LTA, death and non crystallised benefits

GoGas · 18 December 2012 at 5:51PM

In the situation where somebody has final salary scheme which is being paid ( benefit crystallised ) and this is within the LTA but also has a SIPP which is not crystallised before death ( but if it was LTA would be exceeded ) and death occurs, does the LTA then apply when SIPP is taken into account in the persons estate?

In simple terms does the LTA continue after death?

Thanks

dunstonh · 18 December 2012 at 6:02PM

death is an event that creates a lifetime allowance calculation.

does the LTA then apply when SIPP is taken into account in the persons estate?

The SIPP is not in the estate. It is outside of the estate.

GoGas · 18 December 2012 at 7:47PM

Thanks. Any idea how excess would be taxed as normal rules say 55% lump sum and 25% pension but it in this situation the value of the SIPP would be passed onto spouse a neither. My guess it would the 55%.

Seems no advantage in going above LTA for any reason as has effects in life or death.

jamesd · 19 December 2012 at 10:11AM

The recipient gets the money then has to pay a 55% tax charge from the amount above the remaining unused lifetime allowance of the deceased.

Since it was uncrystalised, the recipient has nothing to pay on the portion that's still within the lifetime allowance.

If there are multiple recipients I assume it'd be calculated proportionally for each but this is not necessarily true and should be checked.

Yes, the LTA continues after death. It's the executor or administrator of the estate who's responsible for determining how much is within the lifetime allowance and how much outside it, even though it's not within the estate.

The 55% tax charge can be cheaper than alternative taxes that could be due on money if a pension wasn't used.

I'm assuming that the deceased was not 75 years old or older. Say if they were and whether the death happened before or after 6 April 2011.

dunstonh · 19 December 2012 at 12:16PM

Seems no advantage in going above LTA for any reason as has effects in life or death.

There are some cases it will be worth it. However, generically you would not aim to exceed it. When the lifetime allowance was introduced, there were two transitional protections you could apply for which allowed you to not be hit with a lifetime allowance charge. When it was reduced to 1.5 mill a further protection was introduced which you could apply to which kept your pension using the 1.8 million lifetime allowance figure. With this more recent reduction, two types of protection have been introduced which can be applied for.

So, as long as you are on top of these things and apply for the relevant transitional relief, when available, you should be ok. However, HMRC did say some years back that it felt that not enough people applied for primary or enhanced protections who should have and felt that the last Fixed Protection was under used.

GoGas · 19 December 2012 at 10:21PM

Thanks . There is fixed protection in place but essentially looks as though may be worth watching the SIPP grow and if it is approaching breaching LTA then initiating a crystallisation event for minimum sum possible, even if funds not required and then leving the funds to continue to grow hopefully without then any charge on passing to spouse on death.

jamesd · 20 December 2012 at 3:36PM

If it might exceed the LTA in the future, why not crystalise now when it doesn't? There's no second test against the lifetime allowance from April 2011, so if the total is under then it can grow to an unlimited degree after crystalisation.

The main reason not to is of course the 55% tax charge that applies to the whole amount of death benefit after crystalisation. To counter that there's the removal of the need to watch growth and the ability to recycle the income and some of the lump sum, subject to the limits in the lump sum recycling rules. That'll get another tax free lump sum. I'm assuming, but have not verified, that the percentage of the LTA used under fixed protection will be based on the fixed protection limit, then you can make new contributions subject to the current limit to use the remainder of the LTA that's left, if any.

That reinvesting combined with the removal of the need to watch the total and the use of life assurance to cover the tax charge could make sense. Depends on the specific circumstances, particularly how long the person might live.

Since a living person gets to choose when to crystalise, there's also the possibility of doing it during a market downturn or a downturn for volatile parts of the investment mix when those are in a down period. That can reduce the percentage of the lifetime allowance used. Early 2009 would have been a great time to do this.

However, this is mostly moot if the intent is to use the pension as an inheritance tax avoidance measure by having non-spouse beneficiaries who can get the money outside the estate.

GhIFA · 20 December 2012 at 5:28PM

James, see RPSM11101500. Seems to agree with what you've said (if I've read it and you correctly!) - percentage of LTA used when crystallising under Fixed Protection is based on the protected LTA of £1.8m. If further contributions are then made the available LTA on crystallising these funds is the remaining percentage but based on the prevailing LTA threshold at the time of that subsequent crystallisation. I.e. if crystallisation now (with fixed protection) uses 80% of the protected LTA, further contributions are made, and the fixed protection is lost, there will be 20% of the prevailing LTA available when these new benefits are crystallised.

GoGas · 21 December 2012 at 6:04PM

James and Gh

Thanks for your helpful and lateral thinking comments. As non professional it seems that even Fixed Protection is not a simple issue. I have only just realised that HMRC have more than one BCE their seem to be at least 6 as this was while just trying to establish if the LTA at the BCE (retirement in March on final salary scheme) should be calculated on the offered pension+lump sum or the lower commuted pension+increased lump sum

£1.49m ( 83% of Fixed Protcetion £1.8m) will be crystallised from the Final Salary scheme in March 2012. This will leave £0.31m or 17% of Fixed Protection sum that can be crystallised in future; the separate SIPP which is not required currently for income is worth £0.3m.

The suggestion appears to crystallise the SIPP before it reaches £0.31m and then ?? pay into new pension under the current LTA rules.

Queries:

If a small lump sum is taken crystallise the SIPP presumably no further lump sums can be taken in future?
Can a SIPP be crystallized with taking anything from it and then left to grow?
Is any growth after crystallisation tax free?
Does the LTA not apply as one LTA for one person. The suggestion appears to be that Fixed Protection LTA is crystallised but another LTA under current rules can be utilised but there will be another round of protection when LTA drops from 1.5 to 1.25?

How many IFAs will be familiar with this level of detail; most seem to obviously know about LTAs but asking this sort of level seems to get more vague responses

Thanks.

jamesd · 21 December 2012 at 6:20PM

Yes, that's the suggestion, if life expectancy makes it seem worthwhile.

1. You can only take a lump sum once, at the time you crystalise. You can take a lump sum of 25% from part of it and only crystalise that part if you want to. That'll leave some crystalised and some still uncrystalised and subject to a later LTA test.

2. Yes.

3. Yes. Except for the 55% tax charge on death, of course.

4. There a single allowance of 100% of LTA for each individual for life. But the percentage used is calculated using the LTA that applies to the person at the time of crystalisation. So if you have protection you'll use a percentage of whatever that protected value is and may still have some percentage left over. Then you can make more pension contributions, lose the protection, but still have a percentage remaining to use with the unprotected LTA that is available.

Given your numbers you'd use 83% + 17% = 100% of Fixed protection LTA, leaving none to use for future pension contributions. That 17% or so can be either roughly the 0.31m or the 0.3m. It looks as though it's not possible to have any LTA left over however you work it because you're well over the £1.8 million Fixed Protection LTA.

Say you tried the 1.49m plus the 0.3m that's 1.79m so roughly the full Fixed Protection 1.8m, short by just ten thousand.

About the only way I see to gain is to wait for a drop in the markets that would reduce the value of the SIPP and leave more of the FP LTA left over.

IFAs should in theory be familiar with this but not too many people are going to be really trying hard to maximise things. Most don't get anywhere near to the lifetime allowance. People here tend to be interested in working out what the limits are and how to maximise benefits from them.

GoGas · 21 December 2012 at 6:30PM

Looks like I may just as well look to crystallise the the SIPP in some format before the 17% mark and start a minimal income drawdown or take a lump sum and leave the remains then to grow with no contributions to be handed over to my spouse.

Thanks this has been very helpful.

LTA, death and non crystallised benefits

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