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LTA calculations when someone has both DC and DB pensions

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stoozie1
stoozie1 Posts: 656 Forumite
Could someone please confirm if my understanding is correct:

Mr A has DB pensions which if retiring at 60 (assuming for ease a LTA per individual of 1 million pounds) have an LTA value of £800,000. The LTA would be due at crystalisation, and therefore there is nil to pay.

Mr A has a SIPP which at his 60th birthday happens to contain £220,000

Am I right (so far and also that): No LTA taxation is due until £200,000 (+£1) of the DC pot has been drawndown? How is the further growth in the SIPP handled?

Many thanks for your patience, I appreciate this is a no-brainer to many of you.
Save 12 k in 2018 challenge member #79
Target 2018: 24k Jan 2018- £560 April £2670
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  • Malthusian
    Malthusian Posts: 11,055 Forumite
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    Correct - no LTA charge will arise until he crystallises funds above the lifetime allowance, or he reaches age 75 with funds left in the SIPP. Or some other crystallisation event happens (e.g. using already-crystallised funds to buy an annuity).

    Further growth in the SIPP is most likely to be taxed by the age 75 test. At age 75, all uncrystallised funds will be tested against the lifetime allowance. And all crystallised drawdown funds will have the amount that was put into drawdown subtracted from the current value (giving the growth amount), which will be tested against the lifetime allowance. If all the lifetime allowance has been used up then that effectively means that all growth will be hit by an LTA charge. This can be mitigated by drawing income if he can do so without incurring excessive tax.

    Given the amount of money involved he should be taking professional advice rather than relying on strangers on the Internet who don't know the full story.
  • EdSwippet
    EdSwippet Posts: 1,663 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Amplifying Malthusian's response a little...

    Mr A will use 80% of the £1mm LTA when he starts his DB pension at age 60. This leaves him 20% to use against the DC pension in his SIPP.

    Some time later he 'crystallises' £200k, say, of his SIPP. The LTA is still £1mm (assuming for simplicity no inflation over the years, so no uplift; of course, not realistic) and this uses up his remaining 20% unused LTA. He takes 25% of this tax-free, so £50k, and can drawdown on the remainder as desired. Withdrawals from that chunk are taxable at normal/marginal rates.

    Some time later still he 'crystallises' the remaining £20k (for convenience, assuming no growth, again not realistic). Since his LTA is 100% used he pays 25% of this in LTA 'excess charge', so £5k, and folds the rest into the existing drawdown pot, making it taxable at normal/marginal rates when taken out. Mr A could have crystallised the full £220k in the earlier step, with the same outcome.

    Finally, at age 75 he gets to jump the second LTA hurdle. If undrawn funds have grown that growth is again subjected to another 25% LTA 'excess charge'.

    So, the LTA excess charge is deferrable to an extent, but possibly not entirely avoidable (although a decently sized market downturn might do the trick!). Also, remember that the LTA is supposed to increase with inflation; but then, your funds are expected to grow faster than that. Laws can, and do, change, and they more often change to the government's advantage than to the investor's.

    There are some examples in this document that might help. BCEs 1, 2 and 5 are probably the ones to look at.

    None of this is ever a 'no brainer'. The entire edifice is ridiculously complex.
  • stoozie1
    stoozie1 Posts: 656 Forumite
    Many thanks to both of you. Very clear and informative.
    Save 12 k in 2018 challenge member #79
    Target 2018: 24k Jan 2018- £560 April £2670
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    EdSwippet wrote: »
    the LTA excess charge is deferrable to an extent, but possibly not entirely avoidable (although a decently sized market downturn might do the trick!).

    The possibility of a helpful market downturn would encourage you to defer crystallising the SIPP. A 10% downturn would then do the trick. On the other hand the desire to withdraw money for planned expenditure and before the onset of state retirement pension would discourage you from deferring.

    And then there's always the hope, perhaps forlorn, that this daft system might be reformed. I suppose a cautious policy would be to crystallise the SIPP in small steps, taking out only what you feel you want each year.
    Free the dunston one next time too.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    EdSwippet wrote: »
    the LTA excess charge is deferrable to an extent, but possibly not entirely avoidable (although a decently sized market downturn might do the trick!).

    The possibility of a helpful market downturn would encourage Mr A to defer crystallising the SIPP. A 10% downturn would then do the trick. On the other hand the desire to withdraw money for planned expenditure and before the onset of state retirement pension would discourage him from deferring.

    And then there's always the hope, perhaps forlorn, that this daft system might be reformed. I suppose a cautious policy would be to crystallise the SIPP in small steps, taking out only what Mr A wants each year. If his DB pension really were approaching £40k p.a. then small annual drawdowns might have the desirable effect of avoiding higher rate income tax.
    Free the dunston one next time too.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 16 August 2017 at 4:57AM
    Three things that can help to manage the lifetime allowance risk:

    1. As kidmugsy mentioned a market downturn can provide a good opportunity to crystallise an invested pension. That can be done by taking just the tax free lump sum, no need to take any of the remaining 75%. So no income tax charge on taking a large taxable lump sum if this looks like a good move.
    2. Crystallising at 55 reduces the amount of money growing in the pension. Less money to grow means less chance that the lifetime allowance test at 75 will result in a charge. It's one of the most effective ways to reduce the accrual of potential LTA liability while still paying into pensions. You can crystallise regularly while making ongoing contributions once you've reached 55.
    3. Defined benefit pensions can have options like different tax free lump sums and taking before or sometimes after the normal pension age. Taking an actuarial reduction to stay within the LTA can make sense sometimes even if there's no need for the income at the earlier age.

    While the headline LTA charge level is 55% that's for a lump sum. It's 25% if income is taken instead. Depending on income tax rates that could be higher or lower than 55%. The income tax aspect can also be mitigated through things like buying VCTs to reduce the income tax due and/or to generate ongoing tax exempt dividend income that helps to keep taxable income down.
  • stoozie1
    stoozie1 Posts: 656 Forumite
    Many thanks, lots of food for thought there.
    Save 12 k in 2018 challenge member #79
    Target 2018: 24k Jan 2018- £560 April £2670
  • stoozie1
    stoozie1 Posts: 656 Forumite
    Can't seem to quote on my phone!

    Jamesd said that crystallising the sipp at 55 but continuing to contribute could be a good strategy.

    I understood there were considerable limits in what can be contributed after a benefit crystallization? Does this not outweigh the benefit of early crystallization?
    Save 12 k in 2018 challenge member #79
    Target 2018: 24k Jan 2018- £560 April £2670
  • EdSwippet
    EdSwippet Posts: 1,663 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    stoozie1 wrote: »
    I understood there were considerable limits in what can be contributed after a benefit crystallization? Does this not outweigh the benefit of early crystallization?
    Presumably you're thinking here of the 'money purchase annual allowance' (MPAA).

    That could limit your contributions, but only once you drawdown any of the taxable remainder portion of the crystallised pension. That is, when/if you take any taxable benefits from your pension. Crystallising a SIPP, taking the 25% PCLS and leaving the remaining 75% in deferred drawdown does not itself trigger the MPAA. Note that UFPLS would trigger it.

    Again, ridiculously complex, arcane and obscure. Also worth noting that the government is no longer content with chiselling away at annual and lifetime allowances, but has now moved on to reducing other allowances too. And reducing the MPAA in particular has distinct and noticeable retroactive effects that cannot be mitigated with any form of 'protection'. Doubly aggressive and underhand, then.
  • Malthusian
    Malthusian Posts: 11,055 Forumite
    Tenth Anniversary 10,000 Posts Name Dropper Photogenic
    edited 17 August 2017 at 3:24PM
    stoozie1 wrote: »
    Jamesd said that crystallising the sipp at 55 but continuing to contribute could be a good strategy.

    If he already has £1,020,000 in his pension then it definitely isn't.

    Unless he is an active member of a DB scheme or receiving matching employer contributions, in which case it is more complicated.

    If neither of those are the case, he should apply for Fixed Protection to fix his lifetime allowance at the previous level of £1.25 million. He will not be able to make contributions (or receive increases to his DB pension over and above inflation-linked increases) after that point (edit - without losing Fixed Protection).
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