Pension lifetime allowance

[Amboseli]

What happens if when you die you're over your pension lifetime allowance?

I've just realised that I'm likely to be over the current allowance by the time I am likely to pop my clogs at say age 80 something based on life expectancy stats.

Age 53. At the moment £400k in pension. Likely to grow to £750k by 2032 at age 32 with continuing contributions until retirement.

After taking out tax free lump sum in 2032 leaving £550k approx we won't need to draw on the pension which will keep growing and likely to be above £1m by say 2052.

We're planning on using tax free lump sum to pay off mortgage but now wondering if I should reduce pension contributions. But then there probably won't be enough to pay off the mortgage later.

It's so confusing and complicated. Does anyone have any thoughts? Is there something I've missed?

LTA planning is a big part of our work now. My suggestion is to take advice from a Chartered IFA. Depending on people’s position we have crystallised the pot and moved money offshore, we’ve spent or gifted excess income - income tax is less than the excess charge. It’s a planning hot potato but I think you may be a bit ahead of the curve.

Random quote attached, I was going to point out that the observation above is wrong!

@Sunseed could you point me in the direction of finding out more info about the crystalisation event? Is there a final one at 75 and none after that? So if below LTA at 75 then it doesn't matter if it goes above afterwards?

Just to clarify the original intention to pay into the pension was because of the tax relief and the plan was to use the 25% to pay off the mortgage. So we needed to make sure there was enough in it so that 25% was equal to our mortgage and so we have been paying a lot into them. We're not saving in any other way so the only way the mortgage would be paid off was from the pension.

We hadn't really thought beyond that, certainly not about the LTA and only recently have realised that the pension will keep growing after taking out the 25% and we'll be charged 55% once over the LTA.

We could start saving into ISAs now to limit how much is in the pension. It's just not great that whatever we save has already had 42% deducted in tax and NI. Maybe it is still better to pay into the pension and and then withdraw money later and pay 20% income tax. If we do that before the state pension starts we should stay under the higher rate tax bracket.

We need to get financial advice but it's so expensive and we just don't know who we can trust to give proper independent advice. We spoke to a pension adviser once and he was just trying to get us to transfer our pensions to him to invest and charge very high fees.

I'm just thinking out loud here.

@Sunsetintheeast thank you for your input. I looked into some financial advisers at the weekend. I came across some wealth managers which seem quite good. Are these the same as IFAs? And there's also the STEP practitioner mentioned by pp. Which one to go for?!

Thank you! Sorry to derail with my ignorance. Off to worry about mine now.

@Amboseli wealth managers are often 'just' IFA's that want to make themselves sound top end! If you want complicated investments, or discretionary structures that tends to be their area. I would suggest that a good Financial Planner is better really, the investment area is the easy bit (only 1 global economy and you really can't beat the system so stop pretending you've got the edge), but someone describing themselves as a planner is hopefully going to lead on the options around the money, not just where it sits.

If you plan to use the 25% to pay off your mortgage (I like this approach within reason - think hard stop repayment dates being the downfall of endowments), then the BCE on crystallisation is the first test. You then move the balance of the money to the post retirement account and it keeps growing. Depending on when this is you will have a % of the LTA remaining, or not. The growth then gets tested at 75 and then that's it.

The issue around advice I would suggest you need someone to take a look and advise you, it's a big call and so a sense check would seem a sensible spend when you consider the downside risk.

Can you speak with your children about this. I know your are wanting to maximise tax efficiency but maybe your children would benefit from your money now and not when you die....if you live along time there is a chance you might also outlive your children. It would be nice for you to see your children thrive

@sparkle17 the children are 16 and 19! I'm sure they'd say they need the money now for clothes and playstation games!

Plus I don't want them to know the extent of our assets because it may be a disincentive for them to work hard and stand on their own two feet.

We know people who've never worked because of family wealth and I definitely don't want my DCs to have that mindset

but what's the point of taking money out of the pension if you don't need it? With the rental income and state pension we'll have more than enough to live on

One possibility could be to defer taking your state pension for a few years (then you get more each year when you do take it, I believe) and take money out of your pension for that period. Depends on your life expectancy I suppose.

Does it definitely make sense for you to not just get shot of your mortgage asap?

Except you can’t recover that money or catch up. It no longer makes sense now the government has halved the revaluation factor.

The increases in deferred state pension are based on life expectancy (around 19 years from state retirement age) - you only gain if you live longer than expected otherwise you will lose.

OP, the LTA charge is not 55%, it is 25%.

People “say” it is 55% because they have to pay income tax on withdrawals on top of the 25% LTA tax charge.

If the pot is £2,073,100 on your 75th birthday then you will pay a 25% charge on the £1million that is over £1,073,100, that is £250k. You will then pay normal income tax rates on withdrawals after that.

It is a nice problem to have, do not worry about it.

I assume these pension contributions are coming out of 40% income tax band earnings, so you will have had 40% tax relief applied and then lots of growth on that tax relief so a 25% LTA isn’t too bad.

If you put £8k in get £2k tax relief That’s £10k. If that quadruples to £40k and you have to pay a LTA charge on it of £10k you still have £30k.

If you put £8k into an ISA and it quadruples your £8k will become £32k but will be subject to inheritance tax at 40% (£12,800) leaving £19,200.

You could plan on withdrawing income from the pension at least up to the £50k income tax band so you don’t pay more than 20% income tax on it and give this to your children to put into their SIPPs which they will also get 20% Tax Relief added balancing the 20% income tax you paid on withdrawal.

That is effectively a transfer of wealth from your pension to theirs tax free (but it does use up some of their contribution allowance and only gets tax relief if within that contribution allowance).