I would like to invest more aggressively but I'm confused by the LTA tests. Please help!

01 July 2021

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Question by Dominic

I'm turning 55 next year and I have a SIPP that is now slightly over the LTA. I'm almost fully invested in short term bonds because I want to avoid the additional tax for going over the LTA. I don't need the income, but I would like to invest more aggressively. I'm somewhat confused about the various LTA tests, but I was wondering if the following plans makes sense: I crystallise my full pension at 55, take 25% in cash and invest the rest more aggressively. I take any capital gains as income, so that by age 75 (when there is a 2nd LTA test) my undrawn pension pot does not exceed the remaining 75% of the then applicable LTA. Would that work, or is there anything else I need to consider?

Answered by Alistair Fullerton

Hi Dominic, I see your point about trying to minimise the tax penalty although it is measured using percentages so there isn’t much leverage to side step it like you’ve described above.

In your example you would have crystalised 100% of the pension which may be just over 100% of the LTA. This means any further gains will be in addition to this and be tax again, rather than you being able to withdraw gains to keep you below the LTA.

Although at odds with your thinking, another idea is to only crystalise the pension income you need now, take more risk with the portfolio as you say, and actually try and beat the LTA charge at 75. If you give yourself between 55-75 to grow the fund by more than the 55% LTA charge at age 55, it can leave you in the net same position as avoiding the LTA charge as you described above.

The idiosyncratic part of this strategy is that if the plan works well, you will actually end up paying more £ LTA tax but be left with more money afterwards, which is the ultimate aim.

Answered by

Alistair Fullerton

Financial Adviser & Director

Me, raised near Manchester and now have been working in the City for the past decade helping clients who work for the big City based employers.