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  • FIRST POST
    • martinx62
    • By martinx62 12th Oct 16, 8:22 PM
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    martinx62
    Lifetime allowance
    • #1
    • 12th Oct 16, 8:22 PM
    Lifetime allowance 12th Oct 16 at 8:22 PM
    Hi, how does the Pension Lifetime allowance work. Is it based on the total Pension pot at the time of retirement or is any increase in value due to investment taken into consideration. Thanks Martin
    Last edited by martinx62; 12-10-2016 at 8:40 PM. Reason: Decided to amend question
Page 1
    • PensionTech
    • By PensionTech 13th Oct 16, 10:27 AM
    • 582 Posts
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    PensionTech
    • #2
    • 13th Oct 16, 10:27 AM
    • #2
    • 13th Oct 16, 10:27 AM
    It's the value of the pot when you "crystallise" it. When that happens depends on how you take it. If you buy an annuity, it's the point at which you purchase the annuity; if you enter simple drawdown, it's the point at which you designate the funds as being available to drawdown; if you enter phased drawdown, you crystallise each different section of the pot separately over the course of your retirement. I think we need more information about what you're doing with your pension, and what you mean by "retirement".
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
    • martinx62
    • By martinx62 13th Oct 16, 12:29 PM
    • 4 Posts
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    martinx62
    • #3
    • 13th Oct 16, 12:29 PM
    Additional Information
    • #3
    • 13th Oct 16, 12:29 PM
    Hi, thanks for the reply, please see the following additional detail. I am currently working and contributing to a Defined Contribution pension (Pension 2). I have recently taken the transfer value from a Deferred Defined Benefit pension (Pension 1) and transferred the money to a SIPP and although I am not currently taking a monthly income, I have gone into drawdown by taking the 25% tax free cash. The total value of Pension 1 SIPP (including the 25% cash) and Pension 2 is below the Lifetime allowance but close enough for me to want to understand the tax implications. I will be continuing to add to the Pension 2 pension until I retire next year but that in itself will not be sufficient to push the overall pension pot value through the LTA threshold.

    My question is that although the overall pension pot at the start of my planned retirement will be below the LTA threshold the money will be invested in funds as part of drawdown and if those investments do well over a period of time the value could go above the LTA threshold, so at that time would I become liable for the associated LTA taxes. Thanks
    Last edited by martinx62; 13-10-2016 at 1:10 PM.
    • PensionTech
    • By PensionTech 13th Oct 16, 3:37 PM
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    PensionTech
    • #4
    • 13th Oct 16, 3:37 PM
    • #4
    • 13th Oct 16, 3:37 PM
    It's still a bit unclear to me what you mean by "when I retire next year". This might sound facetious so I'll explain what I mean:

    Usually, when people say they are retiring, they tend to mean they're leaving work. From a pensions perspective, that's irrelevant; what's relevant is what they do with their pensions, and when. So for instance, you've already "retired" from the SIPP containing Pension 1; you crystallised this at whatever point you put it into drawdown and took the lump sum. So that was tested against the LTA at that point, and it won't be tested again except in one very particular situation that I'll explain in a minute.

    Assuming that when you retire next year, you also put Pension 2 into drawdown (like you did with Pension 1), you will be crystallising it at this date. This means it'll get tested against the LTA at that date, and again it won't be tested against the LTA after that point.

    So future investment returns on the remaining invested funds within Pension 1 and Pension 2 won't be tested against the LTA after you've started taking payments from then, with the following exception:

    If you reach age 75 and you haven't withdrawn all of your drawdown funds, and the remaining pot is worth more than the fund that you had originally designated for drawdown (i.e. the amount that you originally crystallised for that purpose), the difference between the pot at age 75 and the pot size when you started drawing down (not including the initial 25% tax-free lump sum) is tested against the LTA.

    So let's say you've already crystallised Pension 1 which was worth, for argument's sake, £300k (£75k lump sum paid upfront, £225k left in drawdown). Then let's say that next year you're going to crystallise Pension 2, which is worth £600k (£150k lump sum paid upfront, £450k left in drawdown). The total crystallised for the purposes of drawdown is £675k, and the total crystallised altogether is £900k, so you've used up 90% of the LTA.

    Then let's say you get to age 75, and you've taken so little from your drawdown fund and the investments have done so well that you now have £800k left in your drawdown fund at that point. Then the difference between £800k and £675k - i.e. £125k - gets tested against the LTA. Assuming that the LTA isn't any higher by that point (though it should be, if it even still exists), it will use up 12.5% of the LTA. You've therefore used up 102.5% of the LTA, and you'll be charged on the excess.

    If, however, you've withdrawn enough from your drawdown fund that only £500k remains at age 75, this is lower than the £675k you originally crystallised for drawdown, so you don't use up any more of the LTA at this point.

    The way to avoid a charge, then, is to ensure that you withdraw at a rate that doesn't leave your fund becoming overgrown by age 75.
    Last edited by PensionTech; 13-10-2016 at 3:40 PM.
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
    • martinx62
    • By martinx62 13th Oct 16, 3:40 PM
    • 4 Posts
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    martinx62
    • #5
    • 13th Oct 16, 3:40 PM
    Thankyou
    • #5
    • 13th Oct 16, 3:40 PM
    Hi PensionTech,
    Thanks for your time and information
    • caveman8006
    • By caveman8006 13th Oct 16, 5:47 PM
    • 29 Posts
    • 2 Thanks
    caveman8006
    • #6
    • 13th Oct 16, 5:47 PM
    • #6
    • 13th Oct 16, 5:47 PM
    Am I not right in thinking that there would be another test at death (whether before or after 75) where the same calculation and potential liability to the penal 55% lump-sum tax (on your estate) will exist?
    • coyrls
    • By coyrls 13th Oct 16, 6:30 PM
    • 590 Posts
    • 544 Thanks
    coyrls
    • #7
    • 13th Oct 16, 6:30 PM
    • #7
    • 13th Oct 16, 6:30 PM
    I have gone into drawdown by taking the 25% tax free cash.
    Originally posted by martinx62
    Your SIPP company should have informed you of the % of the LTA used by this crystallisation event. If they haven't, you should ask.
    • martinx62
    • By martinx62 13th Oct 16, 7:04 PM
    • 4 Posts
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    martinx62
    • #8
    • 13th Oct 16, 7:04 PM
    • #8
    • 13th Oct 16, 7:04 PM
    Hi Coyrls, I have only just gone into drawdown so hopefully they will tell me over the next few days. Thanks.
  • jamesd
    • #9
    • 14th Oct 16, 1:40 AM
    • #9
    • 14th Oct 16, 1:40 AM
    Since you only just put it into drawdown the percentage of lifetime allowance used will be the amount before drawdown as a percentage of one million.

    So if it was 100,000 you used 10% and have 90% of the lifetime allowance available for future use.

    Say the lifetime allowance reduced to 500,000 next tax year and you put a pot of 200,000 into drawdown that would use another 40% (of the 500,000) and you would then have used a total of 50%.
    • PensionTech
    • By PensionTech 17th Oct 16, 9:36 AM
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    PensionTech
    Am I not right in thinking that there would be another test at death (whether before or after 75) where the same calculation and potential liability to the penal 55% lump-sum tax (on your estate) will exist?
    No, I don't believe so. If you have uncrystallised funds and die before age 75, then yes, but the OP's funds will be crystallised when they are put into drawdown. In any case, no test against the lifetime allowance is carried out beyond age 75, even upon death, other than a BCE 3 (non-standard increase in payment). If you die before 75 leaving a crystallised drawdown pot, you pass it on tax-free no matter the amount; if you die after 75, you pass it on and it can be drawn down (or paid out in a lump sum) at the marginal tax rate of the beneficiary. I'd link to HMRC's pensions tax manual but it doesn't make this very clear; Royal London does a better job here http://adviser.royallondon.com/pensions/technical-central/information-guidance/death-benefits/death-benefits-from-april-2015/.
    Last edited by PensionTech; 17-10-2016 at 9:40 AM.
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
    • caveman8006
    • By caveman8006 17th Oct 16, 3:01 PM
    • 29 Posts
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    caveman8006
    You may be right PensionTech when you say that death before 75 does not incur an LTA charge on investment gains above the LTA (although this does seem anomalous given that they do when you reach 75, so that one extra day could mean a hugely increased tax liability and I am checking this point with HMRC as we speak). But either way, it still means that anybody who expects to outlive 75 will sooner or later be forced to withdraw all their investment gains at their marginal tax rates to avoid the penalty tax...on large pots of £1m or so then this might well force them into a higher tax bracket. Not an ideal situation for those hoping to use pensions primarily for IHT protection. See some earlier threads on this.


    http://forums.moneysavingexpert.com/showthread.php?t=5328115


    http://forums.moneysavingexpert.com/showthread.php?t=5425617
  • jamesd
    If a pot starts out at a million Pounds and 25% is taken as a tax free lump sum, 7% growth (not inflation adjusted) on the rest would produce a gain of £52,500 a year so something would need to be done to limit that. It could be lower growth options or just doing say some VCT buying in the early years while taking more than the basic rate band out of the pension.

    Personally I'd just get some VCT buying done since while that won't eliminate all of a 40% tax rate it can eliminate the bill on say 30k of basic rate and 30k of higher rate and then generate some tax exempt income.

    Inheritance tax avoidance with pensions is a fact of life but it's also a high risk thing since it's not what pensions are for and there can't be much confidence that the rules will not be changed in the future to scupper such a plan. That's a bigger potential risk/cost than paying the income tax - with possible reliefs - along the way on just the portion that might go over the LTA.
    • caveman8006
    • By caveman8006 18th Oct 16, 3:03 PM
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    caveman8006
    The crazy thing is that there is clearly an incentive in the early drawdown years to leave all of the returns building up in the plan in case you die early (in which case you can pass the whole estate on tax free, it seems). But obviously, as you approach 75 the potential tax liability will get harder and harder to manage, even by the strategies that jamesd outlines above. As an extreme example: a 55 year-old who goes into drawdown with a £1m fund that earns 7% per annum would have a fund worth about £3.85m on the eve of their 75th birthday: if they died that day they could pass on the whole fund tax free; the next day they would be liable for a £1.5m penalty tax with little way of mitigating it. Trip to a Swiss clinic anyone!
    • PensionTech
    • By PensionTech 18th Oct 16, 4:56 PM
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    PensionTech
    But either way, it still means that anybody who expects to outlive 75 will sooner or later be forced to withdraw all their investment gains at their marginal tax rates to avoid the penalty tax...on large pots of £1m or so then this might well force them into a higher tax bracket. Not an ideal situation for those hoping to use pensions primarily for IHT protection.
    Well, yes. But pensions are not intended to be an IHT avoidance vehicle. They are tax-relieved because it is beneficial to society to ensure that individuals have enough to live on during retirement. The point of a pension is to live on it, not to hoard lots of money away and pass it on to your kids without paying tax. I agree that there is some mismatch when it comes to dying pre/post-75, but I think the pre-75 situation is an anomaly, not the post-75 one.
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
    • caveman8006
    • By caveman8006 19th Oct 16, 2:34 PM
    • 29 Posts
    • 2 Thanks
    caveman8006
    Again, I agree with your points PensionTech and certainly think that that the absence of a symmetrical BCE check on death before 75 to the one at 75 (regarding treatment of retained investment gains) is a strange anomaly (hence why I questioned your interpretation of the slightly ambiguous wording of the HMRC advice and have submitted a specific request to them for confirmation of this). The point though is that, with the increasingly widespread discussion of the IHT benefits of pensions in the Financial press and the growing likelihood of this scenario becoming more widely relevant as the LTA gets cut, I just wanted to focus readers and practitioners' minds on the subtleties of the legislation. To my mind, this makes it increasingly important for some (albeit relatively wealthy) individuals to concentrate high risk/high return assets in ISAs and to leave IHT-focussed "drawdown" pension accounts in lower-returning capital-secure/cash-like investments. This may require a careful focus on cash deposits/fee structures of different SIPP providers. Eg. Standard Life (and many others) have very few eligible deposit takers on their SIPP investment list, making it virtually impossible to earn reasonable cash returns on SIPP investments while keeping FCA protection. They may also treat these type of investments (somewhat counter-intuitively) as non-standard and high risk, making them subject to higher fees than apply to unit trusts.
    Last edited by caveman8006; 19-10-2016 at 2:50 PM.
    • joujou
    • By joujou 19th Oct 16, 4:10 PM
    • 123 Posts
    • 78 Thanks
    joujou
    The lifetime allowed is retarded I don't see it lasting. I think we will eventually reduce the annual limit to something like £10000, possibly also cap the tax rebate at %30 and do away with the lifetime limit or increase it by x5 or x10
    • PensionTech
    • By PensionTech 20th Oct 16, 9:29 AM
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    PensionTech
    I questioned your interpretation of the slightly ambiguous wording of the HMRC advice and have submitted a specific request to them for confirmation of this
    If it helps, there is some pretty clear guidance from HMRC here on the taxation of a lump sum death benefit paid from a crystallised flexi-access drawdown fund upon death before age 75:

    Where the member or beneficiary was:
    • under age 75 when they died, and
    • the payment was made within 2 years of the day on which the scheme administrator either first knew of the member’s or beneficiary’s death or could reasonably have been expected to have known of the death,
    the lump sum is payable tax-free.
    https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073600
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
    • bigadaj
    • By bigadaj 22nd Oct 16, 6:56 AM
    • 7,799 Posts
    • 4,752 Thanks
    bigadaj
    The lifetime allowed is retarded I don't see it lasting. I think we will eventually reduce the annual limit to something like £10000, possibly also cap the tax rebate at %30 and do away with the lifetime limit or increase it by x5 or x10
    Originally posted by joujou
    To aid the baby boomers even more?
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