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Vicente , I thought that the percentage of lta used was calculated at the time of crystallisation meaning you cannot increase your headroom but you can take advantage where the lta is reducing. I could be wrong .
YarYar500 - you are of course correct. I was combining old knowledge with recent advice and getting it wrong. BUT....
When an individual reaches age 75, any pensions that are still uncrystallised at that point will be tested against their available LTA. If there is insufficient LTA, then the LTA charge of 25% will be levied on the excess (the 55% charge is not an option at age 75).
As I understand it, no compulsory annuity at 75. Abolished 10 years ago. Sorry if I misunderstood your post that implies it’s still mandatory.
well i have the advantage (in this situation anyway!) of being over 55, so I am able to manage the situation if the share price goes bananas. If your shares are in your SIPP and you are 8 years away from 55, then all you can do is just relax and see what happens. Nothing you can really do about it (except divorce) - nice problem to have.
Vicente, that's far more manageable, but seems to be so manageable that the government can't possibly have designed it that way :) guess advice needs to be sought after I'm 8 years away from the first possible crystallisation point.
The point of cystallisation is when you elect to take the tax free cash. Lets say my pot is approaching £1.07m - so to avoid going over the LTA, I take the £250k (ish) tax free cash. At that point, whats left of my fund is free to grow to whatever size it wants until I am 75 (another crystallisation point when i have to take an annuity). If i am over the LTA at 75 then you will incur a tax charge of 55% on the amount over the LTA. You just have to make sure that between taking your tax free cash and age 75 you manage the amount of income you draw out to ensure you are not over the LTA at point of taking the annuity (75).
thats my understanding anyway - having once been an adviser and having taken advice recently.
Batman, my concern is that because it seems to not be on the amount taken you could have a lucky period just prior to crystallisation that pushes you over and lands you with the tax bill and then have a poor period which might mean that you've paid the tax on money you've never actually received. Unless you can crystallise part of your pot. So you only crystallise beyond your LTA once you need to access that. Otherwise good timing can lead you have no LTA charge at point of crystallisation and then you grow your pot further.
Worth mentioning that the 40% top up is split (at least in my case). 20% top up in the SIPP the rest is tax relief by an uplift in my taxcode. So I end up with a higher net pay per month which means I put more in my SIPP. All washes through the same and I'm not sure if they have always done it that way? I only got to higher rate in the last couple of years. Excellent explanation though Luke, thanks.
Luke, great post, nobody argue with this, 100% correct!
Yet to find one person who’s annoyed they have more than the LTA in a pension!! And if you are, you can always get divorced and give half to your partner :)
Thanks Luke, not at all boring, not even close.
Luke thank you for taking the time and your skill to provide a very clear explanation. Its really appreciated
I normally have to do this Monday to Friday but here I am doing it on a Sunday too.
For most people a blend of pension and ISA is sensible. From a tax perspective, pensions are far more tax efficient however the trade-off is that you have to lock your money away until age 55. If you’re over 55 then generally pensions are the better option.
Simple example, not factoring in investment returns – you have £80 a month to save. Put the money into an ISA and you can access £80 tax free. If a BR Tax payer puts £80 into a pension then it is grossed up to £100 with tax relief. When it comes to withdrawing post 55, £25 is tax free and £75 is taxable at your marginal rate so if a 20% tax payer then you have received the £25 tax free plus £60 net of income tax so £85.
If you’re a HR tax payer then it only costs £60 to get £100 into a pension as you get 40% tax relief. BR tax payer when withdrawing means £60 in and £85 out net.
Then factor in that pensions are outside of your estate for IHT (some ISA’s are depending on the underlying investments) and the effect of compound growth on a larger sum i.e. the amount post tax relief and pensions look even more attractive.
20k limit p.a. on ISA’s and 40k annual allowance on pensions. With pensions however, you need to have ‘relevant earnings’ up to the level of the personal contribution if it is to be fully tax relievable. Alternatively pay a contribution via your business and offset corporation tax, avoid subsequent dividend taxation when extracting those profits etc.
In terms of the lifetime allowance (LTA), it’s only payable when you crystallise benefits in excess of your available LTA and only applies to the excess and not the whole fund. i.e. you have a pension fund of £1.2million, crystallise the whole fund when the LTA is £1,073,100 then tax is paid on the £126,900 difference and not the whole £1.2m.
There are various ways to reduce the LTA tax charge on any excess so in reality very few people will pay 55% tax (generally those who don’t take advice) but I’m even boring myself now so will stop there.
55% charge is if you take money out as cash. If you take it out as income charge is 25% and then pay your marginal rate on that income.
ISA as much as I can. Agree completely.
Good thinking! Why pay55% lifetime allowance charge and then income tax on what you take out?
Max your ISAS if you can (and your spouse but be warned of creating a running away fund).
And for reference the outside edge of performance of my current portfolio doesn't get me there, but with reinvestment over the next 8 plus years may be, just maybe it's a problem.
Falesta, true, however if at crystallisation is correct then you could have 2m , pay 550k and then start to lose value. Whereas stopping growth at 1m crystallise and then continue growth would be better. They've got to have thought of that though.
Why would you want to stop the growth,45% of something is better than 45% of nothing.
The 45% being what you are left with after after tax.
I believe the 55% life time allowance tax starts at £1073100. So if you had £20173100 you would pay £550000. It just means you have been very successful.
It’s when you crystallise. It really punishes successful investment which is counter intuitive.
the tax rate when you are above the lifetime allowance is almost punitive at 55% (I think) i'm not sure where it kicks in though, is it when you have actually taken that allowance out, or is it just a point in time figure (when you crystallise?) and then a tax bill for that amount is due (seems wrong to me). But then I also think that it should just be on funds entering the pension pots, rather than what ends up in their after growth, at some point some will have the issue of how to stop growth.
Easiest most flexible tax avoidance if you have filled your ISA is a spread bet
With regards to the last 3 years - note that you use this year’s allowance first and then you can use that from 3 years ago... and then the years in between. Also don’t forget capital gains allowance. However you have to be careful as the gains are realised by matching buys and sells in a particular order so you can’t sell and buy within 30 days within your regular trading accounts without the buy being matched to the sell. There is a great calculator that shows the matching process. I have a bunch in a share trading and will sell to make my CGT allowance and then use the profits to pay into my ISA in the next tax year.
You can also use your previous allowance from past 3 tax years. If you think you might hit your lifetime allowance, especially if pension years are some way off, well, that's a nice problem to have. There are some ways to mitigate the potential 55% or 25% charge, depending on how you take it.
Or if you have a wife or husband who has far more of their allowance remaining, then divorce, split pension pot and get married again. Now that's advice no IFA will give you.
ISA:£20k per year. Pension max I think is a just over £1M.
Just remember that your pension annual allowance ¬– normally £40,000 – applies across all the pensions you hold.