Pension pot and Life Time Allowance / crystallisation

ebc

I am 60 years old and have a money purchase pension pot of about £1.2m (just under my registered LTA of £1.25m), and no other pension schemes. I have not crystallised or made any withdrawals from the pot yet. I have enough savings to live on for the next 5 years.


Would it be sensible to crystallise the whole pot now to avoid any excess taxes later on (eg at age 75 when the pot growth has outstripped the LTA growth and the age-75 crystallisation event occurs so an LTA excess tax becomes payable)?

Would I be allowed to crystallise it all now, but not withdraw the money? What are the disadvantages? – is the tax-free element of the crystallised pot allowed to grow? Would it count as part of my estate when I die because it has been crystallised?



Not sure I fully understand the rules so any help would be much appreciated - thank you.

The_Doc

You can crystallise your pot from age 55 and no, you don't need to take the money now, but you must designate it for one of the following:

1. Flexi-access drawdown
2. UFPLS
3. Annuity purchase

You should check with the scheme admins to ascertain if all the above are available to you - the scheme is not forced to provide all options (some don't offer 1 and 2 for example).

Which one is best for depends on a number of things, such as your health, your income, how much savings you have, your attitude to risk, and more.

One possibility would be to crystallise now and designate as flexi-access drawdown. You could then take amounts from the pension pot (which would be tax free if they are less than your unused personal allowance). You could then place these in an ISA to continue their tax beneficial status.

You should also look to withdraw amounts to keep the total pot value (used and unused) at less than £1.25M (I assume you have fixed protection 2016), to avoid the LTA charge at 75.

Simply crystallising and designating your pot for flexi-access drawdown does not mean that it is part of your estate when you die. Whatever you take out of your pot is part of your estate.

The money in a flexi-access drawdown account could be used for an annuity later (when annuity rates are likely to be better than now). So it does give you more flexibility.

The main disadvantage occurs when you withdraw money (not the crystallisation event) as the money is then part of your estate and you are subject to the MPAA (a lower limit on how much you can contribute to your pension annually). But if you have FP2016, you don't want to contribute anyway!

ebc

Thanks very much for your reply, much appreciated.

ebc

Hello again. I've been mulling this over night and have a follow up question if you can spare a bit more time. If I withdraw amounts to keep the total pot value (used and unused) at less than £1.25M as you suggest, do I have to say whether these amounts are coming from the original crystallised part of the pot (on which I think I pay just normal marginal income tax), or from the growth part of the pot (on which I think I pay the excess tax rate of 55%)? Thank you.

The_Doc

If you crystallise it all now and leave it invested, the next BCE would be when you are 75. If the fund has grown to over £1,25M, then you would be subject to the LTA charge on the excess over £1.25M. The charge is 25% if you take it as income (and thus subject to income tax at your marginal rate) or 55% if you take it as a lump sum.

If you withdraw money from time to time from the crystallised fund to keep the value of it less than £1.25M at age 75 then no LTA charge will be payable.You can do this in bits to use personal allowances if you have any left (most efficient method).

If you crystallise everything, then the growth is also crystallised as its part of the same lump. So which part of the pot it comes from (original crystallised lump or growth is irrelevant).

As another option (!), you could part crystallise now and crystallise the remainder later after a possible downturn in the market. In that case, you will have crystallised in total at a lower level which gives you more headroom for growth before you hit the LA.

I am in a similar situation. My pot is just over £1.25M and I am awaiting a possible downturn and then to crystallise so I can reduce any potential LTA charge.

EdSwippet

The_Doc wrote: »

If you crystallise it all now and leave it invested, the next BCE would be when you are 75. If the fund has grown to over £1,25M, then you would be subject to the LTA charge on the excess over £1.25M.

To be clear, assuming one takes the 25% PCLS and leaves the remaining £937,500 invested, then the LTA excess charge at age 75 would be based on the fund growth over £937,500, not over £1.25M. There's an example at the bottom of page 2 of this paper from Scottish Widows.

In practice the LTA penalty at age 75 can be avoided by simply taking taxable income before hitting age 75. Even in the 45% bracket the tax payable will be less than the combination of the 25% LTA excess penalty and normal marginal income tax.

The_Doc wrote: »

I am in a similar situation. My pot is just over £1.25M and I am awaiting a possible downturn and then to crystallise so I can reduce any potential LTA charge.

That this is a reasonably rational response to an irrational system nicely shows just what a nonsense the LTA rules have become.