Quick question on LTA and how it works.

madeinireland_2

I have a total pension that will effectively be about £1.075m by 5th April which will be over the new LTA. This consists of both a DB and DC pension. The DC part is worth about £120k.

I am 55 towards the end of March and I am thinking of crystallising the DC pension by taking £30k before the change of LTA so that I use a % based on the £1.25m limit meaning I have used 9.6%.

I will then be going for Individual protection but my question is - will my pension valuation for that protection still be the same value or would it drop by the £120k as that portion has already been crystallised? - meaning I can't go for IP and my limit would be the £1m.

So in effect is my new available LTA 90.4% of £1m or 90.4% of £1.075m for the remainder of my pension?

Thanks...

madeinireland_2

I am surprised at that answer as I thought there would be a benefit from me crystallising my DC before the LTA changes.

So if I crystallise my overall pension that stays within limit is....

£904K + £120 = £1.024m an overall benefit of £24k

If I don't crystallise then my position would be...with individual protection...

£1.075m a benefit of £75k

Is that right?

Thanks...

madeinireland_2

Put it another way - if what you are saying is correct then the LTA calculation does not consider funds to be included in that calculation if you have already crystallised them. It does not sound right to me???

westy22

madeinireland wrote: »

So in effect is my new available LTA 90.4% of £1m or 90.4% of £1.075m for the remainder of my pension?

Thanks...

I might be muddying the waters here (and completely wrong) but wouldn't the fund value on 6 April 16 after crystallizing £120,000 and having removed £30,000 PCLS be:

£955k + £90k = £1,045,000 (as the £30k PCLS in no longer in the pension fund)?

madeinireland_2

You may be right but I still think / hope that my position would be better than that. I was kinda hoping the answer would be 90.4% of £1.075m plus the £120k already crystallised as my total Individual Protection amount.

westy22

I feel that the way it would work would be that the fund value as at 6 April 16 would be £1,045,000. When the next BCE (Benefit Crystallization Event) occurred the LTA calculation would be:

fund value at BCE minus £90,000 (being the starting value of the funds put into drawdown) x 90.4%. In other words, the growth of the £90k would be included within the 'new fund' but the starting value would be excluded.

madeinireland_2

I'm not convinced but if that was the case I may as well just not bother crystallising and take IP at £1.075m

PensionTech

Ok madeinireland, you've been given a lot of misinformation here.

The amount that counts towards the value of your benefits on 5 April 2016 is the value of all benefits, crystallised and uncrystallised, at that date.

If you were to crystallise your fund before 5 April 2016 then it is valued as the amount crystallised (i.e. the value of the fund designated for drawdown plus the PCLS), revalued for any differences in the standard LTA in force at the time of crystallisation and at 5 April 2016. So in your case, there would be no revaluation, because the LTA would be the same at each time. Your DC benefits would therefore be valued at £120k. Your protected lifetime allowance will therefore be £1.075m, as you say.

The amount used up by that crystallisation will be 120k/1.25m = 9.6%. So the amount available after 5 April 2016 will be 90.4% of your individual Lifetime Allowance - i.e. 90.4% of £1.075m.

The example of "Chandra" on this page: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm094500 may help you - although please note that this relates to IP2014 rather than IP2016, so the limits discussed are slightly different.

So in short, your instincts were right.

westy22

Madeinireland - the post from PensionTech is from the horse's mouth so apologies if I sent you up a blind alley.

I now need to rethink my future strategy based on the above as I had sent myself up the same blind alley!

caveman8006

Of course Westy22 is right in that any further investment growth in the crystalized or uncrystalized portions of the fund at the next BCE will count against your remaining LTA and can still take you over the LTA - in other words crystalizing your fund does not stop you being liable to pay the penal 55% tax on any future growth in your fund which takes it above the LTA. The only way for most people at or close to their LTA to avoid the penal tax rate at their last BCE (whether 75 or death) is to remove the annual investment return as (marginally) taxed income.

Daniel54

caveman8006 wrote: »

Of course Westy22 is right in that any further investment growth in the crystalized or uncrystalized portions of the fund at the next BCE will count against your remaining LTA and can still take you over the LTA - in other words crystalizing your fund does not stop you being liable to pay the penal 55% tax on any future growth in your fund which takes it above the LTA. The only way for most people at or close to their LTA to avoid the penal tax rate at their last BCE (whether 75 or death) is to remove the annual investment return as (marginally) taxed income.

The penalty rate is 25% - and who knows if this will still exist when the OP is 75 ?

Even accounting for the 25% , leaving the SIPP IHT free pre or post age 75 can still be tax effective for estates otherwise subject to IHT

But agree drawing down the excess growth as income might be the better way to go