Pension / LTA query
Discussion
Hi,
Long time PH'er, but I have created a second account specifically for privacy purpose.
Please make a cup of coffee or tea, and pull up a chair as it’s a longish read.
Going back a few years now, but I decided around my mid 30's that I wish to retire at 55. I became aware of the value on my non-contributory DB pensions so it formed the backbone of my retired plan (mixture of DB pension, SIPP, ISA, and cash savings). Why so early some may say? Basically, I wanted to enjoy my life with my wife, pursue our hobbies, socialise with friends and family, and visiting other countries/cultures etc.., and working was just a mean to finance this wish. Back in late 2017 (I was 47), I assessed our finances/retirement plan and the numbers stacked up, so I retired at the start of 2018. My wife retired (39) back in 2015. Our retirement plan (including both my wife & I assets) is broadly broken down as follows:
47 - 55 = Funding out of cash savings & ISA
55 - 60 = SIPP pension & cash savings
60 onward = DB pension & cash savings
As per above, we are funding our early retirement from savings and switching to our SIPP pensions when I hit 55, and then onto my DB pension at 60. Also, any remaining balance on the SIPP pension will be passed down efficiently to my wife and 2 girls if I go first.
Our retirement was ticking along nicely for the last 1.5 years, but then curiosity got the better of me as and I contacted my DB pension administrator for a CETV/ transfer value, especially since the pension didn't cost me a penny during my 23 years’ service. I suspected my DB pension transfer value could be sizable. I received the letter last Friday, and the transfer value was indeed sizable at £1,004,000. To give some context, my deferred DB pension at Aug-18 is £27,570.96 (risen since my departure from the scheme with a preserved income of £25,311 back in 2012 / NRA 60 at 2030) :
GMP after 5 Apr 1988 £1,289.60
Scheme pension before 6 April 1997 £7,197.89
Scheme pension after 6 April 1997 £19,083.47
Total Pension = £27,570.96
This transfer value has twigged my attention and question whether my original retirement plan can be enhanced 1) fund retirement mostly from the growth of our 'new' SIPP pension pot + top up with our cash savings, and therefore leave a sizable pension legacy to my two girls when we pass away, 2) improve liquidity/funding to SIPP pension to match our active lifestyle while we are still youngish / before we are too old to travel at 70+! I am aware of the benefits within my DB pensions (no risk guarantee income, spouse & children pensions, annual RPI increases etc..), but I have a few questions (or concerns!) for the pension experts on this forum to comment on my new retirement plan.
Q1 - Based on the last Aug-2018 pension value of £27,571, the transfer value is approx. x 36 of the DB pension income. Simple question, but one which could be controversial. Is this a decent or poor transfer value based on the DB pension income?
Let’s assume I accept the £1.0mio transfer into my SIPP pension pot which now total £1.3mio. (to simplify, LTA limit and pension growth remain static for this purpose). My LTA excess will be £245k. Retirement plan part 2 would be broken down as follows:
47- 55 = Funding out of cash savings & ISA
55 onward = growth on SIPP pension (with pot increased by £1.0mio), growth on ISA & cash savings
Q2 - Plan is the same from 47-55 using existing savings, but from 55 onwards, we could in theory extract the growth from the £1.055mio to finance our retirement and preserve the pension pot for our girls. High level plan is to make regular drawdown of £200k, and invest the £50k TFC into ISA and retain the £150k in the drawdown account so it remains invested and continue to (hopefully) grow. Continue this for say 5 years until I use up my LTA limit of £1.055mio. Let’s assume a low 3.5% growth, 3.5% on £264k = £9,240 Tax free cash, 3.5% on £791k = £27,685 taxable income.
Potential Net Income = £33,788 (£9,240 TFC + £12,000 + £12,548 (£15,685 x 0.8)) This is quite a bit higher than existing DB pension (aware the gap would reduce with time as the DB pension is subject to RPI increase, but then I would be old and decrepit 😊)
Also, we have my wife’s SIPP and our current savings to top up any extra funding requirements.
Is this a feasible retirement plan or is this a complete no-no, or are there any other issues I should be aware of?
Q3 - Now to the LTA £245k excess amount which is the part that’s unclear to me, and how it would fit into my overall withdrawal strategy.
Is there any benefit if I crystalise the entire £245k on day 1 / 55 years old, and pay HMRC the 25% tax (£61,250), but not use the remaining 75% / £183,750. Would this £183,750 be passed down to my beneficiaries’ tax free (if I pass away before 75).
We are fully aware that we are fortunate to be financially dependent at such an early age, and having this extra option on the table is an added bonus for us / our girls, so we need to ensure the we choose the right path. Thank you for staying the course to read my waffle, but any feedback will be appreciated.
Caveats:
- Aware I need to take financial advice for pension transfer of this size (assumption there’s a willing IFA!)
- Aware the pension income risk is all on us / we would accept market risk on SIPP pension etc..
- Will need to re-balance SIPP pension with lower risk funds to protect our investments
Long time PH'er, but I have created a second account specifically for privacy purpose.
Please make a cup of coffee or tea, and pull up a chair as it’s a longish read.
Going back a few years now, but I decided around my mid 30's that I wish to retire at 55. I became aware of the value on my non-contributory DB pensions so it formed the backbone of my retired plan (mixture of DB pension, SIPP, ISA, and cash savings). Why so early some may say? Basically, I wanted to enjoy my life with my wife, pursue our hobbies, socialise with friends and family, and visiting other countries/cultures etc.., and working was just a mean to finance this wish. Back in late 2017 (I was 47), I assessed our finances/retirement plan and the numbers stacked up, so I retired at the start of 2018. My wife retired (39) back in 2015. Our retirement plan (including both my wife & I assets) is broadly broken down as follows:
47 - 55 = Funding out of cash savings & ISA
55 - 60 = SIPP pension & cash savings
60 onward = DB pension & cash savings
As per above, we are funding our early retirement from savings and switching to our SIPP pensions when I hit 55, and then onto my DB pension at 60. Also, any remaining balance on the SIPP pension will be passed down efficiently to my wife and 2 girls if I go first.
Our retirement was ticking along nicely for the last 1.5 years, but then curiosity got the better of me as and I contacted my DB pension administrator for a CETV/ transfer value, especially since the pension didn't cost me a penny during my 23 years’ service. I suspected my DB pension transfer value could be sizable. I received the letter last Friday, and the transfer value was indeed sizable at £1,004,000. To give some context, my deferred DB pension at Aug-18 is £27,570.96 (risen since my departure from the scheme with a preserved income of £25,311 back in 2012 / NRA 60 at 2030) :
GMP after 5 Apr 1988 £1,289.60
Scheme pension before 6 April 1997 £7,197.89
Scheme pension after 6 April 1997 £19,083.47
Total Pension = £27,570.96
This transfer value has twigged my attention and question whether my original retirement plan can be enhanced 1) fund retirement mostly from the growth of our 'new' SIPP pension pot + top up with our cash savings, and therefore leave a sizable pension legacy to my two girls when we pass away, 2) improve liquidity/funding to SIPP pension to match our active lifestyle while we are still youngish / before we are too old to travel at 70+! I am aware of the benefits within my DB pensions (no risk guarantee income, spouse & children pensions, annual RPI increases etc..), but I have a few questions (or concerns!) for the pension experts on this forum to comment on my new retirement plan.
Q1 - Based on the last Aug-2018 pension value of £27,571, the transfer value is approx. x 36 of the DB pension income. Simple question, but one which could be controversial. Is this a decent or poor transfer value based on the DB pension income?
Let’s assume I accept the £1.0mio transfer into my SIPP pension pot which now total £1.3mio. (to simplify, LTA limit and pension growth remain static for this purpose). My LTA excess will be £245k. Retirement plan part 2 would be broken down as follows:
47- 55 = Funding out of cash savings & ISA
55 onward = growth on SIPP pension (with pot increased by £1.0mio), growth on ISA & cash savings
Q2 - Plan is the same from 47-55 using existing savings, but from 55 onwards, we could in theory extract the growth from the £1.055mio to finance our retirement and preserve the pension pot for our girls. High level plan is to make regular drawdown of £200k, and invest the £50k TFC into ISA and retain the £150k in the drawdown account so it remains invested and continue to (hopefully) grow. Continue this for say 5 years until I use up my LTA limit of £1.055mio. Let’s assume a low 3.5% growth, 3.5% on £264k = £9,240 Tax free cash, 3.5% on £791k = £27,685 taxable income.
Potential Net Income = £33,788 (£9,240 TFC + £12,000 + £12,548 (£15,685 x 0.8)) This is quite a bit higher than existing DB pension (aware the gap would reduce with time as the DB pension is subject to RPI increase, but then I would be old and decrepit 😊)
Also, we have my wife’s SIPP and our current savings to top up any extra funding requirements.
Is this a feasible retirement plan or is this a complete no-no, or are there any other issues I should be aware of?
Q3 - Now to the LTA £245k excess amount which is the part that’s unclear to me, and how it would fit into my overall withdrawal strategy.
- I am aware that if I choose to take the entire £245k as a single lump sum, I would be hit with a punitive 55% tax (£134.75k), leaving me with £110.25k as TFC. I can do as I please with the much reduced TFC lump sum, but this option doesn’t appeal for the obvious reason.
- If I take the entire £245k as income, only a 25% tax £61,250 be applied leaving me with 75% = £183,750. This paid income is taxed at the marginal rate i.e. either 20% or 40%. (per above, taking income from the £1.055mio won’t leave me much breathing space to stay within the 20% tax band).
Is there any benefit if I crystalise the entire £245k on day 1 / 55 years old, and pay HMRC the 25% tax (£61,250), but not use the remaining 75% / £183,750. Would this £183,750 be passed down to my beneficiaries’ tax free (if I pass away before 75).
We are fully aware that we are fortunate to be financially dependent at such an early age, and having this extra option on the table is an added bonus for us / our girls, so we need to ensure the we choose the right path. Thank you for staying the course to read my waffle, but any feedback will be appreciated.
Caveats:
- Aware I need to take financial advice for pension transfer of this size (assumption there’s a willing IFA!)
- Aware the pension income risk is all on us / we would accept market risk on SIPP pension etc..
- Will need to re-balance SIPP pension with lower risk funds to protect our investments
There are some very knowledgable and helpful folks here, so you’ll no-doubt get some good opinions.
My one question is why complicate things? Based on a fag packet;
Unless I’m mistaken, when you hit 55 with a 1m pot, you can take out 250k tax free.
Throw as much as you can of that into an ISA, but assuming it’s cash with zero growth, you’ll be able to fund just over 30k for 8 years (in reality, I suspect you’d have at least what is ISA-able in a stocks and shares ISA generating growth).
Using your 3.5% growth figures, your SIPP ticks along in the background and after those 8 years is worth about 1m again.
From that, (based on long historic trends) you’re very likely to be able to draw down over 30k without putting a dent in your 1m war chest.
There may be a slightly more tax-efficient method than that, but this method can also equip you with a 250k cash chest which can be used to either absorb market fluctuations or dive in after a market slump.
Just my thoughts. I’m a total layman.
My one question is why complicate things? Based on a fag packet;
Unless I’m mistaken, when you hit 55 with a 1m pot, you can take out 250k tax free.
Throw as much as you can of that into an ISA, but assuming it’s cash with zero growth, you’ll be able to fund just over 30k for 8 years (in reality, I suspect you’d have at least what is ISA-able in a stocks and shares ISA generating growth).
Using your 3.5% growth figures, your SIPP ticks along in the background and after those 8 years is worth about 1m again.
From that, (based on long historic trends) you’re very likely to be able to draw down over 30k without putting a dent in your 1m war chest.
There may be a slightly more tax-efficient method than that, but this method can also equip you with a 250k cash chest which can be used to either absorb market fluctuations or dive in after a market slump.
Just my thoughts. I’m a total layman.
Have you "dropped a big one" by not filing for one of the LTA "protections" at the previously higher LTA limits of £1.8m, £1.5m etc? Depends on your overall circumstances including career path/timing and so forth.
Sometimes it's a good idea to pay for proper professional advice and it looks as though you may have been in that category for some time.
Sometimes it's a good idea to pay for proper professional advice and it looks as though you may have been in that category for some time.
It looks as though "protection" at £1.25m may still be available. OP needs to get proper advice on all aspects but the web says,
- Fixed Protection 2012 (£1.8m) and 2014 (£1.5m) have closed.
- Fixed Protection 2016 (£1.25m) is still available.
- There's no time deadline to apply for Fixed Protection 2016.
Testaburger said:
Unless I’m mistaken, when you hit 55 with a 1m pot, you can take out 250k tax free.
Throw as much as you can of that into an ISA, but assuming it’s cash with zero growth, you’ll be able to fund just over 30k for 8 years (in reality, I suspect you’d have at least what is ISA-able in a stocks and shares ISA generating growth).
I did consider crystalising the maximum up to the LTA £1.055 which will leave £264k TFC to reinvest (or to splurge on holidays or a new car!). Reason for spreading the drawdown x 5 was to reinvest the smaller TFC amount via our annual ISA allowance whilst protecting the uncrystalised TFC from potential IHT. Maybe a single withdraw is more beneficial to me, hence putting my questions / concerns onto the forum for the expert to comment on.Throw as much as you can of that into an ISA, but assuming it’s cash with zero growth, you’ll be able to fund just over 30k for 8 years (in reality, I suspect you’d have at least what is ISA-able in a stocks and shares ISA generating growth).
rockin said:
It looks as though "protection" at £1.25m may still be available. OP needs to get proper advice on all aspects but the web says,
Thanks for this info. - Fixed Protection 2012 (£1.8m) and 2014 (£1.5m) have closed.
- Fixed Protection 2016 (£1.25m) is still available.
- There's no time deadline to apply for Fixed Protection 2016.
Protection wasn't considered as I didn't expect to breach the LTA limit under the original retirement plan of DB income (say £30k x 20). Plus I saved £230K into my SIPP (I was contracting via Ltd Co) during the last 5 years. Due to favourable market condition, my SIPP pension stands at £300k. If the SIPP performance remain favourable for the next 5 years and exceed the £1.055mio LTA by a small sum, I wouldn't be adverse to paying a little extra tax too.
Since receiving the transfer letter last Friday, if I proceed with the transfer, then it's apparent that I would breach the LTA limit by a sizable amount. If you say protection is still available, then this is an option I have available to mitigate the tax bill.
And yes, one of the (many) next step is to find a reliable IFA!
rockin said:
It looks as though "protection" at £1.25m may still be available. OP needs to get proper advice on all aspects but the web says,
I thought protection only applied if reached £1.25, op not near yet/- Fixed Protection 2012 (£1.8m) and 2014 (£1.5m) have closed.
- Fixed Protection 2016 (£1.25m) is still available.
- There's no time deadline to apply for Fixed Protection 2016.
rockin said:
It looks as though "protection" at £1.25m may still be available. OP needs to get proper advice on all aspects but the web says,
This only applies if all DB benefits accural had ceased by 5th April 2016. If not, the application window is closed, sadly.- Fixed Protection 2012 (£1.8m) and 2014 (£1.5m) have closed.
- Fixed Protection 2016 (£1.25m) is still available.
- There's no time deadline to apply for Fixed Protection 2016.
HaveYourSay said:
Thanks for this info.
Protection wasn't considered as I didn't expect to breach the LTA limit under the original retirement plan of DB income (say £30k x 20). Plus I saved £230K into my SIPP (I was contracting via Ltd Co) during the last 5 years. Due to favourable market condition, my SIPP pension stands at £300k. If the SIPP performance remain favourable for the next 5 years and exceed the £1.055mio LTA by a small sum, I wouldn't be adverse to paying a little extra tax too.
Since receiving the transfer letter last Friday, if I proceed with the transfer, then it's apparent that I would breach the LTA limit by a sizable amount. If you say protection is still available, then this is an option I have available to mitigate the tax bill.
And yes, one of the (many) next step is to find a reliable IFA!
Hi OPProtection wasn't considered as I didn't expect to breach the LTA limit under the original retirement plan of DB income (say £30k x 20). Plus I saved £230K into my SIPP (I was contracting via Ltd Co) during the last 5 years. Due to favourable market condition, my SIPP pension stands at £300k. If the SIPP performance remain favourable for the next 5 years and exceed the £1.055mio LTA by a small sum, I wouldn't be adverse to paying a little extra tax too.
Since receiving the transfer letter last Friday, if I proceed with the transfer, then it's apparent that I would breach the LTA limit by a sizable amount. If you say protection is still available, then this is an option I have available to mitigate the tax bill.
And yes, one of the (many) next step is to find a reliable IFA!
Whilst some of your terminology is a bit confusing it is apparent you have a good grasp of things. Your know you need to see a financial adviser but I think it could be worthwhile having a chat with Nik on the IM sticky.
I know he has read your post (so there is no need to repeat anything) but he can give you a lot more information to better prepare you before you start spending money (and also provide a sense check of the adviser's report/recommendations).
To simplify your situation, were you to make the transfer then the best way of viewing things could be as follows:
- The moment you crystallise any of your pension the tax charge on the amount above the LTA becomes due
- You have to, at this point, elect whether you are treating this (the amount above) as a lump sum or for income and the appropriate envy tax is due straight away
- Your pension can pay this for you, so you don't have to find the money from elsewhere
- If you (in today's money) withdrew the tax free cash from the LTA element (£257,500) and your pension paid the envy tax you would be left with £911,750 in your pension/SIPP which leaves you some wriggle room for growth before you hit the second LTA assessment at age 75 (and of course you also have the £257,000 tax free cash on top of this)
- From this point in it would be prudent to start withdrawing (as soon as you can) the maximum up to the point higher rate tax becomes due (and certainly everything within your nil rate tax band)
- The £257,000 tax free cash is free from IHT when left to your wife (and the same if you have put this into ISAs - where she can also benefit from a one-off ISA transfer allowance equal to exactly your own ISA fund value)
- The pension value is free of IHT to your wife and your girls in any event
- Finally, I have not made any reference to the point you have stated you understand, but the fact is that the sums involved will change between now and when you can access this pension. Equally, it is highly likely that you would have further LTA penalties to pay in the future (not exactly a bad place to be though!)
So, you seem to be in a position whereby a DB transfer could make great sense (greater flexibility and control, earlier access to your pension funds, massively higher potential legacies), but it is worth (understatement of the year!) you ensuring the financial modelling is accurate before you start spending money on the financial advice you need to take.
Sorry this has been a bit long winded, just trying to cover some of the basics in (hopefully) plain English!
JulianPH said:
all good stuff
Thank you, I really appreciate your concise explanation above.Re: your last point. Yep, fully aware the pension pot and LTA limit (hopefully upward!) will change come the day to access the pension. Per my retirement spreadsheet, assuming a low 3.5% annual growth on just the £1.0mio for 6 years => £1.23mio! Taking a pragmatic view, it's a great problem to have in hand, so I don't feel too aggrieved to paying the extra tax.
Thanks for the offer of assistance, but I am still at a fact finding stage [only 6 days since I received the transfer letter!]. Just need some time to do more research and bounce off some ideas with my close friend, then I will drop a line to Nik for a quick catch up. Thanks again.
HaveYourSay said:
JulianPH said:
all good stuff
Thank you, I really appreciate your concise explanation above.Re: your last point. Yep, fully aware the pension pot and LTA limit (hopefully upward!) will change come the day to access the pension. Per my retirement spreadsheet, assuming a low 3.5% annual growth on just the £1.0mio for 6 years => £1.23mio! Taking a pragmatic view, it's a great problem to have in hand, so I don't feel too aggrieved to paying the extra tax.
Thanks for the offer of assistance, but I am still at a fact finding stage [only 6 days since I received the transfer letter!]. Just need some time to do more research and bounce off some ideas with my close friend, then I will drop a line to Nik for a quick catch up. Thanks again.
As I said, it is apparent you have a good grasp of things and Nik is always available should you want a qualified sounding board and direction to a financial adviser who won't take the micky!
A few observations from me, in no particular order.
I agree that DB transfer values are tempting, however I have so far avoided temptation because I like the combination of the fixed income from DB and flexible income possible under DC.
You say you plan to preserve the pension pot for your girls, but they might be in their 60s before they receive it depending on when you die. Or it (and any property you have) could all be eaten up by care home fees. You may want to consider how you can use your pot to help them sooner.
Why are you taking £50k tax free cash every year just to put it in an ISA when it is already in the tax-free (pension) wrapper? The only benefit I can see with the ISA is that any growth above inflation won’t attract additional LTA tax charges. The drawback is that it is in your estate for IHT.
In your later years, how much appetite will you have for monitoring and adjusting the drawdowns? If you die first, how will your wife do it? A regular income from the DB would negate the need to do this.
Have you considered starting your DB pension early, at age 55 if that option is available to you? This would tie in with your goal of getting more income while you’re healthy enough to enjoy it.
Unless I’ve missed it, nowhere in your post do you say how much income you want / need in retirement. Surely this should be the driver for your drawdown strategy.
Your income strategy is based on withdrawing the growth based on the assumption of 3.5% pa. What will you do if the portfolio goes down 5% in one year?
You say you will de-risk to protect the investments but why is that necessary if you’re planning to leave the bulk of it invested for the benefit of your daughters?
I agree that DB transfer values are tempting, however I have so far avoided temptation because I like the combination of the fixed income from DB and flexible income possible under DC.
You say you plan to preserve the pension pot for your girls, but they might be in their 60s before they receive it depending on when you die. Or it (and any property you have) could all be eaten up by care home fees. You may want to consider how you can use your pot to help them sooner.
Why are you taking £50k tax free cash every year just to put it in an ISA when it is already in the tax-free (pension) wrapper? The only benefit I can see with the ISA is that any growth above inflation won’t attract additional LTA tax charges. The drawback is that it is in your estate for IHT.
In your later years, how much appetite will you have for monitoring and adjusting the drawdowns? If you die first, how will your wife do it? A regular income from the DB would negate the need to do this.
Have you considered starting your DB pension early, at age 55 if that option is available to you? This would tie in with your goal of getting more income while you’re healthy enough to enjoy it.
Unless I’ve missed it, nowhere in your post do you say how much income you want / need in retirement. Surely this should be the driver for your drawdown strategy.
Your income strategy is based on withdrawing the growth based on the assumption of 3.5% pa. What will you do if the portfolio goes down 5% in one year?
You say you will de-risk to protect the investments but why is that necessary if you’re planning to leave the bulk of it invested for the benefit of your daughters?
JulianPH said:
No, it applied to anyone who considered they could reach this amount at the point benefits were to be taken.
Is that right?In April 2016 I was not close to being *at* the limit, yet now I am facing that lovely problem......
https://www.gov.uk/guidance/pension-schemes-protec... suggests "You can apply if your pension savings were worth more than £1 million at 5 April 2016." - which I thought totally ruled me out.
For OP, might depend on the transfer value back on that date - wonder if the admins are able to now accurately share that with him?
Julian, you also say "* The moment you crystallise any of your pension the tax charge on the amount above the LTA becomes due"
I didn't think that was the case.
I thought the tax charge was only due once you had crystallised an amount taking you above using 100% of the LTA.
For example: if you have a DB worth 400K due in 10 years, but this year you take a TFLS from a DC scheme currently worth £1M, then you would NOT be due any "LTA excess tax payment" until starting (& hence crystallising) the DB scheme.
I thought each time you crystallised *any* amount (which could happen multiple times from age 55), the amount would be measured against the LTA and a % number noted......taking note of the fact that the LTA increases each year, so 100K taken this year would be a higher % of the LTA than the same taken next year.
& in my example, it might be worth NOT crystallising the maximum amount in order to avoid the DB being impacted - that would be worth doing, I believe.....so keep a chunk of the DC scheme uncrystallised until AFTER the DB schemes have started paying.
Do I have something wrong there in my understanding?
LeoSayer said:
A few observations from me, in no particular order.
I agree that DB transfer values are tempting, however I have so far avoided temptation because I like the combination of the fixed income from DB and flexible income possible under DC.
Yes, I liked that option too as that is my current retirement plan. However, there is another option on the table, so it's only sensible to research and satisfy myself which is the optimum solution for our retirement days.
You say you plan to preserve the pension pot for your girls, but they might be in their 60s before they receive it depending on when you die. Or it (and any property you have) could all be eaten up by care home fees. You may want to consider how you can use your pot to help them sooner.
My worse fear is coming to light! Having to reveal personal details onto the Net!
I am 49 years young (cough cough), and both my girls are under 3 years old. I would love to attend their 60th birthday party, but in reality, it won't happen.
Our mortgage free property is placed into trust for our girls as per our Will, so hopefully the Local authority won't get their grubby hands on it.
Coincidentally, just discussed over lunch with my wife on the girls savings (we save for them already) i.e. at a minimum put in JISA (4k), Pension (£3.5k) per year. Basically, the girls are well looked after now, but there is potential to spoil them even more (and we have a great time along the way).
Why are you taking £50k tax free cash every year just to put it in an ISA when it is already in the tax-free (pension) wrapper? The only benefit I can see with the ISA is that any growth above inflation won’t attract additional LTA tax charges. The drawback is that it is in your estate for IHT.
As replied earlier, yes it was to shelter potential IHT, but as per JulianPH replied, it's no longer a concern as the entire TFC is protected from IHT if it goes to my wife.
In your later years, how much appetite will you have for monitoring and adjusting the drawdowns? If you die first, how will your wife do it? A regular income from the DB would negate the need to do this.
I am happy to manage the finance (which I enjoy), and my wife is regularly briefed on progressIf I pass away first, she may need some hand holding from the pension administrator, but she is pretty au fait with the financials and how we fund our retirement.
Agree the DB route is file and forget, but if this option provides us with a significant lifestyle change then it's a worth investing the time and effort.
Have you considered starting your DB pension early, at age 55 if that option is available to you? This would tie in with your goal of getting more income while you’re healthy enough to enjoy it.
Option is available, but it reduces the annual income by a fair amount which didn't appeal.
Unless I’ve missed it, nowhere in your post do you say how much income you want / need in retirement. Surely this should be the driver for your drawdown strategy.
I specifically didn't post the amount since PH is such a judgmental place
Your income strategy is based on withdrawing the growth based on the assumption of 3.5% pa. What will you do if the portfolio goes down 5% in one year?
Grrrr, more personal details!
Not wishing to divulge specific details, but we have sufficient savings to cover any shortfall
You say you will de-risk to protect the investments but why is that necessary if you’re planning to leave the bulk of it invested for the benefit of your daughters?
I think my current portfolio is fairly aggressive, so maybe take a less racy stance for a lower growth rate (and less risk to losing the whole lot), but a growth rate which will also fund our retirement. Just my current thinking, so it could be complete rubbish I suspect the investment portfolio will change after discussions with the IFA and over time / as I get older.
Apology if I may sound vague on some details, but I just really don't feel comfortable sharing too much personal information on the Net.
I agree that DB transfer values are tempting, however I have so far avoided temptation because I like the combination of the fixed income from DB and flexible income possible under DC.
Yes, I liked that option too as that is my current retirement plan. However, there is another option on the table, so it's only sensible to research and satisfy myself which is the optimum solution for our retirement days.
You say you plan to preserve the pension pot for your girls, but they might be in their 60s before they receive it depending on when you die. Or it (and any property you have) could all be eaten up by care home fees. You may want to consider how you can use your pot to help them sooner.
My worse fear is coming to light! Having to reveal personal details onto the Net!
I am 49 years young (cough cough), and both my girls are under 3 years old. I would love to attend their 60th birthday party, but in reality, it won't happen.
Our mortgage free property is placed into trust for our girls as per our Will, so hopefully the Local authority won't get their grubby hands on it.
Coincidentally, just discussed over lunch with my wife on the girls savings (we save for them already) i.e. at a minimum put in JISA (4k), Pension (£3.5k) per year. Basically, the girls are well looked after now, but there is potential to spoil them even more (and we have a great time along the way).
Why are you taking £50k tax free cash every year just to put it in an ISA when it is already in the tax-free (pension) wrapper? The only benefit I can see with the ISA is that any growth above inflation won’t attract additional LTA tax charges. The drawback is that it is in your estate for IHT.
As replied earlier, yes it was to shelter potential IHT, but as per JulianPH replied, it's no longer a concern as the entire TFC is protected from IHT if it goes to my wife.
In your later years, how much appetite will you have for monitoring and adjusting the drawdowns? If you die first, how will your wife do it? A regular income from the DB would negate the need to do this.
I am happy to manage the finance (which I enjoy), and my wife is regularly briefed on progress
If I pass away first, she may need some hand holding from the pension administrator, but she is pretty au fait with the financials and how we fund our retirement.Agree the DB route is file and forget, but if this option provides us with a significant lifestyle change then it's a worth investing the time and effort.
Have you considered starting your DB pension early, at age 55 if that option is available to you? This would tie in with your goal of getting more income while you’re healthy enough to enjoy it.
Option is available, but it reduces the annual income by a fair amount which didn't appeal.
Unless I’ve missed it, nowhere in your post do you say how much income you want / need in retirement. Surely this should be the driver for your drawdown strategy.
I specifically didn't post the amount since PH is such a judgmental place
Your income strategy is based on withdrawing the growth based on the assumption of 3.5% pa. What will you do if the portfolio goes down 5% in one year?
Grrrr, more personal details!
Not wishing to divulge specific details, but we have sufficient savings to cover any shortfall
You say you will de-risk to protect the investments but why is that necessary if you’re planning to leave the bulk of it invested for the benefit of your daughters?
I think my current portfolio is fairly aggressive, so maybe take a less racy stance for a lower growth rate (and less risk to losing the whole lot), but a growth rate which will also fund our retirement. Just my current thinking, so it could be complete rubbish
I suspect the investment portfolio will change after discussions with the IFA and over time / as I get older.Apology if I may sound vague on some details, but I just really don't feel comfortable sharing too much personal information on the Net.
mikeiow said:
Is that right?
In April 2016 I was not close to being *at* the limit, yet now I am facing that lovely problem......
https://www.gov.uk/guidance/pension-schemes-protec... suggests "You can apply if your pension savings were worth more than £1 million at 5 April 2016." - which I thought totally ruled me out.
Sorry, you are referring to 2016 Individual Protection, not 2016 Fixed Protection (oh, how easy they make it!)In April 2016 I was not close to being *at* the limit, yet now I am facing that lovely problem......
https://www.gov.uk/guidance/pension-schemes-protec... suggests "You can apply if your pension savings were worth more than £1 million at 5 April 2016." - which I thought totally ruled me out.
If you have not made any contributions to a DC Scheme (or had any accruals - though CPI can be allowed) to a DB Scheme you could still apply.
If you have made one single contribution or had any uplift in accruals (certainly anything over CPI) then you are, to use the technical word, buggered!
mikeiow said:
For OP, might depend on the transfer value back on that date - wonder if the admins are able to now accurately share that with him?
Julian, you also say "* The moment you crystallise any of your pension the tax charge on the amount above the LTA becomes due"
I didn't think that was the case.
I thought the tax charge was only due once you had crystallised an amount taking you above using 100% of the LTA.
For example: if you have a DB worth 400K due in 10 years, but this year you take a TFLS from a DC scheme currently worth £1M, then you would NOT be due any "LTA excess tax payment" until starting (& hence crystallising) the DB scheme.
I thought each time you crystallised *any* amount (which could happen multiple times from age 55), the amount would be measured against the LTA and a % number noted......taking note of the fact that the LTA increases each year, so 100K taken this year would be a higher % of the LTA than the same taken next year.
& in my example, it might be worth NOT crystallising the maximum amount in order to avoid the DB being impacted - that would be worth doing, I believe.....so keep a chunk of the DC scheme uncrystallised until AFTER the DB schemes have started paying.
Do I have something wrong there in my understanding?
No, you haven't missed anything here! It is a complex area though.Julian, you also say "* The moment you crystallise any of your pension the tax charge on the amount above the LTA becomes due"
I didn't think that was the case.
I thought the tax charge was only due once you had crystallised an amount taking you above using 100% of the LTA.
For example: if you have a DB worth 400K due in 10 years, but this year you take a TFLS from a DC scheme currently worth £1M, then you would NOT be due any "LTA excess tax payment" until starting (& hence crystallising) the DB scheme.
I thought each time you crystallised *any* amount (which could happen multiple times from age 55), the amount would be measured against the LTA and a % number noted......taking note of the fact that the LTA increases each year, so 100K taken this year would be a higher % of the LTA than the same taken next year.
& in my example, it might be worth NOT crystallising the maximum amount in order to avoid the DB being impacted - that would be worth doing, I believe.....so keep a chunk of the DC scheme uncrystallised until AFTER the DB schemes have started paying.
Do I have something wrong there in my understanding?
I was referring to the OP's position after moving from a DB scheme to a DC (Money Purchase) scheme. The rules for each (as you highlight) are very different.
For the OP then it is currently 20 times their final salary payment (to calculate the LTA value) whilst he remained in this position.
As soon as he moved over it would be based upon the cash value instead.
Were the OP already 55 then the whole amount could be treated as being under the LTA (£27k x 20 years = £540k + £300k in his SIPP = £840k).
As he is not looking at this, then things are different.
Crystallisation therefore becomes very complex and applies differently to different circumstances.
This is why advice is required, though TBH it always ends up in the sale of something....
I personally believe it should be made far clearer that the rules mean you should seek advice, but not have to pay any ongoing fees for this one off service.
To summarise, this is possibly the most complicated area of pension rules. You need to ensure you are dealing with a professional who places your interests above their own.
Tricky.
JulianPH said:
To summarise, this is possibly the most complicated area of pension rules. You need to ensure you are dealing with a professional who places your interests above their own.
What kind of professional is best placed to help plan an efficient withdrawal strategy and then calculate the LTA tax when it's due?An IFA, an accountant?
How is the LTA charge payable? Via the tax return?
LeoSayer said:
JulianPH said:
To summarise, this is possibly the most complicated area of pension rules. You need to ensure you are dealing with a professional who places your interests above their own.
What kind of professional is best placed to help plan an efficient withdrawal strategy and then calculate the LTA tax when it's due?An IFA, an accountant?
How is the LTA charge payable? Via the tax return?
The scheme is able to pay the LTA charge directly if you wish.
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