3 Lifetime Allowance Planning Examples
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- čas přidán 27. 06. 2024
- Last time I looked at some simple planning ideas for mitigating the effect of the pension Lifetime Allowance. This time I want to show you that planning to avoid the LTA might not be the smartest thing to do and that you may actually be better off by paying it!
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Chapters:
00:00 Welcome
00:24 Intro
00:40 Example 1 - Opting Out of a DB scheme
05:04 Example 2 - Opting out of a DC scheme
08:59 Example 3 - Other taxes and the LTA
13:21 Conclusion
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Great video Pete. I am 18 months from retiring early at 55 with a pot of c.£2m so lifetime allowance is on my mind. I have done similar models with my advisor and whilst a pain, you just have to accept tax is a fact of life and almost have to ignore the number even if it is eye watering. As my old dad said, better to have to pay tax on it rather than never have had it in the first place.
Exactly right, Mikey - that's a healthy response. I always worry about people who want to save tax at all costs...
And what it also shows is that someone can plan many years in advance only for a rule change by some future government to throw it in your face. Back in 2011, LTA was £1.8m. Sure, there has been some protection at certain moments, but things are always changing. Remember to spend enough on yourself and loved ones (through regular gifting, for example) to enjoy the benefits while you can.
@@jam99 absolutely, that is the plan, last thing I want is the double whammy of an LTA test at 75 and then pass on an inheritance tax issue as well.
In a very similar position and I recently found one way of avoiding the tax in some Voyant Go modelling and that was a prolonged bear market. Fingers crossed for paying more tax 😉.
@@Bracebarian 😂 dear stock market, please keep crashing my value so I do not have to pay the extra tax. Who knows by the time I am 75 (2044) it may have all changed, although I do wonder if I would be better crystallising the lot with a 25% penalty at 55 just in case they get even more grabby down the line. 🔮 gazing required!
Thank goodness that this is a problem or issuebof the past! Well, for now!
Excellent and still relevant a year later even though the lta cap has gone (for now! ). Lots of people have a mix, eg in my case 2 x DB plus 2 x DC so it would be great to see a DB+DC example (please!!). Really appreciate your work 😊
Loved the ‘LTA and other tax’ graphic! V informative
Thank you so much for this, incredibly helpful and thoughtful financial planning :)
You're welcome, Bailey - glad it was helpful!
Brilliant video. Best examples seen on this topic. Proper content.
Cheers Alex - I appreciate that!
Superb content
Superb! Many thanks for another great video, Pete. Another factor that might be relevant for those earning between £100k and £120K is the personal allowance taper, which perhaps justifies continuing to contribute to a DC pension even after exceeding the LTA, I think. You've certainly demonstrated that the LTA is not something to be overly worried about!
Thanks Pete.
Thank you, Alan!
Fantastic video Pete - thanks. Clear examples and interesting outcomes/ discussion points. I am also wrestling with the LTA and have decided to ignore it up to now, and it gets interesting when you play in the inheritance tax, although I assume there may be other mechanisms on the investment side which can also have a reducing effect on that - I would be interested in seeing some examples and more thoughts on those 'other variables'. thanks again
Brilliant video, couldn't believe it until I watched it. The DB scheme example would be extremely helpful for big earners in the NHS worried about massive tax bills as they come to retirement. Even with the amount of LTA charge taken only a few years to make that back again, amazing!
Glad it was helpful Benny - thank you!
Great video Pete and I agree it's far better to pay the tax if you are lucky enough to get to a position where you have to.
The tax relief in earlier years and compounded growth from that should more than make up for giving some back 👍🏻
Hi Pete , Great video as usual, would you be able to touch on the subject of pension levelling option within a DB fund , pros and cons etc. Thanks
This was brilliant! I am aged 33 and have carried out my own basic calculations to asses what the lifetime allowance should be when I get to retirement and how to make sure I don't go beyond it...never considered the legacy planning aspect post-75.
It's an important factor, Sean, though at 33, it's not one that should occupy too much of your time and mental energy!
Example for self employed with Sipp please .
I would also be interested in some analysis at what point it makes sense to crystallise the pension if you have breached the LTA - early or leave it until late with also a chance that the pension approach may be reformed in the next 20 years? thanks
An example of how injury pensions already in payment affect LTA would be helpful. Many former service and police personnel receive these relatively early in life then go on to do other jobs which also build up pensions. The lifetime allowance treatment and impact of these injury pensions is different depending the scheme and can be punitive, yet they are often overlooked.
Thanks, interesting video, however with the DC example with Jacob you should also consider that if he would opt out he would have £300 monthly after tax (those 18k you show) that would have compounded to 20431.05 for those 5 years at 5%. Still less than paying into the pension tough
As always, this video was excellent. I think the third example highlighted the complexity of the decision making process and how IHT changed everything. Really pleased I have Voyant Go through the Meaningful Academy to help me with my decision making.
I appreciate your support, Kelvin, as ever!
Great video!
As a 45 year old already over the LTA (transferred out of a DB to SIPP at 38x) I still see value in paying more in. I’m usually avoiding the 63% tax bracket and paying AVC’s also get’s me 10% uplift. The biggest benefit I see to contributing more though is tax free returns for 20 years compared to taking it as cash now after income tax and then being taxed wherever I invest it (ISA always used regardless). In 20 years surely the tax free dividends and growth over the years will be worth way more than taking taxed cash now and paying investment taxes as I go. Hope I’ve not got that wrong!?
Should add it was a closed DB scheme.
Sounds like a plan to me, Steve!
Hello Pete I thought your video was excellent. One challenge that may affect Toby’s decisions depending on his benefits in kind & other income would be the Annual Allowance. It is one thing to worry about the LTA but the decision is made much easier when you also have a large AA charge on your payments into the pension. Welcome your views on this.
Yes indeed, though in the figures his salary wouldn’t taper the annual allowance. It’s a factor though, potentially, for high earners
Hi Pete, very Informative . I am 45 percent tax payer would it be still worth paying into Sipp over LTA since it is only taxed at 25precent on income withdrawals and a marginal rate of 20percent bringing the total tax payable @ 40 percent. Still a difference of 5 percent . Assuming my income withdrawal bracket will be 20 percent example 10000 paid into Sipp I get tax relief of 4500. LTA charge payable will be only 4000 if I take income in 20precent tax bracket. Thanks
Hi Pete, very informative as usual, however your examples appear to assume that each person has only one pension, or are you adding them all together and crystallising them all at once? Am I right to assume that different pensions can be crystallised at different times and this might be a factor to consider? Correct me if I'm talking complete rubbish! Thanks.
Hiya Pete, great video as ever. I may be wrong on this but would I be correct in assuming that in the first example if Toby wanted to continue paying into the DB scheme then he will lose the LTA fix at 2016 levels. My understanding was if you apply for that fixed protection you can no longer make any further contributions into your pension as that will invalid that specific protection.
Depends if it’s fixed or individual protection, Andy. If it’s fixed, then your assumption is correct. With individual protection you can continue paying in.
Thanks Pete for another helpful video. Nothing in life is straightfordward.
I do have a question. At the point a person wants to draw from their pension - as this the first crystallisation event against the lifetime allowance. Who is allowed to submit this calculation to HMRC? Does that need to authorised person/life company/fund adminstrator or can it be a individual as they might with their tax return?
The pension provider will notify HMRC usually, I believe, but as the taxpayer it's your responsibility. You only need to tell HMRC if you exceed the LTA though, not if you're within it...
Love the channel. On the DC example, if he takes a 25% tax free portion does the LTA kick in then or only when you start to drawdown from the remaining 75%?
To take the 25% tax free cash requires crystallising the whole pot, so THAT’S when the LTA calculation is done.
Thanks for being here! 🙏🏻
Would be great to see you do an example of a business owner and comparing the options of leaving £40,000 a year in the pension or taking it out and putting it into two ISAs (husband and wife)
I did a video called pension vs isa. You can search for that easily enough - enjoy!
For me, a bit of both is best. It always depends on personal circumstances. The benefit of the pension is accumulation on the tax saving of money going in. The big benefit of the ISA is that you get to access it if you need it when life suddenly throws something at you (which could be a sudden opportunity or a sudden problem). That gives security, flexibility but, beware, it also means you must be more self disciplined not to squander it.
This is fantastic news, I really can continue to grow my pension wealth. So I could actually pay in the whole of my salary for the next ten years and receive free money from the government.
Hi Pete, love your channel. Just retired myself at 56, and I have received some differing advice on LTA. Is it correct that each time I draw down from a DC pension this crystallisation uses up a % of my LTA,"filling up the LTA bucket" as it has been put to me? You talked about playing around with drawing down to reduce LTA, presumably because by doing so there is no growth on this removed amount.. Thanks, Mike
I think you are correct in both assumptions but that's my opinion only and based on my investigations. I will hit the LTA and plan to retire in 2 yrs. Sadly won't be smashing it like these examples LOL
Hi Mike. You fill up your LTA bucket every time you crystallise a pension, not when you draw from it. Search for my video called ‘how UK pensions work at retirement’ for more on what that means
Hi Pete, I believe this is an example of where it makes sense to keep maximising pension contributions even though the LTA will be breached. Your comments would be welcomed. Paying into company pension through salary sacrifice and receiving the company max contribution. Paying additional funds through salary sacrifice and the company invests their Employer NI savings 100% into the pension. Assuming 40% tax payer during accumulation and 20% tax payer during retirement.
Absolutely agree - all that free money! (Not advice, mind...!)
Great video as always Pete. I’m in the lucky position that I will be over the LTA when it becomes my turn to retire. This is split roughly 50:50 between DB and DC schemes. I’m struggling to see whether it would make any difference in the sequence that I crystallise them. Would this topic be worthy of one of your videos?
Crystallise the DC scheme first then the DB scheme will pay any lifetime allowance charge and spread charge over time.
Thanks Ian. That’s where my head was at, great to have it validated.
would an alternative be to do use an annual ufpls or drawdown so the pot doesnt go over LTA... actively managing the pot for LTA
Yes, in the right circumstances. We do that a lot for clients.
Video seems very jerky Pete. Audio fine. Your hands and mouth just blur with movement. It’s not usually like that.
Weird, David - thanks for commenting; we'll look into it
I thought for a moment Max Headroom had moved into retirement planning 😆
Some employers allow er dc pension contribution to be paid in salary in lieu of pension where lifetime allowance reached. At 45% income tax vs 55% late does this make sense?
I’d say not, because of the points made in the video. Maybe there’s an additional inheritance tax benefit, or maybe you don’t draw benefits over the LTA and let the pot grow, and only pay 25% LTA charge?
@MeaningfulMoney obviously none of us know and as I am only 31 I have some time until it will effect me (potentially, who knows what the government will do), but I am expecting that the LTA will decrease not increase based on history which could significantly affect these situations. This makes financial planning more complicated in my opinion as it is hard to plan for the unknown, but I am considering opting to plan to spread my risk (like an index fund) by spreading my net worth across my pension, ISA, properties, a GIA and bonds to spread my risk because eventually the government will realise/accept they can't just keep printing money and need to tax to fill in the hole they have created. I also think they will introduce a general wealth tax like Belgium, Spain etc so I am paying down my mortgage early to limit my required outgoings. Perhaps a bit too prudent / pessimistic about the situation but I would love to hear your thoughts on whether this is something you have considered?
LTA charge on 10000. @ 25 percent =2500, balance 7500 taxed @ 20precent =1500. Total payable 4000.
Do we have the calculations on this?
Hi Pete, your videos are very useful for me as I am an expat living in UK. Got to know a lot of options available for future planning for my long term stay in UK.
From this particular topic if you can share, could a person like me who doesn’t have ILR yet invest in lifetime ISA? Or this scheme is for citizen only.
ILR?
@@MeaningfulMoney Indefinite Leave to Remain .. this is something you get before citizenship
What about SSAS to extract some of the money
Still a pension - makes no difference to the LTA rules
Please can you tell me if the MPAA will be triggered if I don't take anything else from my pension when it goes in to my SIPP? I have taken the 25 percent tax free from my pension scheme .I am 55 years old and WILL continue to work.
Hi Geraldine. Don't worry - transferring from one pension to another does not trigger the MPAA, as long as no taxable income is paid out to you.
I have a different question. My DB and DC together are only about 650k. I have already exhausted the 40k contrib limits for the past three years. I would still like to pay into my DC at source from my wages more than the 40k per annum e.g. 50k in each year. What tax would I pay on the extra 10k I will put in? What's the most efficient way of doing this?
I have same question too
👍
Cheers!
Will be interesting to see if as a consequence of reducing & freezing the LTA, a trend develops where couples divorce as the primary earner reaches 74 & then re-marry after the age75 BCE.
That sounds like something the taxman would foresee and tax you.
If you divorce just to split a pension.. then remarry a few years later to the same person.
Can you imagine?! “I love you darling, but I want to save tax, so if we could just divorce, I’d appreciate it”
They’d have to not die while divorced and also remake their wills when they remarried.
In example 2, after the 55% excess charge has been applied Jacob has £55,671 in the right hand column. Does he then have to pay further income tax on that £55k, or this that the amount net of all tax?
No, the 55% tax charge assumes he’s taken it out of his pension into his bank account. No further tax to pay.
@@MeaningfulMoney thank you very much for this. This is something I've not been able to get an answer to for years!!!
Great video - at the moment I doubt the LTA at retirement, but I can imagine two scenarios where it would:
- The fund grows nicely as I'm retired and I hit what ever is left of my LTA at 75. I guess that is handled a bit differently?
- Government look for a soft, "painless" option to raise revenue so they don't increase or reduce to LTA and rely on fiscal drag to capture more people like they have with income tax.
I'm early to mid forties so I'm not stressing about it too much, but I do know it's complicated - closer to the time it's worth every penny to get advice. Also, particularly the last case, in a similar way to looking at the asset pool in the whole, it's worth looking at taxation from "from soup to nuts".
Totally agree, Roger. It’s one of many taxes, and sometimes you have to choose your poison. As the examples suggest, sometimes it is worth paying the LTA charge to save tax elsewhere…
Last example, if he puts his investments in trust, he should be alright then?
Yes, but that's a Chargeable Lifetime Transfer, so he'd have to live between 7 and 14 years for the tax to drop to zero, depending on other gifts he's made. Plus you don't 'put' assets into trust, you give them away and you can't access or have any benefit from them, which might be a problem...
Once your pot is nearing the LTA it doesn't seem useful to continue to add to it.
Use up your ISA allowance and look at alternatives like offshore bonds and AIM?
Why didn't the Government just say "there is a pension input allowance of 1.073 million" instead of LTA? It just makes it guesswork instead of proper planning. The Government would still get its tax.
The video shows that passing the LTA is sometimes the most advantageous thing to do…
If the government wanted to still take the same amount of tax, they’d have to set an “input allowance” a great deal lower than the current £1.07m due to average growth.
.... but no more LTA now.
Yup. Older video.
The best move if you're a high earner is to retire early. Many of my NHS doctor friends are doing it and benefitting from it. No point working your bum off to give over half to the tax man who will give it to Ukraine or some peer sitting in the House of Lords.