Income from SIPP in Drawdown - tax treatment

Daniel54

pops66 wrote: »

Thank you, I've visited that link but I'm afraid I can't make head nor tail of it!

It is quite possible that the assets in my fully crystallised SIPP will be higher at 75 than they where at the point of crystallisation. So now I need to understand exactly what the calculation is at 75 but so far I can't find those details anywhere.

The calculation is that your undrawn funds ( whether crystallised or not) are applied to the LTA at the time of your age 75 ,or to your fixed protection limit if that is the higher of the two

You would therefore need to ensure that you had drawn down sufficient funds from your SIPP before the age of 75 so as not to exceed the LTA

The only thing which is certain is that the rules and the LTA are likely to be different by the time you get to 75

zagfles

Daniel54 wrote: »

The calculation is that your undrawn funds ( whether crystallised or not) are applied to the LTA at the time of your age 75 ,or to your fixed protection limit if that is the higher of the two

Minus the amount already accounted for on crystallisation. Otherwise you're counting the same thing twice.

zagfles

pops66 wrote: »

Thank you, I've visited that link but I'm afraid I can't make head nor tail of it!

It is quite possible that the assets in my fully crystallised SIPP will be higher at 75 than they where at the point of crystallisation. So now I need to understand exactly what the calculation is at 75 but so far I can't find those details anywhere.

Yes, the wording is horrible, but have a look at the examples, they make a bit more sense.

This probably explains it better: https://www.aegon.co.uk/content/dam/ukpaw/documents/benefit-crystallisation-events.pdf

pops66

zagfles wrote: »

Yes, the wording is horrible, but have a look at the examples, they make a bit more sense.

This probably explains it better: https://www.aegon.co.uk/content/dam/ukpaw/documents/benefit-crystallisation-events.pdf

Thank you. I've had a look at that document but it does not seem to answer the question I have, which concerns a DB pension and a SIPP. For illustration.

Suppose one retired in 2012 aged 63 with a DB occupational pension of £42K and a £200K SIPP. The 25% tax free sum is taken out of the SIPP, the remaining £150K is in drawdown but zero income is taken. Well below the LTA in 2012.

Now roll on to age 75. The DB pension is now over £50Kpa and let's assume the LTA is £1M. The SIPP funds is still valued at £150K. Given that 20 x £50K is £1M, would there be an LTA tax charge?

What if the SIPP fund is now £250K - an increase of £100K. Any LTA tax charge?

(Or are both the above questions based on a completely wrong premise!?)

Daniel54

pops66 wrote: »

Thank you. I've had a look at that document but it does not seem to answer the question I have, which concerns a DB pension and a SIPP. For illustration.

Suppose one retired in 2012 aged 63 with a DB occupational pension of £42K and a £200K SIPP. The 25% tax free sum is taken out of the SIPP, the remaining £150K is in drawdown but zero income is taken. Well below the LTA in 2012.

Now roll on to age 75. The DB pension is now over £50Kpa and let's assume the LTA is £1M. The SIPP funds is still valued at £150K. Given that 20 x £50K is £1M, would there be an LTA tax charge?

What if the SIPP fund is now £250K - an increase of £100K. Any LTA tax charge?

(Or are both the above questions based on a completely wrong premise!?)

The applicable rules at age 75 are BCE 5,5A and 5B

If the DB pension has already been crystallised then BCE 5 does not apply - the value of the DB pension is not re-assessed at 75

BCE 5A and 5B applies only to money purchase pensions

Taking your example ,the LTA in 2012/13 was £1.5m .The crystallised DB benefits would have an LTA value of £840k ,being 56 % of the lifetime allowance.The crystallised SIPP is a further £200k,being 15% of the LTA.Total used 71%

At age 75 ( or just before) you still have 29% of the then applicable lifetime allowance available.If that is £1m ( and you don't have any higher protection) then the undrawn funds in the SIPP would need to be £290k or less in order to avoid the 25% surcharge

I believe this is correct but have been using an IFA for my planning - if in doubt it may be worth you taking some independent regulated advice for your specific circumstances.Mine are that I have crystallised my DB pensions but am very adjacent to the LTA ( with fixed protection) when an uncrystallised SIPP is added in on top

Hope this helps

zagfles

Daniel54 wrote: »

The applicable rules at age 75 are BCE 5,5A and 5B

If the DB pension has already been crystallised then BCE 5 does not apply - the value of the DB pension is not re-assessed at 75

BCE 5A and 5B applies only to money purchase pensions

Taking your example ,the LTA in 2012/13 was £1.5m .The crystallised DB benefits would have an LTA value of £840k ,being 56 % of the lifetime allowance.The crystallised SIPP is a further £200k,being 15%

I make that 13.33%

of the LTA.Total used 71%

At age 75 ( or just before) you still have 29% of the then applicable lifetime allowance available.If that is £1m ( and you don't have any higher protection) then the undrawn funds in the SIPP would need to be £290k or less in order to avoid the 25% surcharge

The increase is all that counts as it's already been crystallised, so with 29% left the SIPP in drawdown would have to be worth over £150k+£290k = £440k to trigger a LTA charge. (Also it's a bit more than 29% as 30.6% would be left as above).

Daniel54

Thanks for correcting me

pops66

Daniel, Zagfles,

Thank you, I really appreciate that. The two keys bits of info are:
1. what my occupational pension is paying when I reach 75 is irrelevant, and
2. it is the growth in the SIPP that has to be less than the headroom - the headroom being the percentage unused when the SIPP was crystallised x whatever the LTA is when I get to 75.

Now I understand it (I think!) they will probably change all the rules in the next Budget!

Thanks again for the very useful info.

coyrls

Can somebody check if I’ve got this right? Assume that the LTA at crystallisation and at 75 is £1M.

A £1M pension pot is crystallised, 25% is taken as a tax free lump sum and 75% is put into Flexi-Access Drawdown. At this point, there are two Benefit Crystallisation Events:

1) BCE 1 “Movement of money or assets held under a money purchase arrangement into capped or flexi-access drawdown. This uses 75% of the allowance.
2) BCE 6 “Payment of a relevant cash lump sum”. This uses 25% of the allowance.

In total 100% the LTA has been used. Now assume that at age 75 the £750,000 has grown to £1M. We now hit BCE 5a: “An individual with drawdown pension funds (set up on or after 6 April 2006) under a money purchase arrangement reaches age 75”. To calculate the value that is assessed against the LTA the BCE1 amount of £750,000 is subtracted from the £1M and £250,000 is now in excess of the LTA.

What I didn’t appreciate is that BCE6 is not taken into account. I assumed (dangerous I know) it was BCE1 + BCE6 that was subtracted from the value at 75 and so in the above example, it would be £1M - £1M and so there would be nothing in excess of the LTA.

Daniel54

coyrls wrote: »

Can somebody check if I’ve got this right? Assume that the LTA at crystallisation and at 75 is £1M.

A £1M pension pot is crystallised, 25% is taken as a tax free lump sum and 75% is put into Flexi-Access Drawdown. At this point, there are two Benefit Crystallisation Events:

1) BCE 1 “Movement of money or assets held under a money purchase arrangement into capped or flexi-access drawdown. This uses 75% of the allowance.
2) BCE 6 “Payment of a relevant cash lump sum”. This uses 25% of the allowance.

In total 100% the LTA has been used. Now assume that at age 75 the £750,000 has grown to £1M. We now hit BCE 5a: “An individual with drawdown pension funds (set up on or after 6 April 2006) under a money purchase arrangement reaches age 75”. To calculate the value that is assessed against the LTA the BCE1 amount of £750,000 is subtracted from the £1M and £250,000 is now in excess of the LTA.

What I didn’t appreciate is that BCE6 is not taken into account. I assumed (dangerous I know) it was BCE1 + BCE6 that was subtracted from the value at 75 and so in the above example, it would be £1M - £1M and so there would be nothing in excess of the LTA.

Erosion of the LTA is always expressed in percentage terms.Once 100% is crystallised there is no further wriggle room

As Zagfles pointed out when correcting me, it is the increase which is subject to the second LTA test at 75

In your example you would need to have drawn down the £250 k excess in advance of the second test

The relevant words from Zagfles original link are :

"And the prevention of overlap rules apply to ensure that it is only net growth (investment growth less payments of income made) in the drawdown pension fund remaining since the original designation(s) that is tested."