In a nutshell, I will move money from SIPP/DC to Drawdown a.s.a.p. to minimise my use of the LTA. I might exceed the LTA, so if we have spare money we will put it in my wife’s SIPP, not mine.
I believe that the lifetime allowance is in place to limit the amount that is worth saving through a pension, so that the associated tax breaks are given to low-mid earners, and it’s capped for high earners. If you exceed the limit it’s probably not a disaster but you might have chosen to do something else with the contributions if you’d known.
There are a number of events that count towards using up your lifetime allowance. The main ones for me are going to be:
- Moving money from SIPP/DC to Drawdown/Current accounts. The 25% tax free is only free of income tax – it still counts for the lifetime allowance. As does the remaining 75%.
- 20 times the annual sum at the start of a DB pension.
- Tax free sum from a DB scheme.
- When I get to age 75, if I haven’t yet emptied my SIPP/DC then what’s left is counted, and the lifetime allowance maths is thus completed. (My plan is to empty the SIPP/DC long before age 75.)
When you invest you usually hope to get growth above inflation – perhaps you are planning based on RPI plus 3%.
The Lifetime allowance can move based on political whim, but at present it is planned to increase with inflation.
That means your SIPP/DC is growing faster than the allowance. If it grows 3% faster, then in the 20 years from age 55 to 75 that’s an 81% increase relative to the allowance.
So it’s almost certainly best to get it counted early against the lifetime allowance and then let it grow in a drawdown or ISA account.
Paying extra into a SIPP or AVC will add to your usage of the lifetime allowance when it moves back out. That might be no problem, or it might be.
Another consideration is in the event of redundancy. Many people ask for a chunk of their redundancy payment to be put in their pension. Again that might be no problem, or it might be.
Here’s the detail:
These two tables show the effect of exceeding the LTA.
If you have student loan 9% or child benefit taper to include, you should change some percentages when you create the first of these tables for yourself.
First, what if you have gross pay and you are deciding whether take it as income now to put in an ISA, or to put it in a DC pension as an extra one-off contribution. Consider your tax rate now and in retirement.
The second table is to decide whether to make a payment into a SIPP if you have the money in your current account. First work out how much will appear in your SIPP, and then use the orange or blue part of the table as appropriate.
Overall, you can see that if you exceed the LTA, it’s not great. But if you avoid putting money in a pension because of LTA-fear and then get nowhere near the LTA, you have missed out.