Postby ben_power » Mon Dec 28, 2020 2:51 pm
Hi dermvc.
robbob is completely correct, please speak to an IFA, they can help here. The advice will probably be free if you find a reputable one, it's normally only the implementation of advice that costs although smaller firms may want to charge for their time.
As an IFA myself I can give some guidance here:
Regarding the Lifetime Allowance (LTA). The maximum tax free cash available is 25% across your occupational pension and the SIPP. Based on the current LTA of £1,073,100 this represents £268,275.
The occupational scheme may come with automatic tax free cash and this will form part of the 25% and most schemes allow you to commute some income into tax free cash. It's complicated which is why you should seek advice, pm if if you want additional support.
You can also seek additional protection on the LTA but like Individual Protection 2016 which will set your LTA at the 2016 level of £1.25m however in all reality it is unlikely that this will be able to applied for a number of reasons but it is possible and should be explored.
If you have exceeded you LTA then consideration as to remaining in the occupational scheme should also be looked at. In reality, it's likely that even with the LTA charge ultimately being applied at some stage (latest of age 75) the benefits you will gain from the employer contributions will outweigh the tax but it's worth looking at. Some of the larger employers I work with like (HPE and JP Morgan Chase) offer pension offset allowances. Essentially they pay you an extra income rather than paying into the pension. This is also extremely complex as you can often lose other valuable benefits attached to being part of the pension scheme like death in service so speaking to an IFA familiar with your employer will be beneficial. Generally opting out of your employers scheme is ill advisable.
You mentioned drawing the tax free cash from the SIPP, this might look tempting and sometimes it can be but often it isn't, especially when you may have better options to draw the tax free cash from the occupational pension. Both need to be looked at, do not assume one is better than the other. Something that is often overlooked here are the death benefits to defined contribution pension schemes. They are exempt from inheritance tax which if you have large estate can be extremely valuable to your beneficiaries. Both schemes need to be looked at here especially if your occupational scheme is a defined benefit and not defined contribution.
All pensions will be valued against the LTA at some point, each crystallisation event occurs separately, so this can be used over time, not all at once. As mentioned, the last date this will happen will be at age 75. You can chose the draw the excess above the LTA as 'income' or a 'lump sum'. Income is taxed at 25% plus your marginal rate and the lump sum just as a flat 55%. For example:
Lets assume you have an excess of £100,000 (Total value of £1,173,100) and you want to take this now or have to if you've reached age 75. You chose to take it as a lump sum meaning you'd pay £55,000 tax and receive a net payment of £45,000. If you chose to draw this as income you'd pay £25,000 tax plus your marginal rate so if you did this now (assuming you're above 55) and you're a higher rate taxpayer (likely if you've exceeded your LTA) then you'd pay another 40% income tax on top of the 25%. So, £25,000 (LTA) plus 40% x £75,000 (£30,000) total tax £55,000 = Same as the lump sum, if however you retired and potentially became a basic rate taxpayer the you would be wise to take the excess as 'income' as you would pay the £25,000 LTA charge but then only 20% income tax on some of the the remaining £75,000. Again, please speak to an IFA here. It is also unlikely that doing this early would be sensible, let the SIPP grow, it's outside of your estate and any funds inside it grow free from tax (similar to an ISA). Why take funds out of a tax efficient wrapper only to put them back inside your estate and in an inferior wrapper.