Benefit Crystallisation Events at 75 - how to calculate the tax

RetireU2

Hi

I would appreciate if Forum members could check my understanding of how the BCE test at 75 works.

If I crystallise my SIPP each year with just the amount that I draw down will the Benefit Crystallisation Event (BCE) test at 75 first check to see if the amount remaining in my SIPP exceeds any remaining LTA allowance. Only if the amount remaining in my SIPP exceeds the remaining uncrystallised LTA it will I be liable to LTA tax.

For example if I have £250,000 LTA available when I start drawdown on my SIPP investment of £200,000 and by age 75 I have crystallised £200,000 via annual drawdowns still have £100,000 in my SIPP will my LTA tax liability be £50,000 at 25% assuming I continue to draw income.

Alternatively if I had crystallised my SIPP investment of £200,000 at the beginning and (by some careful investing) still have £100,000 remaining in my SIPP after my annual drawdowns totalling £200,000 will my LTA tax liability be nil as £100,000 is less than the £200,000 crystallised?

If both are correct is it normally better to crystallise at the beginning of drawdown?

I have ignored inflation to make the examples simpler but I understand in reality the LTA will get CPI added from 2018. Also for simplicity I have also ignored the fact that the LTA level may change which would mean that LTA test would need to be done using percentages. Hopefully both these simplifications do not cause any problems.

Thanks

zagfles

At 75 uncrystallised funds count in full towards the LTA, but for crystallised funds in drawdown only the difference between the value when crystallised and the value at 75 counts.

So if you've drawn down enough to make sure the value at 75 is less than the value when crystallised then it doesn't count towards the LTA.

Note that it's the amount after the TFLS that is relevant, for instance if you crystallise £200k taking £50k as TFLS and putting £150k into drawdown at 60, then anything above £150k counts towards the LTA at 75 for BCE5A

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

RetireU2

Thanks zagfles, you have clarified the tests really well. The link you provided was also very useful.

I am near the LTA and my thinking is that it would be best to crystallise all my SIPP in the near future by putting it into drawdown (and possibly taking a TFLS). My thought is that crystallising all in one go is better because of the way BCE5a works i.e. as long as I draw out any growth above the crystallisation value before I reach 75 then it does not count towards the LTA. Whereas crystallising annual drawdown amounts would leave me exposed to exceeding the LTA due to SIPP growth in the future as the markets hopefully recover.

I have read other posts that suggest waiting for a market downturn before crystallising but on the basis that we are currently in a downturn then now may be a good time to crystallise.

Would appreciate thoughts on this proposed approach to crystallisation of my SIPP.

jamesd

You're right that crystallising as soon as possible - ideally in the current 2015/16 tax year - and taking the maximum permitted 25% tax free lump sum will reduce your chance of exceeding the lifetime allowance.

While the markets are perhaps a bit down, that's not enough to compensate for the reduction in LTA in a week or so. Get it while you can.

There's always the chance that a future increase in LTA above inflation like the recent and pending drops will happen but this is the best that you can do today.