Strategies for dealing with the Pension lifetime allowance
Discussion
Firstly - this is something I fully intend to take paid for professional advice on - This post is purely to get ideas for possible strategies, as I would like to have an idea what the possibilities are being starting that conversation.
I am in the very fortunate position of having already breached the lifetime allowance on my pension pot and whilst I don't NEED to do anything, I am wondering if there is anything I could / should do to minimise the impact of this.
My current thinking is growth inside the pension wrapper vs. growth outside the pension wrapper vs. any annual increases in the lifetime allowance vs. ISAs.
My understanding is that for every £25K of tax free cash you access, you effectively crystalize £100K of your pot and it uses up a percentage of your lifetime allowance based on the figure for that tax year - so for 2021/22 - taking £25K tax free cash effectively "uses up" 9.32% of your lifetime allowance.
One option is to do nothing, and leave the entire sum to continue to grow (hopefully) within a pension wrapper
The other option that, right now, I can't see a problem with is to take the 25% tax free cash and invest as much of it as I can in ISAs (me and my wife, possibly both of my adult children) and then just invest the rest as "normal" money, moving it into ISAs every year. The actual investment would be in an identical mix of funds as the main pension investments - I'm just focusing on the taxation side of things here. However, I think I would need to structure things so that I used my capital gains allowance every year and that's something I know nothing about, but it might mean I need a different mix of investments for the money outside the pension wrapper.
The theory behind my thinking is that paying tax at 40% is better than paying tax at 55%. If it helps, I am 57 and my pension is already in drawdown. Oh - and I don't make any pension contributions, in case anyone thought I had overlooked that bit.
Any thoughts on innovative strategies, or recommendations for people to talk to would be welcome. I'm already aware of the IM people on this thread and spoke to Nick a couple of years ago - although at the time I hadn't actually breached the lifetime allowance.
I am in the very fortunate position of having already breached the lifetime allowance on my pension pot and whilst I don't NEED to do anything, I am wondering if there is anything I could / should do to minimise the impact of this.
My current thinking is growth inside the pension wrapper vs. growth outside the pension wrapper vs. any annual increases in the lifetime allowance vs. ISAs.
My understanding is that for every £25K of tax free cash you access, you effectively crystalize £100K of your pot and it uses up a percentage of your lifetime allowance based on the figure for that tax year - so for 2021/22 - taking £25K tax free cash effectively "uses up" 9.32% of your lifetime allowance.
One option is to do nothing, and leave the entire sum to continue to grow (hopefully) within a pension wrapper
The other option that, right now, I can't see a problem with is to take the 25% tax free cash and invest as much of it as I can in ISAs (me and my wife, possibly both of my adult children) and then just invest the rest as "normal" money, moving it into ISAs every year. The actual investment would be in an identical mix of funds as the main pension investments - I'm just focusing on the taxation side of things here. However, I think I would need to structure things so that I used my capital gains allowance every year and that's something I know nothing about, but it might mean I need a different mix of investments for the money outside the pension wrapper.
The theory behind my thinking is that paying tax at 40% is better than paying tax at 55%. If it helps, I am 57 and my pension is already in drawdown. Oh - and I don't make any pension contributions, in case anyone thought I had overlooked that bit.
Any thoughts on innovative strategies, or recommendations for people to talk to would be welcome. I'm already aware of the IM people on this thread and spoke to Nick a couple of years ago - although at the time I hadn't actually breached the lifetime allowance.
omniflow said:
The actual investment would be in an identical mix of funds as the main pension investments - I'm just focusing on the taxation side of things here. However, I think I would need to structure things so that I used my capital gains allowance every year and that's something I know nothing about, but it might mean I need a different mix of investments for the money outside the pension wrapper.
As a thought, put lower likely growth stuff in the pension vs the ISA rather than going for identical allocations?With regard to capital gains allowance, I have some unwrapped investments, and I typically aim to sell sufficient of my highest gaining asset in late March to just use my capital gains allowance. The money then goes into my ISA in early April/is invested in something else in the taxable account to meet the 30 day repurchase rule.
I'm more focused on having money to enjoy retirement, rather than maximising my kid's inheritance. They'll be getting plenty and 25% of my pension pot won't make that much of a difference to them.
I've done some fag packet calculations based on a couple of assumptions:
Investment growth is 5% per year
Lifetime allowance increases by 2% per year (which is unlikely)
Growth on the 25% that I extract is tax-free via a combination of ISA wrappers and capital gains allowances (possibly a slight stretch, but should be mostly do-able).
Using those assumptions, I am £110,000 better off after 10 years.
Time to talk to someone.....
I've done some fag packet calculations based on a couple of assumptions:
Investment growth is 5% per year
Lifetime allowance increases by 2% per year (which is unlikely)
Growth on the 25% that I extract is tax-free via a combination of ISA wrappers and capital gains allowances (possibly a slight stretch, but should be mostly do-able).
Using those assumptions, I am £110,000 better off after 10 years.
Time to talk to someone.....
The 55% LTA charge only applies to drawdowns above the LTA that are taken in the form of a lump sum. Where they are taken as income, the charge is 25%.
Also worth noting is the LTA test at age 75 where a final 25% charge will be applied.
Have you worked out how much your proposal might save?
My thinking is that, unless inheritance tax isn't a consideration for you, or your wife can use the funds to make pension contributions of her own, then you're best drawing down only what you need.
For many people in your situation, the IHT point made above trumps other considerations.
Also worth noting is the LTA test at age 75 where a final 25% charge will be applied.
Have you worked out how much your proposal might save?
My thinking is that, unless inheritance tax isn't a consideration for you, or your wife can use the funds to make pension contributions of her own, then you're best drawing down only what you need.
For many people in your situation, the IHT point made above trumps other considerations.
LeoSayer said:
The 55% LTA charge only applies to drawdowns above the LTA that are taken in the form of a lump sum. Where they are taken as income, the charge is 25%.
Also worth noting is the LTA test at age 75 where a final 25% charge will be applied.
Have you worked out how much your proposal might save?
My thinking is that, unless inheritance tax isn't a consideration for you, or your wife can use the funds to make pension contributions of her own, then you're best drawing down only what you need.
For many people in your situation, the IHT point made above trumps other considerations.
My interpretation of what I've read is that the 75% that remains in my pension pot continues to be outside the scope of IHT, so we're only really talking about the 25% that I extract and invest elsewhere. If I've got that wrong, then I might need to re-think.Also worth noting is the LTA test at age 75 where a final 25% charge will be applied.
Have you worked out how much your proposal might save?
My thinking is that, unless inheritance tax isn't a consideration for you, or your wife can use the funds to make pension contributions of her own, then you're best drawing down only what you need.
For many people in your situation, the IHT point made above trumps other considerations.
There is then the added benefit that I can drawdown from my pension to the top of the 20% tax bracket and then top-up if necessary from the tax free side of things, so that I don't pay tax at 40% until I reach the age of 75.
There's also this, from Pensionwise "Your beneficiary might pay extra tax if the amount you take from your pot before you die plus the amount you leave behind is more than £1,073,100" - which will definitely be the case for anyone whose pension has exceeded the lifetime allowance.
I do care about IHT, but I really don't plan on depriving myself during retirement to maximise the amount my kids get. I want to live somewhere nice, travel to nice places, eat in nice restaurants, drink decent wine and drive a nice car. All of those things take money.
Jawls said:
Significant factor here, which could trump the LTA vs income tax considerations, is that pension wealth doesn’t count towards your estate value for IHT reasons. Might be highly relevant if you intend to pass significant wealth on to your kids.
My take on that is to release cash from the pension, and put it into ISA's for my kids.That way the cash is IHT free (after 7 years), grows tax free, and is available any time.
98elise said:
My take on that is to release cash from the pension, and put it into ISA's for my kids.
That way the cash is IHT free (after 7 years), grows tax free, and is available any time.
That works if you know what you want to leave. The advantage of it being in a SIPP is that they can just get whatever is left and it's outside your estate....That way the cash is IHT free (after 7 years), grows tax free, and is available any time.
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