Lifetime Allowance (LTA)

Bignroon

I am 55 years old and transferring my pension into a SIPP (1.5m). My capital will be invested by a Discretionary Fund Management Team and I am initially taking tax free cash payment of £100k (to repay debts and have an emergency fund). I would like to continue with my employment till I am 58 at which point I would fully retire. On retirement, I would like to take an annual drawdown income of £34,625 (£2,500 per month after tax based on current tax bands). I would also take a further withdrawal of £50k from the pot to repay mortgage which is locked in till summer 2018.
My Lifetime Allowance is set at £1 Million.
I do not fully understand the following in respect to the rules regarding the LTA.
1. Lifetime Allowance tax charge.
2. Understanding the difference between crystallise & uncrystallised ( Would it be sensible to crystallise the whole pot now to avoid any excess taxes)
3. Looking for any thoughts and ideas to the best way to deal with my excess on my 1m LTA.
4. LTA tax charges (If they are applied at the start of my transfer or at age 75)?
5. On my death before the age of 75 my wife benefits would be paid tax free (does this include the excess above your LTA?)
Any help or thoughts on any of the above would be very much appreciated - thank you.

zagfles

Who is this "Discretionary Fund Management Team"? If they're financial advisers they should have advised you about LTA implications. Is it a DB transfer to a SIPP? If so you'd have needed advice and the IFA should have accounted for and planned around the LTA issue. Did you take any of the LTA protections?

For such a large pot you really either need to understand LTA issues inside out or you need financial advice. If you already have an adviser it seems they aren't doing their job properly if they haven't explained these issues.

Anyway - basically to take any money out of a pension in any form you need to trigger a "benefit crystallisation event" (BCE), there are around 12 of these. If you google "LTA BCE" you'll get loads of helpful documents describing them. When one occurs, a percentage of the LTA is used up, then when you get to 100% you start paying LTA charges.

The LTA charge is paid in one of 2 ways, either a 55% tax on a lump sum withdrawal or a 25% tax plus marginal tax on the income if you take it as income. This works out the same for a higher rate taxpayer whichever option, but for a basic rate taxpayer it's cheaper taking the income option (effective tax 40%). So why are you only considering taking only £35k income, assuming you have no other income in retirement it would likely be best drawing an income up to the HRT threshold.

There is a BCE on death so you don't usually avoid the LTA charge by dying. Although I think you can if you die under 75 and then your wife leaves it 2 years before crystallising - see BCE 5C, but then I think the drawdown is fully taxed rather than tax free.

xylophone

How on earth is it possible that in this situation, your Financial Adviser has not given you the answers to your questions in fine detail and before you took any action in respect of a pension transfer?

Is this a DB Transfer? If so, have you taken the advice of a Pensions Transfer Specialist?

http://www.pruadviser.co.uk/content/knowledge/technical-centre/pension_transfer_conversion/

zagfles

xylophone wrote: »

How on earth is it possible that in this situation, your Financial Adviser has not given you the answers to your questions in fine detail and before you took any action in respect of a pension transfer?

Is this a DB Transfer? If so, have you taken the advice of a Pensions Transfer Specialist?

http://www.pruadviser.co.uk/content/knowledge/technical-centre/pension_transfer_conversion/

Yes, I'm just wondering if it's a scam - some dodgy overseas investment like Cape Verde holiday properties or suchlike.

If the original pension was DC why would anyone build up such a massive fund while they've got a mortgage and debts? If it's DB why has the adviser not addressed the LTA issues?

Bignroon

Firstly
Could I thank you very much for your prompt response and enthusiasm.
In response to your answers/questions.
I am in the process of waiting for my funds to be released by my DB pension scheme. Hopefully within the next four weeks. I have had an independent Comprehensive Analysis report completed. This report highlighted that I did not have what I thought was a personal protected LTA (1.2m) but it in fact was 800k(20 x Pension from DB).This then resulted in my new LTA being 1m. I will be talking to my IFA over the coming weeks.
The reason for the post was to educate myself prior to the meeting to have an understanding of the process thus no blame should be directed at him.

zagfles

Bignroon wrote: »

Firstly
Could I thank you very much for your prompt response and enthusiasm.
In response to your answers/questions.
I am in the process of waiting for my funds to be released by my DB pension scheme. Hopefully within the next four weeks. I have had an independent Comprehensive Analysis report completed. This report highlighted that I did not have what I thought was a personal protected LTA (1.2m) but it in fact was 800k(20 x Pension from DB).This then resulted in my new LTA being 1m. I will be talking to my IFA over the coming weeks.
The reason for the post was to educate myself prior to the meeting to have an understanding of the process thus no blame should be directed at him.

The point is that the LTA issue should have discussed in detail with your IFA before even thinking about doing the transfer.

You had a DB scheme which wasn't breaching the LTA, you now have a SIPP which does breach the LTA. Generally, doing such a transfer which results in a massive increase in the tax burden would be a bad idea. You didn't have an LTA issue with the DB pension, you now have one with the SIPP.

There might be reasons why in your particular case it wasn't a bad idea, but your IFA should have discussed these with you in detail.

Also please reassure us this isn't a scam. For instance, did any of the following happen:

You were cold called for a "free pension review"

They sent a courier with documents for you to sign

Guaranteed returns above 8% are being promised

kidmugsy

"I am 55 years old and transferring my pension into a SIPP (1.5m). My capital will be invested by a Discretionary Fund Management Team": oh Lord, I tremble. How do you know all this is pukka? Who is your IFA?

If you know nothing about investing what's wrong with transferring in the first instance to whichever of the big insurers offers a decent range of funds within its personal pension and allows the sort of drawdown you want to do?

As a long shot, ask whether yours is one of the few DB schemes that would allow you to transfer out part of your CETV and leave the rest behind as a reduced DB pension. That might get you round the LTA problem.

ex-pat_scot

This is SCREAMING "alarm bells"!!!!!!

From the very scant information, many of the scam flags are flapping merrily.

I would suggest in the strongest terms to pause and consider most carefully what to do, and share all information requested by fellow posters before proceeding.

TheTracker

Very good advice already given.

What is your IFA charging as initial and ongoing fees?

How many IFAs did you talk with? How did you come across this IFA?

Aegis

Bignroon wrote: »

I am 55 years old and transferring my pension into a SIPP (1.5m). My capital will be invested by a Discretionary Fund Management Team and I am initially taking tax free cash payment of £100k (to repay debts and have an emergency fund). I would like to continue with my employment till I am 58 at which point I would fully retire. On retirement, I would like to take an annual drawdown income of £34,625 (£2,500 per month after tax based on current tax bands). I would also take a further withdrawal of £50k from the pot to repay mortgage which is locked in till summer 2018.
My Lifetime Allowance is set at £1 Million.
I do not fully understand the following in respect to the rules regarding the LTA.
1. Lifetime Allowance tax charge.

The easiest way to think about the lifetime allowance charge is to assume that the 25% you normally receive tax free is instead given to HMRC as a present when you commence those benefits (or trigger another benefit crystallisation event).

Without question, this should already have been discussed with you before a recommendation to transfer was given, and your adviser should have accounted for this when deciding whether to recommend this course of action to you, as it is a major part of the decision.

2. Understanding the difference between crystallise & uncrystallised ( Would it be sensible to crystallise the whole pot now to avoid any excess taxes)

A self-invested pension is uncrystallised until you reach one or more Benefit Crystallisation Events, which usually means taking the Pension Commencement Lump Sum, transferring overseas or dying. Self invested pensions (and some of the better personal pensions) can be partially commenced if you choose, leaving a percentage of the pension crystallised and the remainder uncrystallised. As you crystallise each segment of the pension, the administrators will check your remaining lifetime allowance to see if a charge is due. Each crystallisation event will use up a proportion of your lifetime allowance, and once you reach 100% everything after that is subject to the charge.

3. Looking for any thoughts and ideas to the best way to deal with my excess on my 1m LTA.

My usual advice to clients is to leave it alone until they need it. This depends on circumstances though, and you may decide that it is better to take these benefits immediately and settle your pension excess debts to HMRC in one go.

4. LTA tax charges (If they are applied at the start of my transfer or at age 75)?

At the point of crystallisation and / or at age 75

5. On my death before the age of 75 my wife benefits would be paid tax free (does this include the excess above your LTA?)

Any remaining excess would be taxed at 25% first, then passed free of further tax to your heirs.

Bignroon wrote: »

Firstly
Could I thank you very much for your prompt response and enthusiasm.
In response to your answers/questions.
I am in the process of waiting for my funds to be released by my DB pension scheme. Hopefully within the next four weeks. I have had an independent Comprehensive Analysis report completed. This report highlighted that I did not have what I thought was a personal protected LTA (1.2m) but it in fact was 800k(20 x Pension from DB).This then resulted in my new LTA being 1m. I will be talking to my IFA over the coming weeks.
The reason for the post was to educate myself prior to the meeting to have an understanding of the process thus no blame should be directed at him.

It's worth mentioning that this transfer will result in about £125,000 of lifetime allowance excess charge to become payable at some point, possibly more if you get decent growth. It may still be better to do this, but you need to get your adviser to explain exactly what effect this excess charge has on your critical yield (this should also have been explained to you - it is the growth rate required to achieve greater long-term returns than retaining your pension).

If the goal is to maximise benefits to your heirs, you may also wish to consider retaining your DB pension (and paying no Lifetime Allowance charge) and using the pension to fund a whole of life insurance policy. That way you can take no investment risk, can avoid the LTA excess charge and can still leave a tax efficient lump sum to your heirs.

Above all make sure you fully understand what you are giving up before making any commitment to transfer, as such a transfer cannot be undone at a later date.

marlot

Bignroon wrote: »

...but it in fact was 800k(20 x Pension from DB)...

This suggests your DB pension is set to pay out £40k a year. From what age?

Bignroon wrote: »

On retirement, I would like to take an annual drawdown income of £34,625

Again, from what age? Are you comparing like with like?

Is the main reason for doing the transfer to get some tax free cash? If so, there could be better ways of achieving it.