LTA protection calculation

fizio

I am a bit confused around the LTA and the options for protections so would appreciate any advice to help me understand things.

Firstly I have a frozen fionaly salary scheme and a standard DC scheme. The DC element is straightforward and say its 0.5m today.

The DB part is quoted in my pension statement stating a capital value of, say, 0.7m based on 20 times pension at retirement age.

So it seems like I am at 1.2m and should stop contributing.

But the final salary element is calculated at age 63 and if I retired at 55 then it would be a lot less - eg 30% less so around 0.5M rather than 0.7. So it would make sense to keep contributing as the value at point of crystalisation (age 55) would be much less than 1.2m.

So my first question is, as and when we get details of LTA protection for the new 1m limit, Would I be able to apply given my DC today plus DB age 63 is >1m or will the protection require a calculation on my DB element to get a current value versus age 63?

Secondly I am assuming I am not able to apply for the 2014 protection against £1.5m as my capital value was below 1.25 in Apr 14 .

david78

I am assuming these are both company pensions. Your DB pension would have been indexed with CPI approx since it was deferred ("frozen"). So you need to check if the £0.7M value includes this indexation (This value amounts to a pension of £0.7M/20 = £35,000).

Do you intend to take any tax free cash from your DB pension when you come to take it? Because if you do this can significantly lower the value of this pension for working out the amount of LTA used, so the total (DB+DC) value may be smaller than £1.0M . To work out the value one would need your commutation rate and amount of cash you would want to take.

Details of the protection scheme are not likely until the end of next tax year.

madeinireland_2

Are you sure this is right I thought the TFLS was included in the LTA so why would taking cash make things any better ?

david78

I am sure I am correct.

The value of the TFLS is included in the LTA but the Value of the (cash + pension) benefits depends on the formula used to calculate the amount of cash. If you have a commutation rate of 20 the values are the same. If, as is common, you have a lower commutation rate, the overall value when cash is taken is smaller.

If I know your commutation rate I can calculate it for you (with the formula so you can check it).

david78

Here are some calculations.

Pension P = £35,000
Value1 (no TFLS) = 20*£35,000 = £700,000

Commutation Rate R = 10
max TFLS = 20/(3+20/R)*P = 140000
Reduce pension RP = P - TFLS/R = £21,000

Value2 (reduced pension + TFLS) = 20*RP + TFLS = £560,000.



And ... for R = 20 its the same as Value1.

Commutation Rate R = 20
max TFLS = 20/(3+20/R)*P = 175000
Reduce pension RP = P - TFLS/R = £26250

Value2 (reduced pension + TFLS) = 20*RP + TFLS = £700,000.

** Note that the maximum TFLS in each Value2 case is always the value X 25% (the formula is always consistent with this).

madeinireland_2

I think I see what you are saying but my cash lump sum is an AVC and a lump sum that comes as part of the pension so no need for commutation so I think it is already counts as part of the LTA.

david78

You are right that if there is a mandatory lump sum, you just add it to 20 times the pension. When you said 20 times pension value = 0.7M you meant 20 times pension value + lump sum = 0.7M?

fizio

In my case the cash lump sum is irrelevant (i believe). As my DB and DC pensions are 'linked' I am allowed to take all the 25% cash sum from the DC pot and keep DB at full pension. My DB is index linked since frozen so the 0.7m should cover everything.

Given my DB is at age 63 then I assume I am ok to build my pot to say 1.5m but retire a few years early so at point of crystalisation my actual DB value will be reduced to reflect early retirement

redbuzzard

haf63 wrote: »

In my case the cash lump sum is irrelevant (i believe). As my DB and DC pensions are 'linked' I am allowed to take all the 25% cash sum from the DC pot and keep DB at full pension.

Have you checked that? It's quite possible, and very sensible for you of course, but it's likely that at least some schemes will not allow it, and will insist that you take any PCLS pro rata from the DB and DC sections.

fizio

redbuzzard wrote: »

Have you checked that? It's quite possible, and very sensible for you of course, but it's likely that at least some schemes will not allow it, and will insist that you take any PCLS pro rata from the DB and DC sections.

Yes I have checked and it standard practice for most retirees to build enough DC via AVC's etc to ensure lump sum doesn't need to touch the DB.