Options as you approach LTA

caveman8006

The widow's pension is a fixed proportion of my pension in payment, so would be reduced - my conclusion was that I would probably be best to retain normal payment date.


But what is your understanding of my point in the first para? I would love to just crystalize at or close to cap and then "let my pot grow without any concern over LTA" but I just don't think it works like that...

Daniel54

caveman8006 wrote: »

I would love to just crystalize at or close to cap and then "let my pot grow without any concern over LTA" but I just don't think it works like that...

I've had to educate myself on this too,admittedly with the help of my IFA ( money well spent,by the way)

There is a second automatic LTA test at age 75 - for a defined contribution scheme this is BCE5A

http://www.hmrc.gov.uk/manuals/ptmanual/ptm088650.htm#IDACSBKB

The amount applied to the LTA is the difference between the amount originally put into drawdown ,and the value of the fund at the age 75 LTA test - effectively it is the increase in the value of the fund less drawdown taken as pension,To avoid a tax charge at the second test,you will have needed to draw down ( and paid tax as income on) sufficient of the fund to avoid a surcharge at the time of that second test.

The surcharge is 25% plus a deemed 40% tax rate if taken as a lump sum.This matters if you are planning to leave a portion of your SIPP to recipients ( wife,children,grandchildren) who might only be liable to basic rate tax.For this reason it might be worth thinking about splitting your SIPP into two pots,one earmarked purely or predominantly for inter-generational inheritance.

The problem with all of this is that it is an absolute certainty the rules will again have changed by the time we get to 75,assuming we are still around at that time !

caveman8006

Thank you for confirming my understanding that another LTA test is conducted on any further growth in the drawdown pot that has not been withdrawn as taxable income before age 75 or death.

Daniel54 wrote: »

The surcharge is 25% plus a deemed 40% tax rate if taken as a lump sum.This matters if you are planning to leave a portion of your SIPP to recipients ( wife,children,grandchildren) who might only be liable to basic rate tax.For this reason it might be worth thinking about splitting your SIPP into two pots,one earmarked purely or predominantly for inter-generational inheritance.

But what benefit do you envisage for splitting the fund into 2 designated pots - surely the punitive tax rate is levied at 55% whatever the tax status of your beneficiaries?

coyrls

Daniel54 wrote: »

I've had to educate myself on this too,admittedly with the help of my IFA ( money well spent,by the way)

There is a second automatic LTA test at age 75 - for a defined contribution scheme this is BCE5A

http://www.hmrc.gov.uk/manuals/ptmanual/ptm088650.htm#IDACSBKB

The amount applied to the LTA is the difference between the amount originally put into drawdown ,and the value of the fund at the age 75 LTA test - effectively it is the increase in the value of the fund less drawdown taken as pension,To avoid a tax charge at the second test,you will have needed to draw down ( and paid tax as income on) sufficient of the fund to avoid a surcharge at the time of that second test.

The surcharge is 25% plus a deemed 40% tax rate if taken as a lump sum.This matters if you are planning to leave a portion of your SIPP to recipients ( wife,children,grandchildren) who might only be liable to basic rate tax.For this reason it might be worth thinking about splitting your SIPP into two pots,one earmarked purely or predominantly for inter-generational inheritance.

The problem with all of this is that it is an absolute certainty the rules will again have changed by the time we get to 75,assuming we are still around at that time !

You could always take out an annuity just prior to reaching 75 with any excess that would otherwise be subject to the LTA.

Daniel54

caveman8006 wrote: »

But what benefit do you envisage for splitting the fund into 2 designated pots - surely the punitive tax rate is levied at 55% whatever the tax status of your beneficiaries?

The punitive tax rate is 25%.You get to 55% by adding on income tax of 40% on the 75% balance,immediately payable if taken as a lump sum.

For beneficiaries where the deceased is over 75 and the pension is fully crystallised in a drawdown scheme,the beneficiaries may take income at their marginal rate .There is no further LTA limitation on growth and the inherited pension does not form part of their own LTA.From the HMRC website.

"A beneficiary’s income withdrawal is taxable if it is paid in respect of:

the deceased member of a registered pension scheme who died aged 75 or over; or
a deceased beneficiary of a deceased member of a registered pension scheme who died aged 75 or over.
It is taxable at the recipient’s marginal rate of income tax."

Sourced from here :

http://www.hmrc.gov.uk/manuals/ptmanual/ptm072430.htm

So one option is to leave crystallising at least part of your SIPP until nearer 75 ( and who knows what the LTA rules might be then?) , pay the 25% surcharge and then leave it to grow specifically as an inheritance.

From your OP you have other investments aside from your pension and it is well worth investigating other IHT beneficial strategies,which could mean it is more efficient to deplete the capital in your SIPP so as to mitigate the effect of the LTA at age 75.Time with a suitable qualified IFA may be helpful here.Assuming from your posts that you have children,regular or lump sum gifting is also efficient,and it gives much more pleasure and immediate help to give with warm hands .

Daniel54

coyrls wrote: »

You could always take out an annuity just prior to reaching 75 with any excess that would otherwise be subject to the LTA.

Purchasing an annuity counts as a benefit crystallisation event ,so would trigger the LTA calculation ( came across this as I was hunting for links for my other replies)

http://www.hmrc.gov.uk/manuals/ptmanual/ptm088640.htm

coyrls

Daniel54 wrote: »

Purchasing an annuity counts as a benefit crystallisation event ,so would trigger the LTA calculation ( came across this as I was hunting for links for my other replies)

http://www.hmrc.gov.uk/manuals/ptmanual/ptm088640.htm

Thanks for alerting me to this, they don't double count but they will still check the excess over the original crystallisation amount against the LTA. I hadn't realised this. So you really do need to get any excess out before reaching 75, meanwhile inflation will have reduced the value of the original amount. If the LTA at 75 is greater than your protected LTA, will they use the higher LTA in their calculations or stick with the original protected LTA?

jamesd

At a benefit crystallisation event the amount crystallised is calculated as a percentage of the lifetime allowance at the time of crystallisation. That percentage is what is remembered for future crystallisation events, not the amount. Future increases or decreases in LTA do not change this already used percentage, just the value of any remaining percentage that is unused.

However, for the calculation of growth above initial crystallisation amount in the age 75 test, the numeric value is used, so that matters as well.

Daniel54

coyrls wrote: »

Thanks for alerting me to this, they don't double count but they will still check the excess over the original crystallisation amount against the LTA. I hadn't realised this. So you really do need to get any excess out before reaching 75, meanwhile inflation will have reduced the value of the original amount. If the LTA at 75 is greater than your protected LTA, will they use the higher LTA in their calculations or stick with the original protected LTA?

It certainly isn't simple,is it ?

Under current rules I can't see where there would be any advantage in not fully crystallising before the age 75 test .But I could be missing something

If the LTA is higher at the point of crystallisation than the fixed protection,then the available percentage is applied to the higher of the two figures.In other words,the LTA cannot be lower than the fixed protection,but it can be higher.

coyrls

Daniel54 wrote: »

It certainly isn't simple,is it ?

Under current rules I can't see where there would be any advantage in not fully crystallising before the age 75 test .But I could be missing something

If the LTA is higher at the point of crystallisation than the fixed protection,then the available percentage is applied to the higher of the two figures.In other words,the LTA cannot be lower than the fixed protection,but it can be higher.

I think the point is that the age 75 test is applied to the growth in crystallised funds. So, as an extreme and simple example, say you crystallised at 55 using 100% of your LTA and left all the funds untouched until 75, then all growth over 20 years (55-75) would be taxed as being in excess of your LTA at 75.

My question about which LTA is applied would come into effect if you have say 10% of your protected LTA left and by the time you reached 75 the LTA was higher than your protected LTA. Would the 10% allowance against growth be 10% of your protected LTA or 10% of the current LTA?