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Because of our relationship with our investment platform/ manager, the isa and sipp were invested in broadly the same stocks, bonds, structured products, cash etc. So, risk wise, sipp ans isa were identical.
Personal experience, and Luke may disagree.
For the last 3/4 yrs of my working life, I didn’t contribute to my sipp, but put it in a isa Instead. I took out an isa in wife’s name, which was ‘mine’ in practice ( joint bank account required), so I contributed to 2 isas.
I foregoed the tax relief on contributions, but now draw 60k per year pension. The amount from SIPP is at basic rate , the rest is from our isas , so 60k at basic rate. The 25% lump sum on crystallisation was invested as a separate portfolio, and every April, 40k was transferred to ‘ our’ isas, until that 25% was used up.
It’s a trade off. Tax relief while you work, or tax efficient draw down with the flexibility of taking money out of isa tax free when needs arise. Personally, I wished I had spent more years investing in my/ our isas.
Thanks Luke. Very helpful.
More talk of tax and less jokes , that's what we want to cheer us up.
Good work Luke, on your day off too! Can’t please everyone!
If anyone has a genuine issue, they should contact their IFA, if you don’t have one they won’t be falling over themselves to help you, unless you also want help managing your money
CTA’s are your best bet for fee based tax advice. Will cost you, but could save a fortune
My life is good apple and I'd like that to continue into retirement
Its been a helpful thread. Anyone with a significant holding in a share that they believe may go up in multiples is wise to consider the tax implications and I am sure that applies to many here. Whenever possible I have tried to put my extra purchases in an ISA and this have already paid dividends with the recent run which has led to me being nearly 50% above water.
Vegas22 I'm sure I could tell a few jokes about pensions and isa's they seem to get everyone going part of the interesting life you must lead .
Applehighmightyhi, don't worry hopefully lockdown will be over soon, the comedy clubs will reopen and you can do your gigs
Good luck something tells me you might need it
No one said it was interesting, it's just important, more important the further away you are from being able to access the pension, so more important to the novices.
As was stated elsewhere, don't read the thread if you aren't interested.
Look forward to your next joke, it's an investing thread not a stand up audition.
13thmonkey you must lead such an interesting life spending your weekend going on and on about pensions and isa's people get bored. Maybe you've only got 500 pounds worth of Avacta so who are you to be critical of some light hearted jokes or comments what an interesting chappy you must be. Avacta investor I am and been in since last June so no need to worry about me .
Agree 13thmonkey this is a useful board sometimes with knowledgeable posters, ISA and SIPP are related to investing so not stupid if somebody asks advice
Nobody forced you to read the thread. If you're not interested then don't read it.... just keep posting **** jokes. Evidently lta issues aren't relevant to you but to be fair most inbreds don't have lta issues
Apple, you are a pot calling the kettle black. 2 jokes and some posts about Boris and when he'll say something. All top class material.
This is important, if avacta does what done of use hope it will do, then some people will wish they knew more about where there money is and where is the best place for it. If not this share then shares in the next decade, poor planning ahead can make good pot merely mediocre.
Thanks for those that have put time into this, it is appreciated.
If you have money storage issues, I’ll send you an account you can store some in
Sorry,i created a monster.
I thought this was an Avacta discussion not a Pensions and ISA Sunday brainstorm.
Vicente’s amended post is correct in that once you reach the LTA it often makes sense to crystallise. The reason for this is that the LTA is legislated to increase in line with CPI however you would of course expect investment returns to outpace CPI. As you aren’t crystallising benefits in excess of the LTA, there is no LTA charge and you are preventing the compound effect of investment returns outpacing CPI creating / adding to an LTA issue.
Assuming you remain in drawdown then the next time those benefits are tested against the LTA is at age 75 and the charge is simply based on the amount you ‘designated to drawdown’ and the value at age 75. For example, you reach the LTA of £1,073,100 and crystallise your entire fund, this releases the 25% tax free cash and then £804,825 is designated to drawdown. The LTA used at 75 is based on the difference between £804,825 and the value at 75.
Withdrawals aren’t factored into the calculation so the charge at 75 is effectively an optional tax i.e. do you pay the 25% LTA charge and leave the money in drawdown or pay income tax on withdrawals.
One caveat to this strategy is the TFC is then in your estate for IHT purposes but if you’re in reasonable health and married then it would (hopefully) be a while before your estate is tested against IHT and you would have time to put appropriate planning in place to mitigate IHT.
Something else worth considering is ‘small pot lump sums’. Each person is allowed 3 x 10k small pots in their lifetime. Small pots aren’t tested against the LTA. £30,000 x 55% tax is £16,500 tax avoided.
Uncrystallised benefits are tested against the LTA at 75. TFC isn’t available from benefits in excess of your LTA. Having paid the 25% LTA charge the benefits remain in drawdown. These benefits can be passed on to beneficiaries through beneficiary drawdown. They are taxed at the beneficiary’s marginal rate of income tax but beneficiary drawdown can be used to control the tax point i.e. they decide when to withdraw from drawdown rather than taking benefits as a lump sum and paying income tax on the entire fund in one sitting.
If you die pre 75 with uncrystallised benefits in excess of the LTA then the 25% tax charge is payable but your beneficiaries can take benefits tax free.
The 25% LTA charge at 75 isn’t ideal but more favourable than paying a 55% LTA charge having taken the excess as a lump sum and then having said benefits in your estate for IHT so potentially liable to another 40% IHT when you die (a cheery topic I know).
In terms of the percentage of LTA that is used, it is based on the value of the crystallisation and the prevailing LTA at the time I.e. if you crystallised 800k when the LTA was £1mil then you would have used 80% of your LTA. If you crystallise another 200k when the LTA is £1.2m then you would use another 16.66% (200k / 1.2m). You then of course have 3.34% of your LTA remaining.
Anyway, off to make Sunday dinner.
Not that bad when you consider you will have saved 20 or 40 per cent (or more) at the front end as well
i think each time you sell and allocate cash for drawdown they work it out as a % like you say. I think the important thing is that depending on how much you take annually as a pension then you might be paying 27-32% ish in tax anyway.... so really the jump to 55% isn't the end of the world. You don't pay tax again after the 55%. So depending on your age/value of pension it might be worth using ISAs to the max. But it really depends on how you get paid. We get most of our income from a limited company but I also get a small salary from an umbrella company and the rest goes to my SIPP. You can't avoid tax completely at any rate and in my view it isn't as bad as it initially looked to me.
Not sure Mowzer. Logic would suggest that each time you drawdown they calculate what you take out as a percentage of the then LTA and it just proceeds like that until a 100 per cent is hit (or at 75 age based calc) and then anything above gets taxed at the punitive rate. I would guess they would do percentages otherwise they wouldn't be able to cope with the fact that LTA is a moving figure (uplift each year in line with CPI)
I&B - that is the view I take. Max out ISA - make that the high risk/ high reward. Pensions get more of the safer stuff. And I still use my capital gains allowance as well - which kind of funds improvements around the house rather than extracting from ISA. But we have another 10 years+ before we can extract pension but even if it goes above the LTA - then I guess who cares - tax isn't the end of the world. I guess what isn't clear to me is how they work out what you have used of the LTA - I need to try to understand that.
There a useful video on ajbellyouinvest about the LTA. I think Vicente's corrected position is the correct one. I was looking at all this today. I have 700k ceiling for my SIPP before the punitive rate kicks in (on account of also having an employer pension).
I am currently on 245k and it would take 20 years to get to a level of 650k if my investments average 5% a year. But conversely if they average 40% I am there in only 3 years.
The thing is I could do worse than the bottom end, between these figures of better. I have historically been a very ordinary investor but in the last 18month my SIPP has quadrupled in value. All it takes sometimes is a phase of very good judgment and/or good fortune.
In any event my strategy will be to draw down the whole tax free amount if/when it gets even to about 500k because even the 375 left after that drawdown there is a lot of scope to hit the limits. From now on after filling my own/wifes ISAs I will put it in dealing account (better even tax on gains above CGT allowance than 55% punitive or alternatively might be able to look at VCTs or something like that) and kids ISAs (a risk they might be stupid at 18 but better than risking 55%).
If I get close to the LTA I might start investing in so-called safer stuff and indulge my growth oriented instincts elsewhere and if, after taking all these measures, I still go over I think the appropriate phlegmatic response is just to say its at least a result of things going really well and much of the tax will get spent on education, health and other largely useful social ends.
Luke, very helpful post, thanks.
I had a run through with Pension Wise a few months ago and they were unable to explain LTA. I was directed to an IFA which I avoid these days.
I’ve searched HMRC on line and read up but it’s still not clear at all how much tax they hit you for on a big SIPP pot, which had been part crystallised.
Think I’ll wait until the day comes when it’s an issue.
I’m counting on paying 55% on regular withdrawals.