Pension pot limit - when is it calculated

secondincometrader

I'm confused on how this limit works, I am self employed and drip feed employer contributions into my SIPP, as well as having some final salary pensions. This reduces my Corporation Tax liability. I assume that once you're over the £1M limit you lose the tax relief, but at what point in time do they check against the limit? So for example my pension may total £960K and I decide to put £40K in it and claim the full relief. Do I have to retain some form of evidence to show that was how much my pensions were worth at that time, given that its value varies daily due to the SIPP element? Or do they take the cut when my company accounting year is due? Confused....

pathtofreedom

this is a bit out of date with the budget today but does this help

https://www.moneyadviceservice.org.uk/en/articles/the-lifetime-allowance-for-pension-savings

jamesd

The limit is checked at the time of any benefit crystallisation event (BCE). The most common initial BCE is probably taking a tax free lump sum. Only the part of the pot involved in the particular BCE, not any other parts or other pensions. Your pot can be £10 million and not exceed the limit until you carry out a BCE.

At the time of the BCE the amount of pot that you crystallise is calculated as a percentage of the lifetime allowance in effect at that time. That percentage is then added to any future ones and when the total goes over 100 you start to pay the penalty.

So: pot £1 million, lifetime allowance £1.8 million, crystallise £100k to take a 25% tax free lump sum and 75k of annuity or drawdown. £100,000 / £1,800,000 *100 = 5.56% of the lifetime allowance used so far.

For a few years add more money to take the total pot value to £1.2 million including growth. Do a BCE/take benefits for £1 million today. £1,000,000 / £1,250,000 * 100 = 80% of the lifetime allowance. So a total of 85.56% of the allowance used so far.

Wait until the allowance drops to £1 million then take out £144,400. This uses the 14.44% of the lifetime allowance that you have left so it's now at 100% used. The total amount taken is £1,244,400 but you still haven't exceeded the lifetime allowance.

If you place a pot into drawdown that percentage doesn't change in the future, so it can be a useful approach to take benefits/do a BCE as early as you can to lock in the percentage of the higher lifetime allowance. Another good time would be after big market drops when the value is lower. The recovery would then increase the pot value again but you'll have gained from less use of the lifetime allowance.

There is another check at age 75 that counts the increase in value since the original BCE. The way to avoid this one is to draw out the money as fast as you sensibly can, or at least enough so that the value no longer increases.

If you're 55 already consider crystallising/taking benefits/doing a BCE (all the same for this) now, while the lifetime allowance is still 1.25 million.

peterg1965

James that precisely the information I was looking for in a question I asked in a seperate thread. Thanks.

In my situation I am about to receive my DB pension (value £772,000) so I will use 61.7% of the LTA measured against the current £1.25M limit. This will leave me 38.3% of the new lower limit of £1M from next year, so in cash terms £383,000. Is this correct?

I am not 55 until late 2020 so will also potentially benefit from an indexation uplift in the LTA for the three years, 18/19, 19/20 and 20/21.

secondincometrader

Thanks for the replies guys

jamesd

peterg1965 that's right, just remember it's really a percentage of whatever the limit happens to be at the time.

FBF2007

Very helpful post James as I am trying to understand how the lifetime allowance will impact me and the planning I need to make as I hope to have a pension in the region of £1m.

So I am clear, in the scenario where I have a pension pot of £1m in 2018 and trigger a BCE on the full £1m (taking £250k as lump sum and then leave the £750k invested for drawdown) I assume then I have used 100% of my LTA.

Say I leave the £750k untouched for a decade and grow it to £1.25m before I start to drawdown then am I correct in assuming that the additional £500k growth is not subject to the LTA and the drawdown will just be subject to income tax?

If this is the case then I'm assuming I need to trigger the BCE as soon as I hit £1m (and over 55) even if I don't want to access the pension at that time?

Can you also expand on how the check at 75 works? Assuming a slight modifcation to the scenario above then if I'd been able to hold the £750k flat for 20 years by only making drawdowns each year equivalent to an annual growth of £40k then I would have had the orginal pot of £1m plus £800k growth. Would that be subject to any additional tax at 75?

Thanks in advance.

peterg1965

jamesd wrote: »

peterg1965 that's right, jut remember it's really a percentage of whatever the limit happens to be at the time.

Thats a real relief for me!

I thought it would mean a rethink of my pension strategy but if I don't crystallise my SIPP and new employer DC pensions until I am, say, 60 (2025). then I will have 38.3% of the prevailing LTA at the time, which will be £1M indexed up by 7-8 years, which could be £1,150,000 assuming 2% yearly CPI - a further £440,000 more that I can have in pensions before being penalised. (thats a BIG assumption as politicians have a habit of shifting the goalposts!)

GoGas

James

Your answer is seems along the lines to a query I was looking at and using two different LTA.

Person has 2 pension pots - a final salary and seperate SIPP. The final (USS flexible retirement) salary will be taken in April 2015 and and equates to 71% of the LTA of £1.25m. If the SIPP (270k) has a BCE in 2016-2017 this will the % of LTA be calculated against the £1m LTA in force then? I.e. 71%+27%

Presumably if similar transition rules occur for change in LTA as did for previous LTA changes the individual may be able to protect their LTA at £1.25m providing they pay nothing in after March 2016 and leave SIPP grow more.

kidmugsy

GoGas wrote: »

Person has 2 pension pots - a final salary and seperate SIPP. The final... salary will be taken in April 2015 and and equates to 71% of the LTA of £1.25m. If the SIPP (270k) has a BCE in 2016-2017 this will the % of LTA be calculated against the £1m LTA in force then? I.e. 71%+27%

Presumably if similar transition rules occur for change in LTA as did for previous LTA changes the individual may be able to protect their LTA at £1.25m providing they pay nothing in after March 2016 and leave SIPP grow more.

Why not crystallise the SIPP in 15-16 too? Or even better, in 14-15, put it into Capped Drawdown and draw nothing out except the TFLS? The TFLS has then got anti-Balls protection, it uses the larger LTA, it avoids a year's growth (if that happens) counting against the LTA, and it leaves continued ability to contribute to pensions. Win, win, win, win.

GoGas

Thanks for response? Just realised what TFLS is .
This route presumably would be effectively a BCE on SIPP. Future contributions are not really required. the ideal would be crystallise soon, make no contributions and let whole grow tax free and then tak the 25%TFLS sometime in next 10 years.