay?




surely if you crystallise £1m now & the current LTA allowance is £1m then that's 100% of you allowance gone... the fact it might increase with CPI each yr till you are 75 is of no help because you've used 100% of you allowance.


don't think the taking x% a year would work either as a) you need a 20% uplift in the LTA and b) investments are likely to grow more than CPI increases in LTA
HUFC
Posted: 13 March 2018 17:17:31(UTC)
#9

Joined: 20/05/2010(UTC)
Posts: 41

Was thanked: 25 time(s) in 20 post(s)
Steve - was your fund of such a size in April 2016 that you can apply for Individual Protection 2016, which I believe is still available?

As for paying £40k p.a. into your wife's pension, does she have the taxable earnings to allow that (even though it's your cash you intend to contribute) ? I assume you realise you propose putting tax free cash into a likely taxable pension when it's drawn ?
1 user thanked HUFC for this post.
Steve KT on 13/03/2018(UTC)
Steve KT
Posted: 13 March 2018 20:25:06(UTC)
#8

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
Peter Young;58642 wrote:
Suppose you crystallise £1m and take the £250k tax-free cash. There would be no tax to pay at that point.

You then have a remaining fund of £950k. Although only £750k of this remaining fund is crystallised it's still all in the same pot. If you then begin to draw down from this fund what mechanism, if any, will there be in place to distinguish between the uncrystallised and the crystallised?

If the remaining fund is down below 75% of the LTA by the time you reach 75 how can it be determined whether there is any more tax to pay?



It wouldn't be in the same pot, though would it.
If I crystalised £1m I'd
- take £250k in TFLS
- have to move £750 into drawdown, which I can access
- £200k left in my pension uncrystalised, which I can't access

When I crystallised the last 200k I'd have 0% of my LTA left, and would pay the 25% penalty on the whole sum it had grown into ... So far as I can see this makes me worse off, better to pay 25% now and move the rest to draw down so I can access it and avoid further penalty
Steve KT
Posted: 13 March 2018 20:56:03(UTC)
#10

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
HUFC;58650 wrote:
Steve - was your fund of such a size in April 2016 that you can apply for Individual Protection 2016, which I believe is still available?


No, it was less £1m and also I have made contributions since then, so no protection. In hindsight I should have stopped contributing and kept the LTA of £1.2 but ....

HUFC;58650 wrote:


As for paying £40k p.a. into your wife's pension, does she have the taxable earnings to allow that (even though it's your cash you intend to contribute) ? I assume you realise you propose putting tax free cash into a likely taxable pension when it's drawn ?


Yes, she earns about 40k ish. Yes. I am worried about that bit -- but we get the upfront advantage of 20% relief on the contributions and nowhere near the LTA But yes need to get my spreadsheet working.

Thanks everyone for the input really useful
gary s
Posted: 13 March 2018 21:21:51(UTC)
#7

Joined: 10/03/2012(UTC)
Posts: 2

Thanks: 2 times
markus;58646 wrote:
Peter Young;58642 wrote:
Suppose you crystallise £1m and take the £250k tax-free cash. There would be no tax to pay at that point.

You then have a remaining fund of £950k. Although only £750k of this remaining fund is crystallised it's still all in the same pot. If you then begin to draw down from this fund what mechanism, if any, will there be in place to distinguish between the uncrystallised and the crystallised?

If the remaining fund is down below 75% of the LTA by the time you reach 75 how can it be determined whether there is any more tax to pay?




surely if you crystallise £1m now & the current LTA allowance is £1m then that's 100% of you allowance gone... the fact it might increase with CPI each yr till you are 75 is of no help because you've used 100% of you allowance.


don't think the taking x% a year would work either as a) you need a 20% uplift in the LTA and b) investments are likely to grow more than CPI increases in LTA


I think the approach therefore may give a hedge against inflation (LTA index linked) and a hedge against a big market correction, e.g. 20% drop means full crystallisation with no tax to pay. And given that the LTA 'should' be £1.093m in 3 years may be enough for some not to breach the LTA.

Money Spider
Posted: 14 March 2018 00:03:01(UTC)
#11

Joined: 11/01/2013(UTC)
Posts: 123

Thanks: 52 times
Was thanked: 254 time(s) in 87 post(s)
@Steve KT
In your position I would:

1. Check if you can take advantage of any of the Protection mechanisms (e.g. 2016). I'm not familiar with the cut-off dates. I took an earlier protection.
2. Assuming no Protection available, I would crystallise £990,000 now (i.e. just below the current LTA). You will not pay any LTA tax, you will have £250k to invest elsewhere (ISAs, wife's SIPP etc) and you will have £750k in a SIPP Drawdown account (depends on your platform as to how it is presented).
3. Your uncrystallised fund (£260k) will grow tax-free until you crystallise it or you turn 75 (20 years hence). You can crystallise all, or part, of it at any time BUT you will have to pay LTA tax on the amount when you do (55% tax if you take it out, 25% if you move it into the Drawdown fund).
Remember that the LTA (theoretically) is due to increase by inflation each year, so you get some future chances to take more tax-free cash. I would keep just below the (then) LTA limit to maintain future 'headroom'.
4. You can obviously draw down income from your Drawdown account whenever you like but you'll pay income tax at your marginal rate. This might make sense for investing where tax-breaks exist (VCTs, the EIS schemes mentioned today - 13/03/18)
5. You will still pay LTA on your 75th birthday on that amount which has not yet been assessed for LTA. This means anything which is still uncrystallised and all growth in the Drawdown fund.

I think that, unfortunately, you could be paying a lot of LTA tax (at some point) over the next 20 years. If you don't need the money and can't think of a better place to invest if (net of paying LTA tax) then I would leave it (the top £250k) uncrystallised, or at least be in no hurry.

DO NOT continue to pay into any pension schemes - there is no point.
Money Spider
Posted: 14 March 2018 00:29:10(UTC)
#12

Joined: 11/01/2013(UTC)
Posts: 123

Thanks: 52 times
Was thanked: 254 time(s) in 87 post(s)
I've just thought of a flaw in my suggestion above of 'trailing the future increases in the LTA':

The LTA is measured as a percentage i.e. if you (today) crystallise £990k then you will use up:
990/1000 of your LTA, or 99% and so have 1% remaining.
Therefore if the LTA increases by 3% to £1030k then the increase in YOUR LTA is not £30k it is 1% of £1030k i.e. £10.3k. So, you'll get some benefit, but it won't be huge.

HTH
Steve KT
Posted: 14 March 2018 06:33:47(UTC)
#13

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
The more I think it through the more convinced I am that I should crystalize it all now, and use drawdown , judiciously , to avoid paying penalty later . ..

Basically the tax system is designed to encourage that behaviour

The only reason to keep any uncrystalised is if I am hoping for a change in the tax laws , but that's a foolish strategy I think .

Brock
Posted: 14 March 2018 09:51:37(UTC)
#14

Joined: 08/08/2017(UTC)
Posts: 8

Thanks: 3 times
Was thanked: 2 time(s) in 2 post(s)
Depending on your situation would the only other benefit of not vesting all of the fund be IHT based? From what everyone has said realistically, apart from a market correction, it doesn't sound as if you can get out of the LTA charge, but could there be a potential 40% IHT saving?

Would it be possible @ 55 to draw up to the LTA and leave the rest uncrystallised. Accept and pay the LTA tax at 75 and let your successor inherit the balance of your drawdown fund in due course. On your death they will pay income tax at their marginal rate if you die after 75, but not the 40% IHT that they would have paid if the funds were in your estate and they inherit them. (I think it might work better if you were to die before 75 from an income tax point of view.)

1 user thanked Brock for this post.
Steve KT on 14/03/2018(UTC)
Steve KT
Posted: 14 March 2018 10:11:32(UTC)
#15

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
Yes , iht is an interesting one, and your point is interesting

Two other factors to consider though
1 my estate currently goes to my wife so no iht anyway . Of course that might change if she pre deceased me or otherwise.

2 let's assume I live until .. say .. 80. My fund isn't going to increase forever as at some point I retire and live off it. Crystalising now leaves £950k in my pension fund, free of further LTA . It's perhaps optimistic to assume that I would die at 80 with more money than I have now, perhaps more realistic to assume I will spend at least all the forthcoming growth . Perhaps more than that
Brock
Posted: 14 March 2018 10:47:54(UTC)
#16

Joined: 08/08/2017(UTC)
Posts: 8

Thanks: 3 times
Was thanked: 2 time(s) in 2 post(s)
Maybe we should all just cough up the tax, but it just seems a shame to get clobbered with a 55% LTA charge followed by a 40% IHT charge on the same money, even if it isn't until your wife's death the IHT might become payable.
Mr J
Posted: 14 March 2018 10:50:27(UTC)
#18

Joined: 30/09/2014(UTC)
Posts: 70

Thanks: 40 times
Was thanked: 120 time(s) in 38 post(s)
Brock you made me laugh.
I don’t think I am willing to die for tax reasons :)
Steve KT
Posted: 14 March 2018 14:19:08(UTC)
#17

Joined: 10/03/2018(UTC)
Posts: 11

Thanks: 3 times
Was thanked: 1 time(s) in 1 post(s)
Brock;58708 wrote:
Maybe we should all just cough up the tax, but it just seems a shame to get clobbered with a 55% LTA charge followed by a 40% IHT charge on the same money, even if it isn't until your wife's death the IHT might become payable.


Hmmm
When I get to 75 the fund crystalises anyway and LTA excess isntaxed
If I die before 75 isn't that a crystalising event ?

I think the only way to avoid the LTA tax is to crystaliase and take income
Brock
Posted: 14 March 2018 14:42:22(UTC)
#19

Joined: 08/08/2017(UTC)
Posts: 8

Thanks: 3 times
Was thanked: 2 time(s) in 2 post(s)
I believe on your death before 75 there would be a crystallization event and tax if you exceeded the LTA, but your wife would receive the pension benefits tax-free and no extra IHT as the money is not in your estate.

@ Mr J....no dedication!

1 user thanked Brock for this post.
Mr J on 14/03/2018(UTC)
+ Reply to discussion

Markets

Other markets