Lifetime Allowance Calculation

SJD48

Hi,


I've been reviewing my pension arrangements in light of the recent pension changes and this has thrown up a question about the lifetime allowance.


With a defined benefit it's quite easy based on the 20x pension figure and in the case of a defined contribution when an annuity was purchased this was again straight forward. My question relates to my plan to retain my investment pot in my Sipp post taking the 25% lump sum and whether or not the future investment gains then lead to additional amounts that needed to be added to the lifetime allowance figure.


As an example on a figure of a £1m pension pot a lump sum could be taken at 55 of £250k, however if the balance was retained in the Sipp and generated further income of £50k per annum would this income count towards my lifetime allowance figure and therefore exceed the £1.25m after 5 years and incur further tax?

richone

Hi,

On the £1m figure you would crystallise £1m against your available Lifetime Allowance at the time.

There is another test (BCE5) at age 75 on drawdown pots to test the growth in the fund from the £750,000 that was put in to drawdown (£1m less £250K tax free cash).

If you take income out it reduces you fund value and means its less likely there will be a problem. If you your fund grew from £750,000 to £900,000 then £150,000 could be tested against the Lifetime allowance at age 75, however there are ways to avoid this such as taking money out before you reach age 75. Which is why its useful to review your plans.

Your_Hero

SJD48 wrote: »

As an example on a figure of a £1m pension pot a lump sum could be taken at 55 of £250k, however if the balance was retained in the Sipp and generated further income of £50k per annum would this income count towards my lifetime allowance figure and therefore exceed the £1.25m after 5 years and incur further tax?

Initially, there's 2 BCEs (Benefit Crystallisation Events): 1) Taking your TFC, 2) Putting funds into drawdown. So the full £1m is tested against the LTA at this point.

At 75, another BCE 5A occurs and, as richone stated, this time it tests for the growth. This will be tested against the then LTA and not £1.25m, unless it did increase/change.

SJD48

richone wrote: »

Hi,

On the £1m figure you would crystallise £1m against your available Lifetime Allowance at the time.

There is another test (BCE5) at age 75 on drawdown pots to test the growth in the fund from the £750,000 that was put in to drawdown (£1m less £250K tax free cash).

If you take income out it reduces you fund value and means its less likely there will be a problem. If you your fund grew from £750,000 to £900,000 then £150,000 could be tested against the Lifetime allowance at age 75, however there are ways to avoid this such as taking money out before you reach age 75. Which is why its useful to review your plans.

Thanks, so if I withdraw the income generated on the portfolio each year and my fund invested remains at £750k then no issue with LTA

richone

Correct,

the fund could grow if you had available Lifetime Allowance left and not be subject to a Lifetime Allowance tax charge, if within the limits. (also if taken as widows benefits its not tested against the Lifetime Allowance).

SJD48

richone wrote: »

Correct,

the fund could grow if you had available Lifetime Allowance left and not be subject to a Lifetime Allowance tax charge, if within the limits. (also if taken as widows benefits its not tested against the Lifetime Allowance).

Spoke to my SIPP provider today and although the person seemed unsure they seemed to imply that every drawdown after the lump sum was taken would result in a re-calculation of the lifetime limit.

Your_Hero

SJD48 wrote: »

Spoke to my SIPP provider today and although the person seemed unsure they seemed to imply that every drawdown after the lump sum was taken would result in a re-calculation of the lifetime limit.

The person on the phone is correct about each drawdown event. It is probably you who has asked the incorrect question. Also to note, the person on the phone is not qualified to give you much more information that what they've stated already.

We've already told you in post #2 and #3 that there are 2 separate BCEs that test against the LTA. After you take the FULL lump sum, the remainder fund will already have been placed into drawdown and therefore tested against the LTA too. Any amounts you draw out from here, will not be retested against the LTA.

The only other time it will be tested again will be at age 75 (BCE 5A) to check for the growth in your fund since you started drawdown.

SJD48

Your_Hero wrote: »

The person on the phone is correct. It is probably you who has asked the incorrect question. Also to note, the person on the phone is not qualified to give you much more information that what they've stated already.

We've already told you in post #2 and #3 that there are 2 separate BCE tests. After you take the FULL lump sum, the remainder fund is already placed into drawdown and therefore will have already been tested against the LTA. Any amounts you draw out from here, will not be retested against the LTA.

The only other time it will be tested again will be at age 75 (BCE 5A) to check for the growth in your fund since you started drawdown.

I'll confess I'm finding this very confusing so if I can put in an example.


At 55 I expect to have a pension pot of £1m at this point I will take the lump sum of £250k. This test against the lifetime limit will then be £1m leaving me £750k still invested in the fund.


I do not intend to retire until 59 and assuming a growth rate of 5%pa my remaining fund will increase to £911k adding in another 4 years of contributions at £15k per year this will add another £60k bringing my fund total including the lump sum at the point I take an income to £1.221m and just inside the limit.


My question is from this point I drawdown an income, however, as my fund will remain invested it may still grow by 5% per year and may exceed my withdrawals and pushing me through the lifetime allowance. My Sipp provider indicated my allowance would be tested at each withdrawal whereas posts above indicate I can withdraw from the fund and this would not lead to a re-calculation until 75.


Go easy because I'm extremely puzzled.

Your_Hero

SJD48 wrote: »

I'll confess I'm finding this very confusing so if I can put in an example.

At 55 I expect to have a pension pot of £1m at this point I will take the lump sum of £250k. This test against the lifetime limit will then be £1m leaving me £750k still invested in the fund.

For a pension fund of that size, you ought to seek professional advice and not rely on online forums.

I do not intend to retire until 59 and assuming a growth rate of 5%pa my remaining fund will increase to £911k adding in another 4 years of contributions at £15k per year this will add another £60k bringing my fund total including the lump sum at the point I take an income to £1.221m and just inside the limit.

This is probably where you are confusing yourself. You need to differentiate between crystallised and uncrystallised funds. Keeping it simple, let's just consider the crystallised funds and ignore your new contributions of £15k p.a. which you might not even be allowed to do under the new rules (annual allowance restricted to £10k if you access the full lump sum).

At 55:

• Amount crystallised = £1m, which will use up 80% of your LTA. So you will have 20% unused.
• £250k is your TFC.
• £750k placed into drawdown
• You can draw as much as you like from these drawdown funds and they won't be re-tested. Only the new uncrystallised funds will.

At 75:

• Assume the standard LTA has risen to £1.5m
• BCE 5A occurs to test for growth
• Assume fund value remaining in drawdown at 75 is £1.1m
• £1.1m - £750k (placed in drawdown) = £350k growth to be tested against LTA.
• LTA remaining is 20% of £1.5m = £300,000
• Therefore £50k is over the LTA and subject to an LTA charge of 25% = £12,500.
• If you took out £50k before reaching 75, you wouldn't have an excess charge to pay (you would of course have paid normal income tax rates instead)

Does this make it clearer?

This is why it's important to review your drawdown funds at least annually. Regulations can change (seemingly every week these days) and it's important to seek advice from a professional who is on top of this for you.

SJD48

Your_Hero wrote: »

For a pension fund of that size, you ought to seek professional advice and not rely on online forums.
This is probably where you are confusing yourself. You need to differentiate between crystallised and uncrystallised funds. Keeping it simple, let's just consider the crystallised funds and ignore your new contributions of £15k p.a. which you might not even be allowed to do under the new rules (annual allowance restricted to £10k if you access the full lump sum).

At 55:

• Amount crystallised = £1m, which will use up 80% of your LTA. So you will have 20% unused.
• £250k is your TFC.
• £750k placed into drawdown
• You can draw as much as you like from these drawdown funds and they won't be re-tested. Only the new uncrystallised funds will.

At 75:

• Assume the standard LTA has risen to £1.5m
• BCE 5A occurs to test for growth
• Assume fund value remaining in drawdown at 75 is £1.1m
• £1.1m - £750k (placed in drawdown) = £350k growth to be tested against LTA.
• LTA remaining is 20% of £1.5m = £300,000
• Therefore £50k is over the LTA and subject to an LTA charge of 25% = £12,500.
• If you took out £50k before reaching 75, you wouldn't have an excess charge to pay (you would of course have paid normal income tax rates instead)

Does this make it clearer?

This is why it's important to review your drawdown funds at least annually. Regulations can change (seemingly every week these days) and it's important to seek advice from a professional who is on top of this for you.

Your explanation on the calculation is clear and understood.


For clarify - If I withdrew all the growth in my fund each year e.g £61k (paying income tax on that) and effectively maintaining my fund at £750k at age 75 it would show no growth and remain inside the lifetime allowance calculation despite in effect generating £976k of growth in that period that would of been withdrawn **edit just re-read your post re uncrystalised**


With regard to advice I've hunted around for a decent IFA - I'm still looking - some of the ones I've contacted been real shockers hence why I'm trying to gather the facts myself.


Your comments are much appreciated.

SJD48

Also, you've thrown into confusion the point about contributions after taking the lump sum. I've trawled many sites and the conclusion was that it was only if you exceeded the 25% lump sum that you'd no longer be able to contribute the full £40k per annum instead of the reduced £10k. If you just took the lump sum you'd still be able to make full contributions.


Personally I would of thought if you took a lump sum then the reduced contribution amount would kick in.