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Pension - lifetime limits - questions, clarifications


Frank Hovis
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Frank Hovis
Posted (edited)

The lifetime limit is £1,073k at present which gets you a "massive" £29k a year if you buy an annuity; retiring at 65 and RPI linked.

Now obviously sensible people wouldn't buy an annuity but given that many do that strikes me as a rather low amount of pension from a million.

https://www.hl.co.uk/retirement/annuities/best-buy-rates

There was a suggestion this week that in the tax grab pensions were in line and one option was reducing the lifetime limit to £700k.

Given how inflation is likely to rip, meaning that equities and PMs for two will rise heavily simply by keeping pace with inflation, I don't think that you will need much more than say £300k at present if you have twenty years to retirement before you're going to hit that limit so a lot of people will be doing just that.

I know there's a big tax disdavanatge for anything above that.  I'm not clear how it works but AFAIK it outweighs the tax saving you made when you put it in so if you're going to exceed the limit it will net cost you.

My position is that I intend to take all of my pensions at 65 but with an eye to this I wonder if I should start pulling down on my SIPP (only) asap otherwise inflation might take that and the other pensions above a future limit.  Therefore draw down early and only be taxed at normal rate or leave it and be hit by penalty tax if it gioes over.

 

Thoughts?  Corrections?

I can't draw on my SIPP for another three years so I am expecting the pot limit to be cut in that time though don't know by how much.

 

Edited by Frank Hovis
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SpectrumFX

I've got three different defined benefit schemes, and a very small SIPP.

Once I've stopped work my plan is to access them in a staged way by first emptying the SIPP, and then taking one or more of the DB schemes early. My main thinking there is that if I'm not working I'll still want to be taking advantage of my tax allowance.

 

 

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MrXxxx
On 03/07/2021 at 14:11, SpectrumFX said:

I've got three different defined benefit schemes, and a very small SIPP.

Once I've stopped work my plan is to access them in a staged way by first emptying the SIPP, and then taking one or more of the DB schemes early. My main thinking there is that if I'm not working I'll still want to be taking advantage of my tax allowance.

 

 

Thanks, you comment got me thinking about the way I was going to do my own plans.

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DurhamBorn
Posted (edited)

Im taking UFPLS from my SIPP as soon as im 55.£16,700 a year,my tax allowance and the 25% tax free element,so paying zero tax.From that point il live on that and so all divis from my ISAs will then be re-invested.At 67 il put the SIPP into full drawdown and withdraw the 25% tax free lump sum,and feed that into ISA over the years.At that point il take full state pension,£3k a year from SIPP and all ISA divis,so again paying zero tax.My aim from now at 49 until i die is to never pay 1p in income tax or NI.Im a couple of years short on NI but will claim specified adult childcare credits for looking after my grandkids.

I think i should be able to stay under the limit,but if im still alive and its getting close as i get near 75 il take some and pay lower rate tax.I think il be ok.My main risk is from 67 il only be taking £3k a year so there is a good chance the amount rises a lot before 75 when they do a value check again.So,i should be ok,but if between 70 and 75 it looks like i might breach il take some and pay the basic tax,then give it to my kids so they can put in their SIPPs and claim that tax back ,xD

Edited by DurhamBorn
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  • 2 weeks later...
Festival
On 06/07/2021 at 01:30, DurhamBorn said:

Im taking UFPLS from my SIPP as soon as im 55.£16,700 a year,my tax allowance and the 25% tax free element,so paying zero tax.From that point il live on that and so all divis from my ISAs will then be re-invested.At 67 il put the SIPP into full drawdown and withdraw the 25% tax free lump sum,and feed that into ISA over the years.At that point il take full state pension,£3k a year from SIPP and all ISA divis,so again paying zero tax.My aim from now at 49 until i die is to never pay 1p in income tax or NI.Im a couple of years short on NI but will claim specified adult childcare credits for looking after my grandkids.

I think i should be able to stay under the limit,but if im still alive and its getting close as i get near 75 il take some and pay lower rate tax.I think il be ok.My main risk is from 67 il only be taking £3k a year so there is a good chance the amount rises a lot before 75 when they do a value check again.So,i should be ok,but if between 70 and 75 it looks like i might breach il take some and pay the basic tax,then give it to my kids so they can put in their SIPPs and claim that tax back ,xD

DB - what you are planning to do is broadly what I am doing where I am planning to take small UFPLSs from SIPP now I've turned 55 for a few years and then at some point take the 25% tax free element and then reinvest via ISAs to keep the tax wrap.

My question to you and others is given the current noise around the Lifetime Allowance limit being reduced from £1073k do you have a feel for how far this might come down and do you think people will be able to apply for protection as they have been if their values exceed or are likely to exceed the  2016 limit of I think £1.25m. The main reason for asking is that if we get a substantial period of inflation and you get near the cap it might make sense to put the SIPP into drawdown earlier rather than later to avoid any tax penalties that might otherwise arise from breaching the lifetime allowance limit?

 

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Frank Hovis

Using UFPLS does seem a fairly neat way to transfer out of the SIPP with all its regulations and into the ISA with the ability to take the whole lot tax free at any time.

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DurhamBorn
1 hour ago, Festival said:

DB - what you are planning to do is broadly what I am doing where I am planning to take small UFPLSs from SIPP now I've turned 55 for a few years and then at some point take the 25% tax free element and then reinvest via ISAs to keep the tax wrap.

My question to you and others is given the current noise around the Lifetime Allowance limit being reduced from £1073k do you have a feel for how far this might come down and do you think people will be able to apply for protection as they have been if their values exceed or are likely to exceed the  2016 limit of I think £1.25m. The main reason for asking is that if we get a substantial period of inflation and you get near the cap it might make sense to put the SIPP into drawdown earlier rather than later to avoid any tax penalties that might otherwise arise from breaching the lifetime allowance limit?

 

Good question and my best guess would be they will simply freeze it so inflation does its work.Thats a lot of the aims this cycle from government.If it looks like lifetime limit will be breached a lot depends on how old you are,for instance a SIPP can be passed tax free before 75 so if your close its still worth keeping in the SIPP as you might die 10 minutes later etc.

For me my key aim is at 55 to withdraw the £16700 tax free with my allowance and 25% and use the period from then until 67/68 to reinvest inside my ISA nd take nothing from that.Then full drawdown and 25% out at 66 and then most income from my ISA,and only drawdown from my SIPP whatever it takes to equal the tax allowance on top of state pension.

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DurhamBorn
1 hour ago, Frank Hovis said:

Using UFPLS does seem a fairly neat way to transfer out of the SIPP with all its regulations and into the ISA with the ability to take the whole lot tax free at any time.

Its the best way from 55 i think until year before state pension age.During that time im going to stop taking divis from ISA and re-invest etc.Just before state pension kicks in il go into full drawdown though and reinvest the tax free lump sum into my ISA over however many years it takes.From SPA i will only take around £3500 from my SIPP as added to state pension thats the tax allowance and il double that from my ISA easily,so all tax free.The only way il pay income tax again in my life is if the lifetime allowance is close then id have to bite the bullet and get some out.I would then give that to my kids who could put it into their SIPPs and get the tax back xD

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Frank Hovis
4 minutes ago, DurhamBorn said:

Its the best way from 55 i think until year before state pension age.During that time im going to stop taking divis from ISA and re-invest etc.Just before state pension kicks in il go into full drawdown though and reinvest the tax free lump sum into my ISA over however many years it takes.From SPA i will only take around £3500 from my SIPP as added to state pension thats the tax allowance and il double that from my ISA easily,so all tax free.The only way il pay income tax again in my life is if the lifetime allowance is close then id have to bite the bullet and get some out.I would then give that to my kids who could put it into their SIPPs and get the tax back xD

Some advice I read was strongly against it but this is pension orthodoxy which assumes that your SIPP is your main or only pension and advises accordingly.

For me the SIPP has only ever been an ISA with bonus tax benefits and I want to tip all it into my ISA without paying any tax in so doing; rapidly running it down also heads off any issues with the lifetime cap.

The only downside of which I can think would be that being in receipt of a pension then debarring me from JSA which with a bit of temporary work I will become again eligible April 2023. Though that's only £1.9k for the six months so really I should just discount it; I just find it hard to pass up free state money when it's available!

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DurhamBorn
2 hours ago, Frank Hovis said:

Some advice I read was strongly against it but this is pension orthodoxy which assumes that your SIPP is your main or only pension and advises accordingly.

For me the SIPP has only ever been an ISA with bonus tax benefits and I want to tip all it into my ISA without paying any tax in so doing; rapidly running it down also heads off any issues with the lifetime cap.

The only downside of which I can think would be that being in receipt of a pension then debarring me from JSA which with a bit of temporary work I will become again eligible April 2023. Though that's only £1.9k for the six months so really I should just discount it; I just find it hard to pass up free state money when it's available!

Dont forget the inheritance tax benefits.Im not married so only have half a mill allowance and £175k of that is if i pass property on to the kids.So only £325k allowance + SIPP.Below 75 being able to pass on and withdraw tax free is a huge perk.Even after that they can leave as a pension and withdraw themselves whenever the tax situation suits.Even better for kids actually because they can access at anytime against their allowance so could use that to fund retirement from sy 45 to 58 then their own pension from 58 etc.Problem is teaching your kids.

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Frank Hovis
6 minutes ago, DurhamBorn said:

Dont forget the inheritance tax benefits.Im not married so only have half a mill allowance and £175k of that is if i pass property on to the kids.So only £325k allowance + SIPP.Below 75 being able to pass on and withdraw tax free is a huge perk.Even after that they can leave as a pension and withdraw themselves whenever the tax situation suits.Even better for kids actually because they can access at anytime against their allowance so could use that to fund retirement from sy 45 to 58 then their own pension from 58 etc.Problem is teaching your kids.

 

I have no dependents and am happy for my siblings or relatives to have the estate.

My aim is to take the ISA money and use it at 65 plus house proceeds to buy a very nice house with a boathouse at the bottom of the garden and then take my works' pensions to leave me a (hopefully) comfortable few years of gracious living.

I don't really want to jump through lots of hoops to cut the IHT when it's a pile of free money for them anyway.

I appreciate that things change; if I do end up with dependents then yes it will be forestry, buy a farm and work it, off radar PMs, lifetime gifts etc. etc.

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Just giving this some thought....if you have both a DB & a DC pension, and the DB with state pension brings you close to the personal tax allowance, then as well as using @DurhamBorn approach to drawdown from 55-67 into an ISA, its a good idea to transfer the remainder (if you have any) into a SIPP just before retirement...ok, you won't 25% tax free on the remaining sum as you are not going into full drawdown, but you could sell off some  shares every yes to benefit from your £12k capital gains allowance AND if you wanted to take more than this you only pay 10% cgt on the rest rather than 20% income tax...thoughts/comments?

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Frank Hovis
4 hours ago, MrXxxx said:

Just giving this some thought....if you have both a DB & a DC pension, and the DB with state pension brings you close to the personal tax allowance, then as well as using @DurhamBorn approach to drawdown from 55-67 into an ISA, its a good idea to transfer the remainder (if you have any) into a SIPP just before retirement...ok, you won't 25% tax free on the remaining sum as you are not going into full drawdown, but you could sell off some  shares every yes to benefit from your £12k capital gains allowance AND if you wanted to take more than this you only pay 10% cgt on the rest rather than 20% income tax...thoughts/comments?

Personally if I find myself in the situation where I'm liable for income tax then I will be back to buying VCTs as I do like the nature of them; assuming that I have the spare cash to do so.

I'd rather take the DBs as DBs and I'm then left with one decent and medium sized DC which yes I hope to put into my SIPP rather than buy annuities unless the rates are seriously improved in ten years' time.

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30 minutes ago, Frank Hovis said:

Personally if I find myself in the situation where I'm liable for income tax then I will be back to buying VCTs as I do like the nature of them; assuming that I have the spare cash to do so.

I'd rather take the DBs as DBs and I'm then left with one decent and medium sized DC which yes I hope to put into my SIPP rather than buy annuities unless the rates are seriously improved in ten years' time.

The VCTs are not for the mainstream though, and

 

34 minutes ago, Frank Hovis said:

 

probably more relevant/beneficial for high rate tax payers, as I think you have pointed out previously?

 

35 minutes ago, Frank Hovis said:

rather take the DBs as DBs and I'm then left with one decent and medium sized DC which yes I hope to put into my SIPP rather than buy annuities unless the rates are seriously improved in ten years' time

I assume you are taking this approach for the same reason I mentioned Ie using CGT, and secondly as the DB takes the place/role of the annuity I.e guaranteed income?

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Frank Hovis
5 minutes ago, MrXxxx said:

The VCTs are not for the mainstream though, and

 

probably more relevant/beneficial for high rate tax payers, as I think you have pointed out previously?

 

I assume you are taking this approach for the same reason I mentioned Ie using CGT, and secondly as the DB takes the place/role of the annuity I.e guaranteed income?

Yes to the last.

There are many caveats to be made about VCTs but they work well in my situation though will work increasingly less well as I get older.

Realistically I wouldn't buy them if I didn't think that I had at least another fifteen years left but touch wood I hope that that isn't going to be the case in my sixties so doing that will enable me to empty what may be a fairly chunky SIPP after I've transferred my DCs into it and without paying tax.

Ideally each year I have plenty to live on, put £20k into an ISA, and enough into a VCT to soak up the income tax.

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Pension access age to change in 2028 from 55 to 57.  

https://ifamagazine.com/article/7-in-10-adults-unaware-of-plans-to-increase-the-minimum-pension-access-age/

The government is increasing the age people can access their pension from 55 to 57 in 2028. However, Aegon research shows 7 in 10 (68%) adults remain unaware of this change. 
The ‘normal minimum pension age’ is the minimum age from which most individuals can access their pension savings. The government is increasing this from 55 to 57 in April 2028 with final details on exactly how the transition will work awaited from the Treasury.

Aegon’s latest research highlights a significant lack of awareness of this change which could have knock on impacts for those planning ahead to access their pensions.

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Frank Hovis
12 minutes ago, Herby said:

Pension access age to change in 2028 from 55 to 57.  

https://ifamagazine.com/article/7-in-10-adults-unaware-of-plans-to-increase-the-minimum-pension-access-age/

The government is increasing the age people can access their pension from 55 to 57 in 2028. However, Aegon research shows 7 in 10 (68%) adults remain unaware of this change. 
The ‘normal minimum pension age’ is the minimum age from which most individuals can access their pension savings. The government is increasing this from 55 to 57 in April 2028 with final details on exactly how the transition will work awaited from the Treasury.

Aegon’s latest research highlights a significant lack of awareness of this change which could have knock on impacts for those planning ahead to access their pensions.

Good.

I had thought it an automatic ten years prior to SPA which would have made it 57 for me.

Tbh I don't know why it isn't though I'm not complaining.

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DurhamBorn

On the age increase to 57 be carefull you dont move a pension that has protected access rights.In the small print of the legislation coming it says pensions running before they announced it with a right to access from 55 will be honoured.So my Hargreaves SIPP for instance is fine,even though im 55 before it kicks in anyway.If i moved that HL SIPP though now i would lose that protection,if it was into a new SIPP or pension.If it was in to another SIPP set up before the announced it then it would be fine.A lot of people will lose the right of course because they will transfer from a company scheme into a new SIPP.I opened SIPPs for all my kids before they announced it so locking in 55 for them hopefully.

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  • 2 weeks later...

Couple of questions folks:

1. If you have both a DB and DC pension from the same employer are the two treated individually i.e. can you crystallise the DB [and get the 25% tax free lump sum] yet keep the DC uncrystallised or vice versa?

2. Anyone used a PensionWise appointment, are they any good or is it just really basic info?

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On 14/07/2021 at 15:15, DurhamBorn said:

Dont forget the inheritance tax benefits.Im not married so only have half a mill allowance and £175k of that is if i pass property on to the kids.So only £325k allowance + SIPP.Below 75 being able to pass on and withdraw tax free is a huge perk.Even after that they can leave as a pension and withdraw themselves whenever the tax situation suits.Even better for kids actually because they can access at anytime against their allowance so could use that to fund retirement from sy 45 to 58 then their own pension from 58 etc.Problem is teaching your kids.

After reading your earlier bit about shifting money from SIPP to ISA, I was going to mention that you lose the inheritance tax free, if you die before 75. The problem I see is that if they limit the pension lifetime allowance then they will probably do an ISA limit as well. The £20k max into an ISA is obviously less than some people put into pensions but if they make pension contributions less attractive with a limit, more people will stick it in ISA's instead. Although you get tax relief on pension contributions you might have to pay tax when you take money out, depending on circumstances. As you know I'm old enough to shift money from SIPP to ISA, I haven't touched the SIPP, partly for the inheritance tax free and to wait and see what they do. Given our debt situation they will probably be doing something soon.

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1 hour ago, Democorruptcy said:

After reading your earlier bit about shifting money from SIPP to ISA, I was going to mention that you lose the inheritance tax free, if you die before 75. The problem I see is that if they limit the pension lifetime allowance then they will probably do an ISA limit as well. The £20k max into an ISA is obviously less than some people put into pensions but if they make pension contributions less attractive with a limit, more people will stick it in ISA's instead. Although you get tax relief on pension contributions you might have to pay tax when you take money out, depending on circumstances. As you know I'm old enough to shift money from SIPP to ISA, I haven't touched the SIPP, partly for the inheritance tax free and to wait and see what they do. Given our debt situation they will probably be doing something soon.

Yes i think the way you use the two is key.The real big one for a SIPP as you say after the tax relief is the inheritance tax side.Without putting into drawdown between 55 and state pension age you can take out £16,700 from a SIPP tax free if using your tax allowance for it.Im going to do that at 55 and stop taking divis from my ISAs then and re-invest those.At 67 or 68 il put into full drawdown,take the 25% tax free and feed into my ISA and at that stage take £9000ish state pension,£3500 from SIPP and all the divis from my ISA so all tax free.

On ISAs there is a risk they put a cap on,though id expect £1mill,though they might not because the government likes the fact no tax relief on the way in.

Osborne was one of the greatest occupants of no 11 ever for me.Pension freedoms were a fantastic policy for ordinary people who actually work and save.

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2 hours ago, DurhamBorn said:

Yes i think the way you use the two is key.The real big one for a SIPP as you say after the tax relief is the inheritance tax side.Without putting into drawdown between 55 and state pension age you can take out £16,700 from a SIPP tax free if using your tax allowance for it.Im going to do that at 55 and stop taking divis from my ISAs then and re-invest those.At 67 or 68 il put into full drawdown,take the 25% tax free and feed into my ISA and at that stage take £9000ish state pension,£3500 from SIPP and all the divis from my ISA so all tax free.

On ISAs there is a risk they put a cap on,though id expect £1mill,though they might not because the government likes the fact no tax relief on the way in.

Osborne was one of the greatest occupants of no 11 ever for me.Pension freedoms were a fantastic policy for ordinary people who actually work and save.

The pension cap is so high partly because of higher salary contributions. ISA's haven't even been £20k for long. No need to have their limit as high as pensions.

Pension freedoms see a lot of spending, brought forward. A lot of the money isn't willingly contributed as a 'saving', employer contributions etc. A lot of folk will do a Viv Nicholson? Blow the lot and need state support.

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31 minutes ago, Democorruptcy said:

The pension cap is so high partly because of higher salary contributions. ISA's haven't even been £20k for long. No need to have their limit as high as pensions.

Pension freedoms see a lot of spending, brought forward. A lot of the money isn't willingly contributed as a 'saving', employer contributions etc. A lot of folk will do a Viv Nicholson? Blow the lot and need state support.

My opening point was that with current "on the floor" annuity rates the pension cap isn't high enough so there should be no question of reducing it.

 

The lifetime limit is £1,073k at present which gets you a "massive" £29k a year if you buy an annuity; retiring at 65 and RPI linked.

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