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Lifetime Allowance
Joe 90
Posted: 21 January 2018 11:57:41(UTC)
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With 4 years to go before I retire, and assuming my DC pot continues to grow as it has over the last 10 years, I will be within spitting distance of the current LTA. My intention is to go into drawdown and take (say) 4% annually, with the first 25% of each payment free of tax.

Assuming I live for a few more years there is a danger that my drawdown fund could exceed the £1 figure. Will this result in being hit by the punitive tax charge? If so, I may rein back in my pension contributions now, and invest elsewhere instead.

Grateful for thoughts.
Redundant (Old Timer?)
Posted: 21 January 2018 12:08:27(UTC)
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The LTA is tested at the time the pension is put into drawdown. It will then be tested again at the then prevailing LTA when you reach 75. If you think it likely to breech the age 75 LTA, you can always increase the amount you draw down.

I believe the pension industry thing the age 75 LTA serves no real purpose in the vast majority of cases, so hopefully their lobbying will eventually lead to its removal - ideally before I reach 75 and I am ahead of you!
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Joe 90 on 21/01/2018(UTC)
Redundant (Old Timer?)
Posted: 21 January 2018 12:10:42(UTC)
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The LTA is tested at the time the pension is put into drawdown. It will then be tested again at the then prevailing LTA when you reach 75. If you think it likely to breech the age 75 LTA, you can always increase the amount you draw down.

I believe the pension industry thing the age 75 LTA serves no real purpose in the vast majority of cases, so hopefully their lobbying will eventually lead to its removal - ideally before I reach 75 and I am ahead of you!
Mr J
Posted: 21 January 2018 12:58:59(UTC)
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LTA rises by 3% to £1,030,000 in April.

LTA should rise with inflation, so you will be doing well to grow your fund by more than 4% + inflation over the long term I think.
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Joe 90 on 21/01/2018(UTC)
andy
Posted: 21 January 2018 13:05:04(UTC)
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Posted this on the other version of this ...

Joe

I can not comment on your specific circumstances for all sorts of reasons but comments:

1. The chancellor increased the lifetime allowance in the 2017 budget by 3% to £1,030,000 - as we all know governments of all persuasions are very keen to keep changing the rules - but this maybe the first of a trend. Think of it as a bribe to the rich middle classes to vote Tory.

2. You may want to contribute more than the LTA considering that there maybe a correction / crash during your retirement which at the moment I am not sure where would be safe from it - the extra you might want to hold as cash or if you are in to that sort of thing - gold.

3. I personally have a strategy which contributes 1/3 of my total investments to my ISA and 2/3rd to my SIPP. I use the ISA for income generation and my SIPP on an income and growth strategy. As such - both generate a similar amount of income due to the different strategies in play.

Andrew
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Joe 90 on 21/01/2018(UTC)
Money Spider
Posted: 21 January 2018 13:17:51(UTC)
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You don't have to crystallise your whole SIPP in one go - you can do it in as many tranches as you like and there is no penalty for doing so. The LTA is tested at EACH of these 'Benefit Crystallisation Events' and then again on your 75th birthday.

If you think that you may exceed your LTA in ~4 years then:
1. Is any 'Protection' available to you? This generally fixes your LTA at a fixed sum, often the one in force a couple of years ago. I am not familiar with what the current rules are - google "Fixed Protection for Lifetime Allowance", or similar. You MAY be entitled to a higher figure than £1M (e.g. £1.25M). If true, this will give you a higher LTA.

2. You could consider crystallising a percentage of your SIPP now (you don't need to take an income from it yet). For example, if you were to crystallise £320k you would then have £240k in Drawdown (still growing at the same rate) and you would have £80k to fund ISA contributions for you(your wife?) for the next 2-4 years where the money can be re-invested for tax-free returns.

3. In the end, I would suggest that you only crystallise, say, 95% of your SIPP. This means that your is not fully 'drawn down' and (presumably) you can benefit from any future increases in the LTA.

4. Don't forget that if you have a wife/partner they can contribute to their own SIPP up to age 75 - even if they have no earned income. If you have no income, you can contribute £2,880 p.a. into a SIPP and the government will give you tax relief to top it up to £3,600 gross.

There are quite a few postings on this very subject somewhere on this site.

HTH
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Joe 90 on 21/01/2018(UTC), AJW on 22/01/2018(UTC)
Money Spider
Posted: 21 January 2018 13:28:10(UTC)
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BTW, the £1M LTA figure doesn't apply ONLY to the Drawdown Fund - it is the total SIPP fund (uncrystallised + crystallised) PLUS the tax-free cash that you have taken.

Think of it like this:
LTA = £1M
Each time you crystallise some funds, you use up a %age of the LTA.
Viz: using my example above, if you crystallise £320k then you have used up 32% of your LTA (although your Drawdown Fund only contains £240k).

So, if you make the first crystallisation when your total SIPP funds = £1M (LTA), then you need to draw down ALL the yield and ALL the growth each year to avoid paying any tax on your LTA.
*This ignores any annual increases to the LTA and any capital reductions in your SIPP.

Obviously you would try to develop a strategy to smooth out the 'ups' and 'downs'.
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Joe 90 on 21/01/2018(UTC)
Mr J
Posted: 21 January 2018 13:40:36(UTC)
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Sorry but you cannot call an inflationary increase ‘a bribe to the rich middle classes’. Inflation is inflation and there is no real terms rise involved here.

In terms of the level of the LTA, in a low interest rate environment £1M is rather meagre. It will buy someone an income of £30k to £40k gross per annum. That income will be subject to income tax (less 25% tax free). That income will be permanently subject to precarious investment risks and inflationary pressures over what could be a 40 year retirement period. That income is not enough to pay the fees at a home for the elderly for one person. That income is probably being used towards supporting a second person with no income - spouse etc during most of the retirement period. That income could be supporting someone living in the expensive south east.

Del Boy said ‘this time next year we’ll be millionaires’ but in the end with inflation many ordinary people already are and find it is a long way from being rich.
4 users thanked Mr J for this post.
Money Spider on 21/01/2018(UTC), Freddy4Skin on 21/01/2018(UTC), Tim D on 21/01/2018(UTC), Keith Cobby on 21/01/2018(UTC)
Alan Selwood
Posted: 21 January 2018 15:54:25(UTC)
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I agree!
Politicians are very skilful at spin : so-called 'generous amounts' added to what is paid to you will often be expressed as '3% more' or '£2.50 per week more or 'a whole 17% greater than when the other party was in power' (30 years ago?) depending on which of these looks, superficially, the most saleable figure, regardless of the true cash value to you personally in RPI-adjusted terms.

Meanwhile tax increases will be by :
Not increasing previous allowances to allow for the lost purchasing power of the money (= inflation)
Sheer stealth (e.g. hiding the fine detail in gigantic paragraphs of small print in the form of post-Budget HMRC guidance notes, rather than saying it boldly in the Budget speech itself)
Also, there is a tendency to make the increase look small, by saying 'a modest increase of (for example) just 40p per day' rather than '£146 this year, probably rising again next year'.

Then there is the timing trap : Increases are often 'from midnight tonight' while decreases are usually 'spread over the next 3 tax years'.

If they were salesmen, they would be hauled up for deception (and for not having clearly expressed Key Information Documents!!)
3 users thanked Alan Selwood for this post.
Joe 90 on 21/01/2018(UTC), Tim D on 21/01/2018(UTC), Mr J on 22/01/2018(UTC)
Julianw
Posted: 21 January 2018 16:04:34(UTC)
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Bear in mind how punitive breaching your life time allowance depend on the tax relief you get on your contribution and your tax rate on withdrawal!

If you get 40% tax relief on your contribution and if you are a 20% tax payer at withdrawal, the net effect is neutral.

Contribute £100 gross require £60 net

breach life time allowance by £100. 25% tax charge leaves £75. 20% tax rate leave you £60 net

PS: any employer contribution will also favour continue pension contribution.
2 users thanked Julianw for this post.
Joe 90 on 21/01/2018(UTC), Tim D on 21/01/2018(UTC)
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