How are my pensions 'valued' for Lifetime Allowance purposes?

peterg1965

I posted a question on this last weekend but got no response.

In a nutshell, I have two pensions which will be initiated at different times (years apart). One Final Salary, one SIPP. How are they valued for Lifetime Allowance purposes?

What happens if I go over the £1.25M Allowance and how are the pensions taxed above this figure?

Thanks

GhIFA

The SIPP will be the value of the fund at the point you crystallise (take benefits). The value given to the Final Salary will be calculated by multiplying the annual pension you receive x 20 (and also adding on the value of any lump sum you might receive).

If you exceed the lifetime allowance when you take benefits then the excess will be taxed at 55% if you take it as a lump sum or 20% if you choose to use it to provide income.

You will be able to apply for fixed protection which will retain your LTA at the current £1.5million from 6th April 2014, but if you elect to do this you won't be able to make any further pension contributions after this date.

There is also something called "personalised protection" being considered. This will be for people alread in excess of the £1.25m and is likely to allow contributions post April 2014 - however, this is only a proposal at this time and we don't know the exact details of how this will work.

mania112

Additional question for my own knowledge, but may be relevant to the OP.

If one has total pension over £1.5m and buys an Annuity with enough of the £1.5m to secure income of £20k pa.

With the excess the retiree decides to enter into Flexible Drawdown.

Will he be liable to 55% tax at all, or just income tax?

peterg1965

GhIFA wrote: »

The SIPP will be the value of the fund at the point you crystallise (take benefits). The value given to the Final Salary will be calculated by multiplying the annual pension you receive x 20 (and also adding on the value of any lump sum you might receive).

If you exceed the lifetime allowance when you take benefits then the excess will be taxed at 55% if you take it as a lump sum or 20% if you choose to use it to provide income.

You will be able to apply for fixed protection which will retain your LTA at the current £1.5million from 6th April 2014, but if you elect to do this you won't be able to make any further pension contributions after this date.

There is also something called "personalised protection" being considered. This will be for people alread in excess of the £1.25m and is likely to allow contributions post April 2014 - however, this is only a proposal at this time and we don't know the exact details of how this will work.

Thanks. Example, not unrealistic in my circumstances. I am able to take my Final salary pension at age 53 and the value is 20 times the annual pension which would be somewhere in the region of £800,000-£900,000. Two years later at 55 I can take my SIPP, if it is then valued at £400,000, is the final salary pension revalued at the point I take my SIPP. The final salary pension will have increased with CPI.

Also,to value my final salary pension at the point of crystallisation is is just 20X the annual pension, or do I have to add the tax free lump sum as well.

Edit. I see I have to add the value of my tax free lump sum as well - missed that sorry.

GhIFA

PG65, when the first Benefit Crystallisation Event (BCE) takes place, which in your example would be taking the final salary pension, the value would be measured against the LTA that applies at the time, and recorded as a percentage of the LTA used. For example purposes, if this was £900,000 and the LTA was still £1.5 million, then 60% of the LTA is used and 40% is available.

If, 2 years later, the SIPP is crystallised, and the LTA has then fallen to £1.25million, then 40% is still available, meaning as long as the value of the SIPP is less than £500,000, no LTA charge will apply.

Mania112, you are correct - if enough of the fund is crystallised to provide total secure pension income of £20k pa (with other secure sources taken into account) then the rest of the fund can be used for Flexible Drawdown.

peterg1965

GhIFA, many thanks again. If I applied for fixed protection from 1 Apr 14 in order to preserve an LTA of £1.5M, as opposed to the reduced £1.25M, I understand that from that date I cannot make any more contributions to my SIPP. Additionally, is it the case that if my benefits increase in the final salary scheme (ie I was promoted and therefore benefits increase) then it nullifies the fixed protection?

Is it realistic to expect that over the next 7/8 years that the LTA will be increased?

The changes to LTA and Annual Allowance has really thrown my financial planning into question.

GhIFA

You and many others PG65, as well as keeping us IFA's on our toes!!

With the reduction earlier this year, there was some allowance made in the Fixed Protection rules for ongoing accrual in Defined Benefit schemes up to a point known as the "relevant percentage". Hopefully you'll appreciate that I can't readily lay my hands on the precise details at 9.45 on a Friday evening!

I would imagine that there will be a similar allowance in the Fixed Protection 2014 rules, but we'll have to wait and see.

With regards to whether it will increase over the next 7/8 years - I honestly don't know, there have been so many changes over the last few years that I wouldn't rule anything out (including further downward movement!).

peterg1965

Thanks again. I need to do some research and think carefully about where I go from here. It may well be that I cease making my SIPP contributions in the next tax year, currently £22300 with 40% tax relief, and switch to maximising ISA savings, accepting that there is no direct tax relief. A difficult call, but I don't want to face hefty tax bills in a few years time.

GhIFA

peterg1965 wrote: »

Thanks again. I need to do some research and think carefully about where I go from here. It may well be that I cease making my SIPP contributions in the next tax year, currently £22300 with 40% tax relief, and switch to maximising ISA savings, accepting that there is no direct tax relief. A difficult call, but I don't want to face hefty tax bills in a few years time.

Careful planning required. ISA's are certainly one route, spouse's pension contributions may be another. May be worth speaking to a local IFA.

peterg1965

Some really useful information GhIFA, just what I was after, thanks for taking the time. Another supplementary question if I may. On crystallising the SIPP,taking the tax free 25% and going into Flexible Drawdown on the remainder, can I just leave it to grow over a number of years, without he need for a revaluing against the LTA. In other words if the SIPP was £400k, I took the £100k tax free and continued to invest £300k in flexible drawdown and that pot grew to £600k over the next ten years with me not taking any income from it, is this allowed or will both my DB and Drawdown pot be revalued against the LTA at some point in the future?

Hope that makes sense! Thanks.

GhIFA

In your example, the DB benefits would have no further measure against the LTA. The balance of the drawdown fund would be measured again at age 75. For LTA purposes the value at age 75 would be taken and then reduced by the amount that was designated to drawdown at the original crystallisation I.e if the fund had grown to £600k, it would be reduced by £300k ( the original drawdown fund) leaving £300k to be measured against the LTA.

The reality however is that with flexible drawdown you wouldn't expect to have any fund remaining at age 75 - the tax rate getting the income out is likely to be lower than the LTA charge ( at current rates). As I say, careful planning - depending on your circumstances, appetite for risk etc, there may be other vehicles that could be used to benefit from tax reliefs that can reduce the impact of taking the funds for the flexible drawdown plan.