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Oops! I’ve gone over the pension Lifetime Allowance

Photo of a big fisherman’s catch as an analogy for going over the pension lifetime allowance

This is the story of how I found myself over the pension Lifetime Allowance (LTA) and what I’m doing about it. It does not constitute investment advice. I use ‘pension’ and ‘SIPP’ interchangeably to mean a Defined Contribution pension. (Sadly, I’ve no experience of Defined Benefit schemes.)

I started with the best of intentions. Sometime back in the 1990s I began putting all my earnings above the higher-rate tax threshold into my pension.

I was fairly sure the higher-rate years wouldn’t last long – my nagging imposter syndrome was itself no phony!

After a while I’d still not been found out. And so with other calls on my money – ISAs, property investment, family – I moderated my contributions.

All told, there was only a few hundred thousand pounds in my SIPP when the £1.8m Lifetime Allowance for pensions was introduced in 2006. So it didn’t seem particularly consequential at the time. There was certainly no urgency to worry about going over the pension lifetime allowance.

The LTA felt even less consequential in the immediate market wreckage of the Global Finance Crisis. Everything was down, including my portfolio.

Pumping up my pension

Fast-forward a few years. Asset prices recovered, and I continued to squirrel away my contributions. The chances of my hitting the LTA increased.

As the tax system got more draconian, I therefore got more tactical. I only contributed to my pension when I was getting an effective 50-60% rate of relief. When paying the ‘additional’ rate, for example, or because of the annual allowance taper or the child benefit claw-back.

It was starting to look like I might be a higher-rate tax payer in my retirement.

Nevertheless, I kept contributing – because who ever knows what’s going to happen?

Psychologically I’d prefer to see money go into my pension – even if it faced an uncertain future – than to see it wiped out today in tax.

Once it’s gone it’s gone, after all.

Allowance down. Portfolio up

I didn’t apply for LTA protection for a couple of reasons. But the main one was that once you take this action, you have to stop contributing.

I had ended up in a job with the sort of arrangement where my employer put in 4% if I put in just 3%. So even if more additions did take me over the LTA, contributing still seemed just about worth it.

By this time they’d cut the allowance to £1.5m. Meanwhile my SIPP was worth about £800,000.

Still plenty of room, you’d think?

Tax tail wags investment dog

What investments did I hold in my SIPP?

Well, US equities.

And why US equities?

Because under the reciprocal tax-treaty, UK pension funds, including SIPPs are treated as tax-free entities by the US tax authorities (the IRS).

Even more amazing, some brokers and custodians are actually sufficiently well organised that they apply the correct rules so that you don’t pay dividend withholding tax on US equities in a SIPP. 

There was a time when this really mattered; when you got a 4% yield on US stocks, that’s a 60bps per annum uplift (15%x4%).

I appreciate that doesn’t sound like much. But it’s £6,000 a year on £1m. Every little counts.

The US equities market is roughly half the world market cap. So I’d keep that half in the SIPP and the other half in ISAs and suchlike.

Even better – you can hold foreign currencies in a SIPP. This means that when your US stock pays dividends, you can re-invest 100% of those dollars back into more US stocks, paying more dividends. All without your broker gouging your eyes out with a currency exchange spread that you could drive a bus through. 

Lovely, you would think.

Or perhaps more an example of being too clever by half?

2016: Under a cloud and over the pension lifetime allowance

All at once, a bad thing and then a very bad thing happened in quick succession.

In April 2016 the LTA was reduced to £1m. That was annoying.

But not half as annoying as what came in June, which, for me personally, was pretty devastating: Brexit.

Sterling, predictably, depreciated sharply. The pound value of my completely US Dollar-denominated SIPP soared up and over the pension lifetime allowance, without even touching the sides.

Not that this was any silver lining to the Referendum result for me. I’d rather live in a rich multi-cultural society and be well-off in hard currency terms, than live in a poor insular one and be nominally rich in a devalued currency.

But apparently not everyone felt the same way.

No point crying over spilt milk

Apart from a brief market swoon in March 2020 – when it looked like my LTA problem might be solved for me – I’ve been well over the pension lifetime allowance ever since.

In retrospect I should have done things differently. Perhaps there are some lessons for the reader in here: 

  • I shouldn’t have contributed so much when I was younger. But in my defense, there was no LTA then. So it is, in effect, a bit like retrospective taxation – especially with respect to the 25% tax-free amount. Lesson: don’t trust the government. 
  • My wife has fewer pension assets than me. I should have had my employer contribute to my wife’s pension, out of my salary sacrifice. This would have got money into her pension, with tax relief at my marginal rate. I only found out this option when I read about them closing the loophole! Lesson: pay more attention.
  • I shouldn’t have concentrated my non-Sterling exposure in my SIPP. But in my defense, what other country in history has voted to devalue its own economy? Lesson: populism doesn’t work for complicated issues.
  • I should have changed my asset allocation, maybe in the depths of the March 2020 crash. But in my defense, I didn’t know US equities would go on to nearly double while the world economy largely stayed on its knees. Also rebalancing is difficult. Some of the US-listed ETFs in this portfolio are irreplaceable, because of – cough – an EU rule called PRIIPS. (The irony isn’t lost on me) Lesson: pay more attention, again. 
  • I should have given more serious thought to this issue before The Investor asked me to write an article about it a couple of weeks ago. Lesson: pay more attention, again, again. 

I guess the meta-lesson for readers is to start thinking about this issue early.

Where we are today

The value of my SIPP is now far over the pension Lifetime Allowance.

  • At the margin it’s a reasonable assumption that gains in my SIPP will eventually incur a 55% LTA charge.
  • Outside the SIPP, assets that don’t produce an income will attract a 20% capital gains tax (CGT) rate. 

Let’s first run through the conventional wisdom of what one should do in these circumstances.

Stop contributing 

There’s no point now I’ve hit the LTA – a bit of convoluted maths indicates the 55% penalty rate I’ll pay on taking my money out will at the least undo the 40% tax relief I got putting money in.

But… I’m in an employer’s matching scheme that means it costs me 20p for every £1 in my scheme (up to a fairly low limit).

I’ll get 45p of that, after the LTA charge. 

[Editor’s note: Individual tax situations vary hugely, and the maths may be different for you. Read the comment thread after this article for a good discussion of this!]

Decrease risk in the SIPP

Wise heads say I should concentrate my growth investments outside the SIPP, and just use the SIPP for the bond allocation.

We all hold a 60/40 equity/bond portfolio, right? So I should have the bond bit in the SIPP, high-yielding equities in my ISAs (or my Family Investment Co), and no-yield equities outside of the tax wrappers.

With bond yields where they are, returns from that asset class aren’t going to shoot the lights out after all.

With any luck the LTA will rise with inflation again. Eventually it could catch up with the value of my SIPP, which will have had very little growth in the meantime from those bonds. Heck, I could just leave it in cash. 

This is all fine in theory. But I have a few issues.

Firstly, it assumes that there’s a couple of million pounds outside the SIPP for the equities allocation.

Then there’s psychology. I’ve noticed that it’s easier for me to stomach high volatility in the tax wrappers than outside. There’s some mental accounting, whereby losses in the tax wrappers are somehow less real (and therefore less painful) than losses outside them.

Why? I guess because the funds in tax wrappers won’t be touched for a very long time, if ever. In contrast funds outside are money I could use to pay for groceries or school fees.

Tellingly, my SIPP was my best performing investment account by a country mile for a very long time – and also the least accessible. (Though perhaps this was down to me being (un)lucky. It was only the withholding tax issues drove the asset location decision.)

Finally, rebalancing out bonds into equities from this pot is a problem, should it be required, because we effectively can’t move money out of the SIPP any time soon. 

Increase risk in the SIPP

On the other hand, all losses in the SIPP now effectively get a 55% tax rebate.

Short-dated out-of-the-money call options on a meme stock like AMC? Why not? YOLO! HMRC is going to pick up more than half the tab if it goes bad!

This feels wrong. But I’m still giving it some thought. 

Get a divorce

This would be quite a bit of paperwork, but under certain circumstances pension assets are split on divorce. And my my wife’s pension assets are only about 15% of the way to the LTA…

There’s a point at which divorcing Mrs Finumus and then immediately re-marrying her might save us hundreds of thousands of pounds.

(I’ve not run this one by her yet).

Take the tax-free lump sum as soon as possible 

Taking the tax-free lump sum at least reduces the extent to which the problem is compounding. The trouble is that that’s deemed an LTA benefit crystallisation event

Do nothing

Currently, the first mandatory LTA test is at age 75. Fortunately that’s nearly 25 years away for me. It’s possible the rules will change during that time – probably for the worse, but possibly for the better.

The SIPP still has many advantages, including the multi-currency capabilities, the freedom from US withholding tax, and minimal paperwork compared to doing CGT submissions on a trading account.

My SIPP also falls outside my estate for IHT purposes (albeit after paying the LTA charge). 

What have I actually done to my SIPP?

I’m still contributing to my pension to get the matching contributions.

I’m slowly reducing the risk level in my SIPP and increasing risk outside. In fact I’m going to explicitly let my leverage run a little hotter than previously, and offset this with short-term treasuries (essentially cash) in the SIPP. 

And I’m practicing gratitude. I’m acutely aware of how fortunate I am to be in this position. 

Other implications of going over the pension lifetime allowance

I’ve also made some wider changes in light of all this.

Decreased risk in my children’s SIPPs

My children are in their late teens. They’ve had SIPPs since they were born, and various people have made contributions on their behalf, contributing a maximum £3,600 p.a., gross and including basic rate tax relief. (How do they get tax relief when they pay no tax? Don’t ask me.)

These SIPPs are now worth over £100,000 each.

Whilst this still seems like a long way from the LTA, they might be lucky enough to be paying very high marginal tax rates sometime in the future. Compounded growth of all these early contributions might rob them of the opportunity to avoid those high tax rates by contributing themselves – because it will bring them closer to the LTA.

But who knows? They’ll be much regulatory uncertainty over their lifetimes. 

Increased risk in the (grand)parents’ SIPPs

Note: What follows is based on my current, slightly hazy, understanding of the rules.

Now this might seem even more orthogonal to the original problem. But since we’re in the neighborhood anyway, let’s drive by.

Between my wife and I we have three surviving parents. All are comfortably off, all over 75, and all, sadly, mortal.

Each of the three have substantial sums in their SIPPs – which are in ‘flexible drawdown’ – but the sums are far below the LTA threshold.

In addition, in all but the most extreme of circumstances they likely have sufficient assets outside their SIPPs to last them out.

Historically we’ve taken a fairly standard approach to their investments – reducing risk steadily as they have aged and stopped working.

However, my review of the LTA situation suggests a slight change of direction.  

The rules are complicated, but SIPPs can be inherited, fall outside the estate for IHT purposes, and the beneficiaries (in this case because the benefactors will be over 75 on their death) can draw down at their marginal tax rate (it’s treated as regular income for the beneficiaries).

The last time the LTA  ‘benefit crystallisation’ test is applied is on death. The beneficiaries can pass on the SIPP, generation after generation, and weirdly, as soon as one of them dies under age 75, the whole lot can be taken out tax-free by their beneficiaries.

In case you missed it… the last time the LTA test is applied is on the death of the original beneficiaries. 

What does all that mean? Clearly, as a family, we want the high return stuff in the oldies’ SIPPs. In an ideal world they’d be worth exactly the LTA on the day of their demise.

And then? This seems like a gaping loophole… but as I read it the pot can grow tax-free – forever. Theoretically, under the current legislation, you could leave it compounding, untouched, and completely tax-free, for centuries. 

Of course they’ll change the rules long before that. 

Any other ideas?

This has been a classic example of a ‘you only understand it if you can explain it to others’ situation.

Just writing this all down has forced me to properly confront a looming issue that I’d just been sort of ignoring for a while now – that my excess over the pension lifetime allowance isn’t going away, and some mitigation measures are appropriate.

I’m sure there are many other things I could do. Let’s hear some of them in the comments!

If you enjoyed this, follow Finumus on Twitter or read his other articles for Monevator.

{ 83 comments… add one }
  • 1 Mr Optimistic October 18, 2021, 10:02 am

    Thank you for the article. I tnink your idea of a problem is rather different to mine . Looks to me that the LTA rather changes the reward risk dynamic in that rewards are further taxed. Why take on more risk than otherwise in the SIPP ? Seems to me that any risky stuff should be outside.
    Me, I’d contribute up the the employer’s contribution cap and divert the rest into your wife’s SIPP.

  • 2 D October 18, 2021, 10:42 am

    Really enjoying the Finumus articles, and I recently killed my monthly housing payment using your flexible ISA / offset mortgage wheeze.

    I wonder if the unequal pension pots dilemma will be improved at some point through legislation. Stay at home parents really miss out here, and it’s disproportionately unfair on women.

    Another area which you could look into is emigrating to a country to which a UK pension transfer is allowed, but from which withdrawals are taxed at a lower rate. Of course, such a scenario may not actually exist! And there would be many other tax consequences.

    As you say, gratitude for a nice problem to have.

  • 3 platformer October 18, 2021, 10:42 am

    Thanks for this. Could you help explain the below:
    “A convoluted bit of maths shows the 55% penalty rate payable on taking money out is the reverse of the 40% tax relief going in.”

    Doesn’t a £100 pension contribution cost a higher rate tax payer £60, but if they withdraw that £100 at a 55% penalty rate they get £45? I feel like I’m missing something obvious…

    The below is also a good summary of the issues you’ve discussed:
    https://employer.royallondon.com/globalassets/docs/adviser/misc/1901-annual-lifetime-allowance-guide.pdf

  • 4 Whettam October 18, 2021, 11:02 am

    @FINUMUS good to see this topic covered on monevator, I’m just ‘nudging’ the LTA myself. As you said, I consider myself to be fortunate to be in this position. The markets had a great run in exactly the period I decided to increase my contributions. Also my pension has been the best performing of our investment accounts, I would have preferred the “best” growth in ISA’s or my wife’s pension, but got overall allocation wrong for this. Our situation is maybe easier, because its just my wife and I no IHT issues to worry about.

    I’m still taking my employers contribution and as @Mr Optimistic suggests I have now put most of our defensive allocation, in my pension.

    A few things I think its worth highlighting / remembering:

    • the LTA also limits the tax free lump sum you can take from your pension e.g. under current LTA £267,500 is the maximum TFC you can take

    • you mention 55% LTA but my understanding is this only applies if you take the excess as a lump sum? If you move the excess into Flexi Access Drawdown account then I think the LTA charge is 25%, this is what I am planning because I think I’ll only be a basic rate tax payer once in drawdown.

    • it is possible (likely?) that some higher (and additional) rate taxpayers will only be basic rate taxpayers in drawdown? On a 1 million pound drawdown account you would need a withdrawal rate of 5% to be a higher rate taxpayer

    • I’m not sure I understand your position on taking the TFC as soon as possible and the impact of a BCE, maybe this is because of your family situation. I’m 52 and definitely planning to trigger the BCE as soon as I can at 55 and take the TFC, I will not take any income from the FAD account, so will still be able to contribute with my employer.

    Think this is an area that is very personal to individual circumstances.

  • 5 old_eyes October 18, 2021, 12:12 pm

    I too overshot my LTA. It is slightly irritating, but for me, the key question was “am I still ahead in the game?”. And I think the answer is definitely yes.

    I did take protection – Individual Protection 2014 – which permitted me to continue contributions if I wished. I did as at that point I was working for an organisation still providing DB pensions. So with employer contributions, it was a good deal even with the penalties. I took the hit in reduced pension rather than in lump sum, so only a 25% reduction in the notional pot size over the limit.

    Would it have been nice if there were no lifetime or annual limits? Of course, but there were, and I am not grieving too much. My only shift was to stop salary sacrificing and increase contributions to ISAs.

    I think sometimes we obsess about the unfairness of things that have marginal impacts on us. Personally, I am much more upset about VAT on reducing the carbon impact of my home, and environmental levies on electricity, but not fossil fuels for heating. But that is just me.

  • 6 Andrew October 18, 2021, 12:47 pm

    > A convoluted bit of maths shows the 55% penalty rate payable on taking money out is the reverse of the 40% tax relief going in.

    Anyone want to explain this? I did a quick calculation for 2021/22 someone on £150K (simply the top end of the 40% income tax threshold, who won’t receive a Personal Allowance because they’re earning over £125K).

    Take home without sacrifice: £90,661.16
    With £10K sacrifice, take home: £84,861.16

    So the take-home cost for putting £10K in to the pension was £5800. If they’re charged 55% on this £10K (because you’re over the LTA) then you’re left with £4,500

    So it seems to me overall in this scenario you’d be down about 22%?

  • 7 Andrew October 18, 2021, 12:52 pm

    (The same math works out for someone below the £100K taper threshold, e.g. on £80K)

  • 8 J Kash October 18, 2021, 1:07 pm

    @Whettam the 25% LTA charge if you take an income is then taxed at your marginal tax rate when withdrawing. Therefore in ideal circumstances if you are a basic rate tax payer the net works out at 40% tax (you keep 80% of 75%).
    However you also take an LTA charge at age 75 on any growth left in the drawdown fund. If that is an equity index tracker growing at an average of say 7% a year then you need to withdraw 7% each year of at least a £800,000 or pay another excess charge on the growth. 7% of at least £800,000 is £56,000 and over the higher rate threshold so you are back to 55% tax.

  • 9 Andrew October 18, 2021, 1:18 pm

    I suppose if the alternative is a trading account with 20% CGT then it’s about even, but I would point out that you can keep more in cash or CGT free assets (e.g. your hedgey allocation in vaulted Gold coinage), or simply net off your losses against your gains for CGT purposes. There are also alternatives like VCTs and EIS investments where you can avoid CGT.

  • 10 Genghis October 18, 2021, 1:24 pm

    @Andrew. Can’t speak for Finumus. But to expand on your points a bit, for someone on £125k taxable income, the relief for paying into a pension is at 62% (40% income tax relief, 20% for taking back the personal allowance, 2% NI, currently). If have kids, you can add on the lost tax free childcare amount for earning over £100k, if relevant. Will increase next year with the social cost add onto NI and maybe thereafter if can sacrifice away against the standalone charge. This is much greater than the LTA charge of 55% for lump sum / effective total of 40% if taken as income and a basic rate tax payer, so makes sense to continue to contribute at this level. Everyone’s circumstances are different and they change over time.

  • 11 Whettam October 18, 2021, 1:43 pm

    @J Kash – My understanding is you pay the 25% LTA income charge at the BCE when you enter FAD, then you pay income tax on withdrawals. So if you are £100k over the LTA, you pay the 25K charge and the remainder (75k) goes into FAD (or buys an annuity), you then pay income tax on withdrawals.

    As you say there is another test against the LTA at 75, which does need to be managed, but your example is for a 100% equity rather than a lot of people likely to have more balanced portfolios. I think I’ll be a basic rate taxpayer at least for the early years of my retirement.

  • 12 Andrew October 18, 2021, 1:57 pm

    @Genghis

    That’s only true if you sacrifice within or in to that magic £100-125K range. If you’re earning below it, or even above £125K and don’t manage to sacrifice in to it, the cost for every £1 put in to a pension is 58p. Sacrificing in the £100-125K range, as you said, costs 38p. So yeah if you’re in that bracket and have hit the LTA allowance it’s still worth it.

    My employer actually contributes ~14.3% of what I put in to my pension beyond their regular match. I assume this is something to do with employer NICs. In this case it’s also still worth it in the 58p scenario, since £10K contributed would become £11.4K and then £6.2K after the 55% charge. I guess?

  • 13 JP October 18, 2021, 2:24 pm

    Thanks for this article. Very useful.

    I wonder if the convoluted maths issue may be referring to the fact that the 25% charge on funds taken as income plus 40% income tax (assuming it applies) on the balance equates to 55% of the funds if taken as a lump sum instead – both end up with the same net figure? That explains the different rates imposed by HMRC depending on whether income or lump sum is taken from the excess over the LTA. One way or another they want their cut of tax. If the individual is a basic rate taxpayer in retirement (but a higher rate taxpayer when contributed), and they choose to take income when breached the LTA, that will mean less tax overall on the funds (but then they will end up with the same net amount as if they has never contributed – for example, say they contributed 10k by net pay – which would have been 6k if they had received it as salary – then they take the pension benefts as income but are subject to an LTA charge, reducing the excess to 7.5k, then income tax at basic rate applies to this when taken as income drawdown, leaving a balance of 6k).

    Taking tax free cash crystallises the value and growth on that sum (say, put in an ISA so tax free) can then take place outside the pensions tax regime and and wont be subject to an LTA charge. Any income taken as drawdown will be subject to income tax, but possibly at basic rate, and that helps reduce the amount in the pension fund when it comes to the automatic LTA charge at age 75 which taxes the increase in value. That’s my understanding at least, but happy to be corrected.

    It gets more complicated when there is a DB scheme too, as decisions might have to be made about timing of crystalising benefits in the DB scheme and DC scheme and which takes the LTA hit. Lots to consider and as commented, factors at play very much depends on individual circumstances.

  • 14 steveark October 18, 2021, 3:13 pm

    The only thing that makes me appreciate the US tax system is everybody else’s. 55% penalty because you saved too much money, that’s such a perverse incentive. And then to keep moving the goal line retroactively? That’s simply evil. But at least you are being proactive under the rules as they stand today.

  • 15 Naeclue October 18, 2021, 3:16 pm

    It is surprising how irrational people can become when considering the LTA. I think it is based on that 55% figure that crops up whenever the LTA is superficially considered. For a start, as others have pointed out, it is only a 25% charge combined with the marginal rate if the excess is taken as income rather than a lump sum. So an overall charge+tax of 40% if the income is drawn at basic rate, 55% if taken at higher rate. Provided at least 40% in combined tax/NI relief + employers’ contributions were made on contributions, you not losing out compared with saving in an ISA. Finimus, with additional rate savings, etc. is winning hand over fist on this deal even if he chooses to draw an income that increases his marginal rate to 40%. On top of the substantial income tax (etc) relief, you get to pass the drawdown fund to next of kin, or whoever you want, totally free of inheritance tax.

    I went through similar angst years ago when confronted with the LTA and tried to think of workarounds, so can understand why people do this. 55%! My God that’s steep! But when I sat down, did the sums and especially considered the IHT saving, I realised doing things like going overweight in bonds, etc to reduce the LTA charge made little sense.

    We have stopped drawing from our SIPPs and will not start again until we have spent all of our unsheltered investments and most of our ISAs (unless the rules change). Big LTA charge, yes, but still lower overall tax compared to the increased IHT that will be paid on our estates if we continued to make SIPP withdrawals.

    Our SIPPs are now 100% equities and overweight US listed ETFs for the reason given in the article. Not a problem as this investment horizon is very long. I don’t anticipate needing to touch our SIPPs for at least 20 years and maybe not ever.

  • 16 Naeclue October 18, 2021, 3:22 pm

    @steveark, you illustrated my point about the “LTA panic” perfectly, thank you. 55%, That’s simply evil! No it isn’t when you take the bigger picture. For many people (including me), the LTA charge is very generous.

  • 17 Naeclue October 18, 2021, 3:40 pm

    @Andrew, if your employer is putting in 14.3%, then yes 10k gross personal contribution becomes 11.43k. But that 10k gross has only cost you 6k (assuming you are a higher rate taxpayer), or 5.8k with the 2% NI saving. So if the 11.43k is gets hit with a 25% LTA charge it reduces to ~8.57k. Drawing and paying 20% tax leaves you with ~6.86k, so you are up by 18% on the alternative scenario of putting your 5.8k after tax/NI into an ISA instead. But if choose to withdraw and pay 40% tax you will only get back ~5.14k, about 11% down.

  • 18 Andrew October 18, 2021, 3:50 pm

    @steveark

    If you can trust Investopedia[0], in the US there are only ~233,000 401(k) millionaires, so it doesn’t seem like it’d be worth the US penalizing people.

    [0] https://www.investopedia.com/articles/financial-advisors/121615/how-become-401k-millionaire-trow.asp

  • 19 Naeclue October 18, 2021, 3:59 pm

    @Finimus “In case you missed it… the last time the LTA test is applied is on the death of the original beneficiaries.”

    On reading that I am not sure that you fully understand the LTA test(s) on death. There is no LTA test at death on crystallised benefits, only on uncrystallised. So if the SIPPs you are talking about have been fully crystallised, there will not be an LTA test on death.

  • 20 J Kash October 18, 2021, 4:01 pm

    I agree that if inheritance (tax) is a major concern for you then LTA isn’t that much of a concern (you are effectively paying a significantly smaller IHT on the excess by leaving it in pension for the LTA charge, typically under 15%).

    However if the intent is to try and spend it all then the LTA is more significant and worth taking a more active approach.

  • 21 J Kash October 18, 2021, 4:15 pm

    @Naeclue BCE 5A Any growth on a crystalised drawdown fund is treated as uncrystalised.

  • 22 Andrew October 18, 2021, 4:21 pm

    > The beneficiaries can pass on the SIPP, generation after generation

    If this is true, why would anyone bother with a Junior SIPP unless both parent SIPPs were maxed out?

  • 23 Naeclue October 18, 2021, 4:33 pm

    @J Kash, BCE 5A is applied at age 75, not at death.

    https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088650

  • 24 ZXSpectrum48k October 18, 2021, 5:26 pm

    The error here surely is not to have taken LTA Fixed Protection at £1.8mm. My choice basically came down to a £10k annual allowance (since I earned well over £200k) or £700-£800k of lifetime allowance. It was an easy decision for me and I grabbed it the higher LTA.

    I’m not sure he can do much now other than just suck it up. You only pay tax on gains and the marginal rate above the LTA is not really any more punitive than anything else. I’m going to be paying effective income tax rates of basically 50% from next year and you’ve got to assume CGT is going to 40% at some point. Everything is converging to higher tax levels.

    Plus, it’s just easier to focus on earning more or investing better than than try to finesse the tax position. It’s always seems such a good idea but it’s actually an unproductive waste of time.

    Finally, he has time on his side. At some point the stock market is going to dump 50% and not come back for a decade or two. Problem solved!

  • 25 Boltt October 18, 2021, 5:29 pm

    Thanks Finumus

    I took Fixed Protection 2014 – on the basis if my Sipp doubled in 16 years I’d hit £1.5m. Agree the penalty/subsidy does make you wonder about using risky derivatives – ZX48k seems to be able to access these but I’m not sure they’re generally available (or perhaps that inside ISAs)

    The only other cunning plan was to move to Portugal and access the pension with a tax rate of 10% (was recently 0%) – should help balance out the excess LTA penalty.

    I have a large deferred DB pension – if I took a CETV this would cause LTA problems, but unless the multiple is 45+ I won’t consider it.

    There are a lot of fortunate readers..

  • 26 JP October 18, 2021, 5:36 pm

    The DC scheme I was formerly a member of permitted funds to pass down through generations. This could be be done by the original member of the scheme nominating a beneficiary who, for example, could choose drawdown and in turn nominate their own beneficiary who could continue drawdown with the balance of funds after the first beneficiary’s death, and so on (an annuity or lump sum might be chosen instead, of course). All of this is permitted by HMRC rules, as I understand it, but an individual scheme has to cater for it.

    It seems to be a topical subject right now – https://forums.moneysavingexpert.com/discussion/6305284/more-budget-speculation

  • 27 BeardyBillionaireBloke October 18, 2021, 5:50 pm

    Is there such a thing as investing in an impending mis-selling scandal where you lose a lot of the SIPP before getting it back in compensation after you’ve spent enough to be below LTA?

  • 28 The Investor October 18, 2021, 5:59 pm

    @all — Solid discussion here everyone.

    On reflection I think Finumus’ comments about the maths were a bit too definitive given the varied tax relief in and ways to / tax rates on taking money out.

    I’ve edited the copy accordingly and referred readers to this comment thread, so everyone please stay on your best behaviour haha. 😉

    I’ve also put in a second disclaimer about tax situations varying hugely, because… taxes! Argh!

  • 29 Naeclue October 18, 2021, 6:19 pm

    @ZXSpectrum48k, I think you must be misremembering. Fixed Protection at £1.8m could only be taken if no more benefits were added after April 2012. Tapering did not come in for another 4 years. There was still a £50k Annual Allowance available for 2012/13 (and subsequently 2013/14), irrespective of income. I agonised over taking FP 2012 and it was not clear cut. Fix at £1.8m, or accept a lower LTA of £1.5m but be allowed to keep contributing.

    In the end I went for the fixed protection, but it is only with the benefit of hindsight with the subsequent LTA reductions that this turned out to be a good decision. I can well understand someone not taking out FP2012 at the time.

    Even now there are times when I wonder whether I got that right. I could have got another £100k into the pension and taken fixed protection 2014. £300k lower LTA, but another £100k outside my estate, probably worth £200k now and continuing to rise. That £100k would have come with substantial tax and NI savings as well and I would not have missed it.

  • 30 Naeclue October 18, 2021, 6:29 pm

    @JP, these are called “Nominee and Successor Pensions” and operate as Finimus describes. Introduced as part of George Osborne’s “Pension Freedoms” and available with SIPPs as well as employer’s schemes.

  • 31 JP October 18, 2021, 6:51 pm

    @Naeclue, yes, that’s right. A scheme member can nominate someone (a nominee) who, when they become entitled to benefits on death, can in turn nominate someone (a successor), as a beneficiary of any balance they dont take, and so on. Some DC schemes dont allow for this and just pay out death benefits as a lump sum (or possibly an annuity) on death.

  • 32 JP October 18, 2021, 6:53 pm

    The nominated person could the member’s dependant (called as such) or anyone else they choose.

  • 33 Al Cam October 18, 2021, 6:54 pm

    @steveark (#14):
    Naeclue (at #15) illustrates very clearly that a UK SIPP is only ever taxed if/when it is drawn from. US pension accounts – by way of contrast – have required minimum distributions (RMD’s) from age 72. Pros and cons depending on your own situation.

  • 34 James October 19, 2021, 7:51 am

    I assume you continued to receive employer contributions after 2016? If you didn’t and you haven’t contributed since 2016 you can still apply for protection up to £1.25m today:

    https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

  • 35 Al Cam October 19, 2021, 8:30 am

    Re #33
    Apologies – should have noted that UK Sipp does have a mandatory test at age 75

  • 36 LadyFIRE October 19, 2021, 8:31 am

    “There’s a point at which divorcing Mrs Finumus and then immediately re-marrying her might save us hundreds of thousands of pounds.”

    That sounds just about insane enough to be true… What a crazy loophole!

  • 37 D October 19, 2021, 9:26 am

    I think the divorce and remarry plan could be caught under the General Anti Avoidance rules.

  • 38 J Kash October 19, 2021, 9:51 am

    “ If this is true, why would anyone bother with a Junior SIPP unless both parent SIPPs were maxed out?”

    Because you can do this when retired and neither of you have relevant earnings. You can put £2880 in anyones SIPP and get £720 tax relief. Most folk who aren’t LTA challenged or a higher rate taxpayer should do this to their own pensions until age 75. Its a net £180 gain for basic rate taxpayers with the 25% tax free.

  • 39 Al Cam October 19, 2021, 11:39 am

    @Whettam (#4)
    Re: “Our situation is maybe easier, because its just my wife and I no IHT issues to worry about.” IMO, this could make the situation less favourable, depending on what exactly you mean by “no IHT issues ….”.

  • 40 Dave Jones October 19, 2021, 11:43 am

    Featured on SIPPclub is an interesting article which talks about taking a ‘Scheme Pension’ from a SIPP, which could save considerable tax. You’re a bit too young to draw income at the moment, Finumus, and whether it’s available when you’re the right age is anyone’s guess. It’s shown in the yellow box a third of the way down this page – https://sippclub.com/how-to-save-tax-if-you-exceed-the-pension-lifetime-allowance/

  • 41 MG October 19, 2021, 12:10 pm

    I’m just about to retire, and I think my solution to this issue is to take my DB pensions early. So I’ll get a lower pension for longer and reduce the percentage of LTA that I use up. My income could be boosted by selling unwrapped investments each year to use the CGT allowance, and maybe from taking some ISA income, and possibly dip into my SIPP if necessary. Meanwhile, I’m going to let my SIPP grow past the current LTA and hope for a LTA rule change in the next 20 years.

  • 42 PB October 19, 2021, 12:12 pm

    You can effectively increase your LTA by 30K by making 3 x 10K withdrawals without triggering an LTA calculation by using the small pot rules – HL seem to have a scheme to facilitate this.

  • 43 Peter October 19, 2021, 1:18 pm

    You could transfer your SIPP into a QROPS. There are some which allow share dealing (as opposed to high cost managed funds) and their costs are very reasonable (about £600/year). The transfer is a crystallisation event, and then your QROPS can continue to grow without the LTA ceiling and as far as I am aware, even if you don’t emigrate you can still receive your QROPS pension in the UK.

  • 44 Whettam October 19, 2021, 1:36 pm

    @Al Cam (#39) I just meant @FINUMUS situation, seems to me complicated by the wider family context (both dependant children and parents SIPPs) and the fact that as I understand it there are IHT benefits to SIPP’s vs. ISA’s. For my wife and I the portfolio just needs to provide for us, I don’t think we are likely to inherit anything and we don’t have any family that are depending on us to leave them anything.

    I could plan to take the majority of my withdrawal from my SIPP, leaving my ISA’s with a lower withdrawal to proportionately move our wealth to ISA’s, as they pass between spouses. But as I understand it this is not possible if you are worried about IHT.

    @Lady Fire (#36) This is why I think the LTA would be much fairer if you could share the allowances between couples. I’m pretty much at 100% of mine, but my wife is only at 30%, would be fairer if she could allocate excess to me.

  • 45 JP October 19, 2021, 1:44 pm

    I think there are different small pots rules depending on circumstances and whether the pot is taken from a personal pension or an occupational scheme. I imagine the scheme will tell you whether they would treat it as a small pot (and not subject to the LTA test)!

    https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063700

  • 46 JDP October 19, 2021, 2:30 pm

    Great article, three points from me:

    1) Your understanding of the lifetime allowance and death is slightly wrong. Death is *only* a BCE in the event that you die with uncrystallised funds. As age 75 is also a BCE in the event that you have uncrystallised funds, death over the age of 75 has no implications on the lifetime allowance (though of course withdrawals from inherited pension funds where the member died post age 75 are taxable at the beneficiaries’ marginal rate of income tax).

    2) The lifetime allowance tax charge is only 55% if you take the funds as an excess lump sum – this then isn’t subject to income tax. There’s nothing stopping you retaining the funds in the pension and only paying a 25% lifetime allowance tax charge – this is still less than 40% inheritance tax so is still a net saving if you’re not going to spend it all.

    3) You can crystallise your SIPP only up to the lifetime allowance £1.0731m and take the tax free cash from that portion – and leave the other part uncrystallised until age 75 – therefore utilising 100% of your lifetime allowance. It doesn’t trigger the money purchased annual allowance as you’ve not taken income so can carry on contributing as normal.

  • 47 Al Cam October 19, 2021, 2:40 pm

    @Whettam (#44)
    That is pretty much how I see it. If you take IHT off of the table then the calculus changes and the appropriate strategies are different. It is all devilishly complex and tied to your situation now and in the [unknown and unknowable] future too! My current view is that SIPPs are more likely to be [further] dabbled with than ISA’s – but what do I know?

  • 48 BBlimp October 19, 2021, 3:09 pm

    The maths seems extremely complicated to me and judging from the comments the bulk of people.

    All contributors, perhaps because Finimus is a currently a high earner, appear to assume all pensions are made up of money that attracted relief at the higher and even additional rate.

    My ‘fear’ is breaching the LTA whilst being a higher rate taxpayer in retirement having spent YEARS and years of my earlier working life slogging away making contributions that only attracted the basic rate of relief.

    The younger me could have done with that money if I’m going to be taxed more heavily on the way out than the relief I got on the way in 😉

    It’s perhaps no surprise an investing site attracts the comfortably well off middle aged… surely some of you had a hard slog of it when starting out

  • 49 Naeclue October 19, 2021, 3:11 pm

    @Peter, as far as I am aware for UK residents QROPS follow the same rules as other pensions, including the LTA rules. So you are only going to escape subsequent LTA tests if you leave the country. I am not sure what would happen though if you qualify for overseas residency, but then return to the UK after you are 75 having not triggered any LTA tests!

  • 50 Seeking Fire October 19, 2021, 3:18 pm

    Very interesting article and follow up comments by everyone including the differing views. Also at the LTA but with 15 years + before it can be touched, I figured I’d just bury my head in the sand for a bit and keep full loaded into equities. The rules will no doubt have changed substantially – probably such that I’ll be forced to exchange all of it into regular food coupons (joke).

    @43 Peter – I have read / looked into this before and am surprised more isn’t made of it. Any views? I didn’t bother really digging into it as not sure it’s worth it for now if I still have 15 years to go before a possible crystallisation event.

    Also interesting to see Finumus opening children’s pensions. Under the current LTA one could put money in each year until they were 18 and under reasonable compounding assumptions not have to put any further funds in. I never did this but possibly should have.

  • 51 Naeclue October 19, 2021, 3:20 pm

    @Al Cam, I agree with you. For those unconcerned about the IHT benefits everything gets simpler. It is then all about tax arbitrage and trying to reduce/eliminate LTA charges and income tax.

  • 52 Finumus October 19, 2021, 4:48 pm

    Thanks for the comments everyone – really enjoying the discussion. Slightly disappointed that nobody’s come up with a secret-sauce way of escaping the trap.

    The observation about no test on death if pension already in drawdown is an interesting one – might have to up the risk in the grandparents SIPPs even more.

  • 53 Al Cam October 19, 2021, 4:57 pm

    @Naeclue (#51):
    Thanks for that.
    We have discussed this topic on and off for quite a while now at Monevator!
    Having said that, new things are always coming up. For example, I recently had cause to do a bit of a deeper dive around a scenario with an active DB scheme (as opposed to a deferred one) and that added some further nuances and complexity all of its own though!

  • 54 Al Cam October 19, 2021, 5:06 pm

    Re @53:
    I meant to add that I have used the paper linked to above by platformer(#3) several times over the last few months and IMO it is very good. However, it is not the easiest read.

  • 55 Naeclue October 19, 2021, 7:46 pm

    @Finumus, there is a secret-sauce way to mitigate the LTA charge, but it is not foolproof, is costly, risky and I am not entirely sure is legal (I have been warned it might not be).

    The way to do it is to move your SIPP to a provider that allows you to buy options. When I looked into it, several years ago, there were SIPP providers that essentially gave access to an interactive brokers cash account for investments (ie an account that does not provide margin). Inside the IB account you buy OTM puts on something with low brokerage costs, such as S&P 500 E-minis. You simultaneously short the same position outside the SIPP in a regular investment account (cash or margin). If you are say 10% OTM then most of the time the SIPP will lose the premium and your investment account will gain.

    Downsides are higher SIPP fees, brokerage costs, CGT on the shorts and the risk that if/when it goes wrong you may end up transferring significant money into your SIPP!

    You could of course use the IB account instead to make some of your suggested YOLO trades – long calls on AMC, etc. would be spice-squared.

  • 56 Bally001 October 19, 2021, 7:53 pm

    I’m not sure why but I found this article really irritating. The author’s investments have done fantastically well but he is not happy. If my investments do as well I will be very happy and share my good fortune.

  • 57 Naeclue October 19, 2021, 8:05 pm

    @Finimus, just to add that with the savings in IHT you get with SIPPs, I am uncertain why you are interested in reducing your exposure to the LTA charge.

    Make 100k inside your SIPP, pay 25% LTA charge, a beneficiary pays 20% income tax, total 40k charge+tax. Make 100k outside your SIPP, you pay CGT + income tax on the gain and your estate pays 40% IHT. Net to your beneficiary, more than 40k tax.

    I think of the excess over the LTA in our SIPPs as most likely being beyond our use, but a good insurance policy that we can access if we really need to.

    Or do you have a good IHT avoidance plan?

  • 58 Planalyst October 19, 2021, 8:53 pm

    Having sat many technical pension and tax exams for my Paraplanner job in the last 5 years, I feel qualified to raise some points for information/guidance (but not regulated personal advice!).

    Current LTA Protection Individual Protection 2016 (IP16) doesn’t stop further contributions from 2016. Can get it if your personal total pensions were valued at more than £1,000,000 in April 2016 to give a personal LTA up to £1,250,000. Might help extend your personal LTA limit and its available tax free cash a little bit.

    As many above commentators have said, the LTA tax charge is 25% if “designated” as income (doesn’t have to actually be drawn). You could also not pay tax on the income drawn, if it’s under your Personal Allowance – unless you’re using this elsewhere of course, which apparently everyone but me seems to be planning to do in retirement. ;-D

    The current standard LTA is only frozen until April 2026 when it should start to rise again, theoretically by inflation (but who knows what that will be, or if the next Chancellor changes things by then).

    Taking the tax free cash now would crystallise the allowance, using up 100% now potentially might not help because you wouldn’t be able to benefit if the LTA limit increases in the future. If you also retain the higher growth equities in the SIPP, then ideally you should also start withdrawing the taxable income to reduce the invested gains by age 75, because, as others have said, the crystallised gains since the original crystallisation date will be tested against the LTA then. But this would completely depend on whether you actually need the extra income or not, maybe some juggling by reducing from other sources.

    @D (comment 2), @Peter (comment 43), and @Naeclue (comment 49) moving a UK pension to an overseas pension scheme would incur the LTA test at 25% tax at the point of transfer, so there’s no escape that way. Unless it’s not a UK-recognised scheme, but then you’d be taxed at 40% on transfer as a minimum instead.

    @JP (comment 31) absolutely it’s down to the individual pension’s scheme rules, as you mention, some of the older schemes still around only allow lump sum death benefits to be paid out. And some are NOT Inheritance Tax free, because in their rules the lump sum is paid directly to the deceased’s estate, rather than beneficiaries at the discretion of the scheme’s trustees. Something to be careful of with older arrangements, always read the fine print!

  • 59 FM October 19, 2021, 10:45 pm

    Amply clear from the comments that the UK govt sponsored ‘Office of Tax Simplification’ isn’t very effective!

  • 60 Can’t see the wood for the trees October 19, 2021, 11:35 pm

    Great article and what a first world problem to have! @Finumus have you explored the possibility and implications of transferring part or all of your sipp to a property sipp and using this to purchase a commercial property from your wife’s limited liability company?

    It would free up funds for you in the present, with the certainty that your wife’s business would pay you a decent pension in later life with the property as capital.

  • 61 Al Cam October 20, 2021, 12:17 am

    @BBlimp (#48):
    I completely recognise the scenario you describe. However, it may not be just about tax differentials. IMO, @Naeclue summarised it rather well at #51. If applicable, your take on IHT could also be key. Presence of DB scheme(s) could further complicate matters too.

  • 62 Al Cam October 20, 2021, 12:23 am
  • 63 Al Cam October 20, 2021, 7:33 am

    Re #60:
    Not to forget, in employer sponsored schemes: the impact of any employer contributions and/or salary sacrifice effects too.
    IMO, it really is complex!

  • 64 Amit October 20, 2021, 10:39 am

    I decided very early in my investment journey to diversify my assets across a number of instruments, ISA, LISA, SIPP, rental property – for this very reason. We know the regulatory headwinds are against accumulation of wealth – and it is always going to be palatable for Governments to target the few with lots of wealth than many with little. A resilient financial plan in this climate is one that does not seek to test the boundaries of the current allowances made by Government. For example, its probably prudent to assume you may not have state pension in a decade or so from now, or that the LTA will fall even further – say for a couple, or that withdrawals will be deferred by another 2-3 years.

  • 65 Peter October 20, 2021, 11:39 am

    @ Seeking Fire (Comment 50)
    I transferred my SIPP into a QROPS and the remainder above the LTA was left in the SIPP to grow. The % growth in LTA which should hopefully resume, should “free” the final amount left in the SIPP since the remainder in the SIPP is much less than the LTA now.
    I transferred before the overseas transfer charge was introduced, and at the time if I took my QROPS pension whilst resident in the UK, only 90% of the QROPS income was taxable which was even better than a SIPP, but since then, the government has stopped that too.
    There was no taxes to pay for the transfer, and besides the IFA fees which are required for the transfer (which some quotes were eye watering high since they were % based, but I found a very reasonable fixed fee IFA), the transfer has been hassle free. The QROPS is based in the EU but administered via the UK. I haven’t withdrawn my QROPS yet since the IFA said that if I can, to leave it untouched for 10 years since the QROPS provider only has to provide inform HMRC of any transactions within 10 years of transfer.

  • 66 Naeclue October 20, 2021, 12:00 pm

    @Peter “The % growth in LTA which should hopefully resume, should “free” the final amount left in the SIPP since the remainder in the SIPP is much less than the LTA now.”

    Sorry, but that cannot happen unless the rules radically change, such as the complete removal of the LTA. The LTA calculations are on a proportional basis. If you used up 100% of the LTA in your partial transfer to a QROPS, it will not matter what the LTA goes up to. You will remain at 100% LTA and anything you take out of your SIPP will be in excess of the LTA.

    Have you checked to see whether your QROPS can grow free of the LTA tests if you remain tax resident in the UK? My understading is that QROPS are treated in exactly the same way as other pensions with respect to tax and LTA tests for UK residents. It is only if you gain residency abroad that the UK tax rules no longer apply. I could easily be wrong on this, but this is something I would want to be absolutely sure about before I went for a QROPS.

    My understanding as well is that there is still no tax charge on a transfer to a QROPS provided the QROPS is domiciled in the EEA and you are tax resident in the EEA. But if you leave the EEA at any time, there will be a tax charge. With Brexit this may change at some point of course.

  • 67 Boltt October 20, 2021, 12:34 pm

    @ can’t see the wood for the trees

    Interesting – sipps can invest in unlisted limited companies.

    So, perhaps you could invest/lend your £LTA pot to your wife’s investment company (ltd) for nominal interest and let her invest the the pot and take profits as dividends and pension contributions.

    Sounds great, but surely it’s not possible (any IFA comments)

    B

  • 68 Peter October 20, 2021, 12:39 pm

    @Naeclue
    Thanks for the clarification on the porportional basis of the LTA. I didn’t realise that.
    I live abroad, but from the web ref tax
    “What tax will be charged in the UK on my QROPS Income?
    This is dependent on the jurisdiction where your pension is held and the nature of their double taxation agreement (DTA) with the UK.

    Using Malta as an example – the most popular destination for UK pension transfers – pensions are paid out gross (meaning zero tax at source in Malta). Tax is then due according to your country of residence. If you are resident in the UK you will pay income tax according to your marginal rate in exactly the same way as if you had never transferred it in the first place.

    There may be tax implications for someone returning to the UK if pension withdrawals have already been made from a QROPS while they were resident overseas. This generally applies where the UK authorities consider that the period of residence overseas was only temporary – i.e. it did not exceed five complete and consecutive UK tax years. In this instance advice should be sought before deciding to return”

  • 69 Seeking Fire October 20, 2021, 4:28 pm

    Peter / Naeclue

    Thanks and very interesting and I concur with your later messages having done some desktop research today.

    Up until 2017 – the LTA was neatly sidestepped by moving residence to Portugal and extracting all of it tax free and NHR scheme.

    Now it potentially still remains slightly tax beneficial to move to say Andorra (0 – 10% tax rate), take the 25% charge and extract accordingly, which is a tax saving of sorts. But this is only relevant if (a) you have a very very large pot you want to extract fairly quickly (b) you want to live in say Andorra. Which is presumably not very many people. Oh well 🙂

  • 70 Dave S October 20, 2021, 7:00 pm

    I have no problem with tax breaks being tightened for the wealthy. But what I object to is that the LTA reductions are effectively being applied retrospectively. My pension funds are trapped – I can’t get them out until some future age, which is also being increased. And I can’t apply for protection unless I’m already over the reduced LTA. So either I switch everything to cash, or I just have to accept that the government will appropriate whatever percentage of my pot that they choose when the time comes.

    All I can do is hope for a market crash just before I reach minimum pension age, so I can crystallise everything below the LTA. This also seems deeply unfair – it’s a matter of chance how high the stock market is when you need (or choose) to access your pension.

  • 71 Boltt October 20, 2021, 9:04 pm

    @Dave S

    Historically when the LTA changed there were 2 types of protection available – individual and fixed. If you had already exceeded the new LTA you could apply for Individual protection to keep the old, higher, LTA. Fixed protection was available so keep the old, higher, LTA. BUT no new money in to your pension was allowed (or you lose the protection and higher LTA).

    You can take protection without being over the LTA – I took fixed protection when at circa 75% of the old LTA and stopped contributions. Tough decision.

    Also, you can still apply for historic protection – if you meet the criteria of no new contributions past the relevant date.

    As has been said earlier the 55/25% penalties are (more or less) just the govt taking back the tax relieve you enjoyed putting you back in the position of investing post tax income in a GIA.

    B (this is my understanding, happy to be corrected by the more knowledgable)

  • 72 light fantastic October 20, 2021, 9:15 pm

    Great article. As I was reading this I was thinking… Yep I went through that thought process… Yep and that one…

    I liked your comments on brexit too. I feel that act of selfishness like an amputee feels their missing limb. So gutted that my country had become one of the baddies.

  • 73 Marked October 21, 2021, 11:42 am

    Hi Finimus,

    No secret sauce, but I did seriously look at the “Divorce” aspect you mentioned due to the big differences in our pensions.

    In the end I’ve concentrated on having a side hustle where my wife is a director and we pay her a salary to get a bigger amount into her SIPP. The side hustle is now looking to become the main hustle!

    So, again, no secret sauce, just concentrate on balancing both spouses LTA’s.

    We also max out the children’s JSIPP’s and have been just throwing VWRL / VWRP into them, which I can’t believe has made such a tidy amount for them even though they are only just teenagers. There was a discussion above about why JSIPP’s if a SIPP can be outside IHT. My view on that is more how long before it becomes under the auspices of IHT? When you think back in the mid noughties the LTA was £1.8M and from memory a £255K input per year, you’d never have thought that landscape would change so much under successive governments in 15 years – so how about a further 15 years of change with a country that may become poorer and poorer and an aging population that will creak and groan under social care costs?

    That is probably a great discussion point too. ISA’s, up to now, have been much more simple and have no glass ceiling, so in some ways you may be better off taking the hit and putting it in the ISA if the future of pensions is this road that now is well travelled? However, how long until ISA’s have an LTA? It doesn’t seem impossible that could occur with successive governments desperate for more tax pounds.

    Good Luck All

  • 74 Mark Edwards October 21, 2021, 11:56 am

    All,

    Was going to say with Fixed Protection – particularly 2016, we were aware at that time the Chancellor was going to up it by CPI per year. I saw that as a very good reason not to take FP2016, and of course we’ve had 73K of increases over 3 years, so it seemed my thinking was sound (as I’ve got another 18 or so years until I want to take retirement). However, with the Chancellor’s mothballing of CPI increases until 2026 it now seems a not so great decision. I also can’t believe it will increase after that. There are so many examples of the Government taking more people into taxation by keeping the brackets – e.g 50K – 60K withdrawal of Child Benefit has never moved, and 100K personal allowance withdrawal has never moved in 12 years. I just see the 1.073M staying from now on. I just don’t think there’s any political will for it, since as Finimus says, it is a privileged problem to have!

  • 75 faramog October 23, 2021, 10:24 am

    Another very interesting article .. had not realized a couple of the IHT things, but you are in a very health place.

    25 years to retirement: why wait that long – life is to be lived and enjoyed.

    Just a couple of things I am not sure about: “On the other hand, all losses in the SIPP now effectively get a 55% tax rebate”. No… that assumes you take the money out. Proft or loss only happens when you physically remove money. your ‘loss’ is purely notional and not actual.

    And a great weeze idea on divorce, but I seem to remember HMRC have sweeping and onerous powers of interpretation and I would not be surprised to see a divorce, split of pension and re-marry as deliberate tax evasion

  • 76 Mark Meldon October 24, 2021, 11:28 am

    Goodness! I have several clients with “Lifetime Allowance Issues”, and none of them worry about it; I leave the worrying about such things to ‘money and tax obsessives’, like accountants. In my professional experience, not being able to see the wood for the trees is very detrimental to one’s mental health.

    My point is simply that having a ‘problem’ with the LTA is surely a nice problem to have in that one has the advantage of having a well-funded pension pot, massively larger than the vast majority of citizens. If one ends up paying a bit more tax on retirement income then ‘so what’? You will have more than sufficient income, whether ‘insured’ via an annuity, or ‘probabilities -based’ using flexi-access drawdown, to see you out. In addition, most people I meet with this ‘problem’ have other substantial financial assets to use in retirement, too.
    I was once accused by a client entering retirement of being glib when I said “you will be fine, don’t worry about it”, when he realised his gross income was going to fall by about 45% as he stopped being paid a lot of money for flogging himself to the point of nervous exhaustion in his job. A year or so after he retired, we had a chat on the ‘phone and he said “well you were right after all” – it’s all about having sufficient INCOME, after all. I encouraged him, and many others, to start giving away money he didn’t NEED, which he and his wife have found to be a very satisfying experience.
    Sure, it makes sense to mitigate taxation within reasonable parameters but to even consider divorce as a ‘planning exercise’ – how cynical!

  • 77 Peejay October 29, 2021, 12:20 pm

    Thanks very much, especially naeclue and JDP. I found this thread extremely helpful in confirming that exceeding LTA is really nothing to worry about.

  • 78 J October 29, 2021, 1:59 pm

    Just to trigger a discussion:
    Is there something you can short in your sipp with long term growth where you could take the (net-idh) opposite position outside?

  • 79 IvanOpinion November 22, 2021, 6:32 pm

    A very timely article for me, thanks. I haven’t exceeded the LTA yet, but a further 20% growth will get me there, so it seems like I ought to be taking steps to mitigate. It hadn’t occurred to me that I should concentrate my bond holdings in my pension, but this seems a good idea. It won’t account for my entire pension, but it will certainly dampen down the returns.

    I suppose there is still a risk of a sudden plunge in sterling giving a big gain on my non-UK bonds. I might go for currency hedged versions.

  • 80 Harps November 22, 2021, 7:09 pm

    I really do not understand this desire to dampen returns in order to mitigate possibly exceeding the LTA. Assuming a reasonable drawdown from your pension it will take many, many years (decades maybe) to actually reach the point of 100% of your LTA being crystalised and charges then being levied (I would hazard a guess that for most this will be at the 75th Birthday BCE). During which time no one knows what will happen with regards to the markets or the pension rules. Simply put: I would much rather have a potential LTA problem than not.

    Perhaps I’m missing something…

  • 81 IvanOpinion November 23, 2021, 10:10 am

    @Harps
    If you were replying to my comment, I am not contemplating changing the overall likely returns of my portfolio, just shifting into the pension part of my portfolio the assets that are likely to have the lowest returns. I have a holding of bonds in order to dampen volatility of my portfolio, even though they are likely, in the long run, to give lower returns than equity. If I’m going to hold them anyway, I might as well hold them in my pension and shift the equity-based assets to my ISA. I still get the same overall performance, but less of it is likely to be in my pension.

  • 82 Harps November 23, 2021, 11:43 am

    @IvanOpinion
    Your post prompted my comment but it was really in response to the general sentiment I read in such fora regarding LTA. Your mitigation strategy seems a sensible approach, balancing, I assume, possible LTA and IHT charges, and based on educated assumptions.

  • 83 IvanOpinion November 23, 2021, 12:06 pm

    @Harps
    My decision is simplified by my attitude to IHT, which is that avoiding it is a lower priority for me than for most people.

    A big chunk of my estate will owe its existence to policy decisions over the last few decades that protected/boosted the value of property and shares and I have been lucky enough to be in the right place at the right time to benefit handsomely from that. I ought to pay tax, but if so, I’d rather do it when I’m dead. My children will be fine with 60% of my estate.

    Not that I completely disregard IHT planning, but my priorities lie elsewhere.

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