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  • FIRST POST
    • eric100
    • By eric100 20th Mar 17, 7:09 PM
    • 15Posts
    • 1Thanks
    eric100
    LTA and BCEs
    • #1
    • 20th Mar 17, 7:09 PM
    LTA and BCEs 20th Mar 17 at 7:09 PM
    HI,

    Hopefully someone can help explain LTA to me please?

    I'm trying to understand more about how LTA would affect me if I decided
    to transfer out of my DB scheme. I believe I will have 3 pensions that will qualify as BCE events.

    Potentially as follows:

    A) Final salary transfer to SIPP (later this year) approx £950k
    B) DC scheme pot transfer to SIPP (later this year) approx £300k
    C) 2nd Final salary scheme due to be paid in 2025 approx £3kpa (remaining as DB pension)

    Assuming I wanted to transfer A & B on the same day and I wanted to maximise TFLS then
    I'm assuming I would be stuffed and have to pay 55% on a large part of the £75k from the £300k (assuming that was the second pension to transfer)

    Doing a little reading seems to suggest that any TFLS is assessed first and then the associated remaining sum of the pension is assessed. So you can't just take the 25% TFLS from both A & B and then assess the remaining amounts from A & B and pay 25% tax on the excess above LTA at drawdown time?

    Am I on the right lines here and are there any suggested strategies for maximising tax efficiency with regards to LTA (I could of course not transfer out)

    Other than that I suppose I delay the transfer of B until the LTA has increased in line with CPI but then I would be drawing larger sums of from A until such time and would probably be quite some time.

    Also does fund growth have any impact on the LTA, I'm assuming not if I'm also in a flexi-drawdown

    Many thanks
Page 1
    • TcpnT
    • By TcpnT 20th Mar 17, 8:27 PM
    • 20 Posts
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    TcpnT
    • #2
    • 20th Mar 17, 8:27 PM
    • #2
    • 20th Mar 17, 8:27 PM
    I think you are perhaps confusing the difference between transferring a DC fund to a SIPP, which is not a BCE, and putting that SIPP into drawdown which is a BCE.

    You can transfer A+B into a SIPP together or separately and end up with £1.25m uncrystallised funds. To take the TFLS you must crystallise all or part of it. Max TFLS is 25% of LTA - £250k. You would get this if you crystallised £1m or £1.25m. The remaining £250k would be taxed at 55% if taken as cash or 25% if added to the drawdown fund.

    DB pension taken later would also be subject to LTA penalty tax as you have already used 100% LTA.

    If you pension value at April 16 was over £1m you may still be able to apply for IP 2016 to get a slightly higher LTA.
    • TcpnT
    • By TcpnT 20th Mar 17, 8:34 PM
    • 20 Posts
    • 11 Thanks
    TcpnT
    • #3
    • 20th Mar 17, 8:34 PM
    • #3
    • 20th Mar 17, 8:34 PM
    Sorry misread that A is a DB transfer - but the principle remains the same. Once it gets to the SIPP it is is just a sum to be added to whatever else is already there
    • kidmugsy
    • By kidmugsy 20th Mar 17, 9:45 PM
    • 9,197 Posts
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    kidmugsy
    • #4
    • 20th Mar 17, 9:45 PM
    • #4
    • 20th Mar 17, 9:45 PM

    A) Final salary transfer to SIPP (later this year) approx £950k
    B) DC scheme pot transfer to SIPP (later this year) approx £300k
    C) 2nd Final salary scheme due to be paid in 2025 approx £3kpa (remaining as DB pension)
    Originally posted by eric100
    Refraining from transferring a valuable DB scheme is often one way to avoid LTA difficulties. What is the annual pension that A will provide?
    • zagfles
    • By zagfles 20th Mar 17, 10:31 PM
    • 11,628 Posts
    • 9,614 Thanks
    zagfles
    • #5
    • 20th Mar 17, 10:31 PM
    • #5
    • 20th Mar 17, 10:31 PM
    Have you had advice about the DB transfer to a SIPP yet? I can't believe any IFA would recommend it unless you have a short life expectancy, given that the transfer will mean you'll be way over the LTA. You might be over without the transfer but almost certainly by far less.

    There's another BCE at age 75 for crystallised funds but only on the difference between fund value then and when crystallised. So if growth exceed withdrawals there could be another LTA charge.
    Last edited by zagfles; 20-03-2017 at 10:35 PM.
    • LOST
    • By LOST 20th Mar 17, 11:24 PM
    • 279 Posts
    • 65 Thanks
    LOST
    • #6
    • 20th Mar 17, 11:24 PM
    • #6
    • 20th Mar 17, 11:24 PM
    Guys. LTA is only a problem if you intend to crystallize everything now. You could have millions in pensions and only a £1m LTA. If you only need £20k a year you will only be tested at 75 and even then there may not be an LTA
    • zagfles
    • By zagfles 21st Mar 17, 8:32 AM
    • 11,628 Posts
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    zagfles
    • #7
    • 21st Mar 17, 8:32 AM
    • #7
    • 21st Mar 17, 8:32 AM
    Guys. LTA is only a problem if you intend to crystallize everything now. You could have millions in pensions and only a £1m LTA. If you only need £20k a year you will only be tested at 75 and even then there may not be an LTA
    Originally posted by LOST
    Of course the LTA is a problem. It will apply at some point - crystallisation before 75, at 75, or at death. You can't avoid it, except perhaps by bad investments which reduce the value of the pot!

    Delaying crystallisation could make the problem worse if investment growth is higher than the LTA increases (which in the current environment, I wouldn't be surprised to see the govt freezing it for a few more years).

    There's no way the govt are going to abolish the LTA without some charge for people already above it, perhaps even for those below it who'd likely be above with a few years of assumed investment growth. This would be a giveaway at a time the govt are looking for something to make up for the U-turn on self-employed NI. Rumours are they're looking at pensions, so pensions tax treatment is likely to become worse not better.
    • ThinkingOutLoud
    • By ThinkingOutLoud 21st Mar 17, 8:49 AM
    • 745 Posts
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    ThinkingOutLoud
    • #8
    • 21st Mar 17, 8:49 AM
    • #8
    • 21st Mar 17, 8:49 AM
    Delaying crystallisation could make the problem worse if investment growth is higher than the LTA increases (which in the current environment, I wouldn't be surprised to see the govt freezing it for a few more years).
    Originally posted by zagfles
    zgafles is right - the LTA issue if you have more than the allowance is not going to go away.

    Current Hammond promise is for LTA to grow with CPI in due course (not this year) - but as your pension investments growth will hopefully beat inflation - then as zagfles says - the problem will get worse.

    BUT the burning question that comes first - and more details may explain your thinking (maybe) - why are you trying to transfer out of the DB scheme at all? What are you going to gain?

    If you do still want to transfer out from DB you will be forced to take "advice".
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
    • EdSwippet
    • By EdSwippet 21st Mar 17, 9:31 AM
    • 427 Posts
    • 388 Thanks
    EdSwippet
    • #9
    • 21st Mar 17, 9:31 AM
    • #9
    • 21st Mar 17, 9:31 AM
    Refraining from transferring a valuable DB scheme is often one way to avoid LTA difficulties.
    Originally posted by kidmugsy
    To amplify this, CETV valuations are often currently much higher than the assumed 20x annual pension multiplier used for LTA valuations.

    Suppose your current pension A CETV is 30x annual pension. That would be £32k/year, giving an LTA valuation of £633k. Adding to that your £300k pension B and 20x your pension C entitlement takes you to £993k, so just a touch below the magic £1mm LTA. Depending on your age then, you might skirt under the LTA issue or you might exceed it, but if you choose to transfer you will exceed the LTA by a larger margin than if not. You don't mention any protections, so I take it you have none and so get the current £1mm LTA.

    How old are you? If over age 55 and you do decide to transfer, you could crystallise the resulting DC pot(s) right away and at least mitigate future increasing LTA penalties. Once you have crystallised the pensions there are no more LTA tests to worry about until age 75.

    If you are under age 55 though, the decision is far trickier. The known unknowns and unknown unknowns multiply the further you are from age 55, but you cannot act on anything until age 55 arrives. Or later if/when the government moves the goalposts yet again.
    • EdSwippet
    • By EdSwippet 21st Mar 17, 9:39 AM
    • 427 Posts
    • 388 Thanks
    EdSwippet
    Guys. LTA is only a problem if you intend to crystallize everything now. You could have millions in pensions and only a £1m LTA. If you only need £20k a year you will only be tested at 75 and even then there may not be an LTA.
    Originally posted by LOST
    You cannot access a DC pension until crystallised, though. So unless the aim is purely to build a legacy for your heirs, crystallisation is inevitable. Not just that, but the longer the wait, the larger the LTA penalty becomes.

    And where in the initial post did the OP say they would only need £20k/year from a pension?
    • eric100
    • By eric100 21st Mar 17, 9:03 PM
    • 15 Posts
    • 1 Thanks
    eric100
    Thanks for all the replies, to add some more context.....

    Pension A) transfer would be £970k (error on my behalf). The annual pension is £22500 so a good transfer value IMO

    I've seen 4 IFAs so far just for an informal chat nothing formal and 3 have moreorless indicated they would probably recommend leaving the final salary pension where it is subject to more detailed work. The fourth is doing a bit more work for me but believes its worth further consideration
    and going to come back to me with some more figures. Going to chat with some other IFAs also.

    I haven't made any decision yet on which way I wont to go yet but I do know LTA will come
    into play if I transfer out and wanted to understand the implications better at least so I can
    understand any IFA view point on the matter

    I'm 57 later this year

    Also just to clarify further my understanding on what crystalisation actually means....

    For example, if I transfer pension B) into a SIPP set up for drawdown then I have just
    crystalised the whole £300k, right? Regardless of how much might be invested in funds versus sitting in a cash bucket, it's all crystalised

    Also, let's just assume that I had previously used up 100% of my LTA before transferring
    that £300k (having taken 25% TFLS from the £1m) then I will effectively have to
    pay 25% plus my marginal tax rate on any withdrawals (so most likely 25%+20%), is that right?

    Many thanks again
    • TcpnT
    • By TcpnT 21st Mar 17, 9:36 PM
    • 20 Posts
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    TcpnT
    In the example in your last paragraph (someone tell me how to get a quote in a yellow box please):

    Assuming you have already used 100% of your LTA and you wish to crystallise another £300k there will be a further LTA test which will reveal that you have no remaining LTA. You will have the choice of whether to take £300k - 55% = £135k as cash or to move £300k - 25% = £225k into your drawdown fund. Once there withdrawals will be taxed in the normal way
    • ThinkingOutLoud
    • By ThinkingOutLoud 21st Mar 17, 9:58 PM
    • 745 Posts
    • 475 Thanks
    ThinkingOutLoud
    Thanks for all the replies, to add some more context.....

    Pension A) transfer would be £970k (error on my behalf). The annual pension is £22500 so a good transfer value IMO

    I'm 57 later this year
    Originally posted by eric100
    Eric

    Some details are missing to make a bit more sense of the transfer value:-

    is the £22.5k everything without no lump sum coming to you and from what age is that taken
    (i.e. if you take it now or when?)
    What is the guaranteed increase on your DB e.g. RPI with 5% max?
    Do you have a spouse? What would she get if you died first?
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
    • LOST
    • By LOST 21st Mar 17, 11:27 PM
    • 279 Posts
    • 65 Thanks
    LOST
    LTA just as IHT is a good problem. Tax on more money at the end of the day and there are numerous ways to mitigate.

    Don't get hung up on LTA unless you are crystallising the whole lot over the next few years. Jo Bloggs does not eally need to do that.

    If LTA is an issue leave DB where it is and take benefits as they are prescribed to you.

    You need solid advice about what you need and not just about transferring or LTA issues.
    • EdSwippet
    • By EdSwippet 21st Mar 17, 11:56 PM
    • 427 Posts
    • 388 Thanks
    EdSwippet
    LTA just as IHT is a good problem. Tax on more money at the end of the day and there are numerous ways to mitigate.
    Originally posted by LOST
    An additional tax that deliberately punishes diligent saving and good investment performance is hardly a "good problem". Aside from the assorted protections, seemingly not applicable here, there are virtually no ways to mitigate the LTA penalty. It is designed to be unavoidable.

    Don't get hung up on LTA unless you are crystallising the whole lot over the next few years. Jo Bloggs does not really need to do that.
    Originally posted by LOST
    You are talking arrant nonsense. Once at the LTA, crystallising the whole lot immediately would be many people's smartest move.
    • LOST
    • By LOST 22nd Mar 17, 6:26 AM
    • 279 Posts
    • 65 Thanks
    LOST
    An additional tax that deliberately punishes diligent saving and good investment performance is hardly a "good problem". Aside from the assorted protections, seemingly not applicable here, there are virtually no ways to mitigate the LTA penalty. It is designed to be unavoidable.


    You are talking arrant nonsense. Once at the LTA, crystallising the whole lot immediately would be many people's smartest move.
    Originally posted by EdSwippet
    There are too many variables to consider. Crystallising your whole pension is a dangerous move unless you need the money which most people would not unless say they were buying a holiday home or something else lumpy.
    • TcpnT
    • By TcpnT 22nd Mar 17, 6:36 AM
    • 20 Posts
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    TcpnT
    Dangerous in what way ?
    • EdSwippet
    • By EdSwippet 22nd Mar 17, 10:06 AM
    • 427 Posts
    • 388 Thanks
    EdSwippet
    Crystallising your whole pension is a dangerous move unless you need the money ...
    Originally posted by LOST
    You seem to be confusing 'crystallisation' with 'withdrawal'. They are not the same thing.
    • ThinkingOutLoud
    • By ThinkingOutLoud 22nd Mar 17, 10:21 AM
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    • 475 Thanks
    ThinkingOutLoud
    There are too many variables to consider. Crystallising your whole pension is a dangerous move unless you need the money which most people would not unless say they were buying a holiday home or something else lumpy.
    Originally posted by LOST
    I agree with Ed -you seem to be confusing crystallisation with withdrawal.

    Of course, if you intend to buy something lumpy - remember that pension income is taxable too - so if you withdraw a huge chunk - you will probably be giving Mr Hammond a whole chunk of his tax back as higher rate (he says thanks BTW).
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
    • LOST
    • By LOST 22nd Mar 17, 12:41 PM
    • 279 Posts
    • 65 Thanks
    LOST
    Yes ed. Why would you crystallize if you weren't looking to withdraw?
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