LTA taxed at 55% taken as lump sum, 25% as income

cautious_investor

Please forgive my blinding stupidity ....I'm just about grasping tapering, Aa's cetvs and SIPPs..... Is this a left brain/right brain thing?

Anyway; i'm 56 next birthday, ( still feel 18, so how did this happen ?)
DB pension ( from company pot with a big deficit) is approx 39K now or 51K at age 60.
No protection. ( CETV?, last dec offered at 1.25M, I'm hoping its a smidge higher this year when the DB scheme closes)

I'm considering a transfer, taking 257K tax-free and dinvesting roughly 1m for 5 years in a SIPP with someone experienced like St James Place.

What I don't understand is the "LTA taxed at 55% taken as lump sum, 25% as income".

Will my 257K really be tax free if I request it this May ?
What is the difference between income and lump sum ?

Please forgive me if this is a dumb question!

Brynsam

No blinding stupidity involved - just wildly complex legislation!

If you are thinking of transferring at some point, get your relationship with a financial adviser off the ground now. You will be required to show that you have received (but not necessarily followed) advice from a suitably qualified and authorised person before the transfer can proceed. Transfer values, once issued, are only guaranteed for 3 months. Your adviser will have had to go through a huge amount of work on your behalf before the relevant advice can be given - and getting through it all within the allowed time frame is one heck of a push.

Miss a key deadline and your transfer won't be able to proceed and you will have to start again with a revised transfer value. You are only entitled to one free TV in any 12 month period and may or may not be allowed to pay (around £500+VAT is typical) for a second TV within the 12 months. Transfer values can go up or down, depending on market factors and how recently the trustees have reviewed the basis of the TVs they offer.

See how well - and quickly - your adviser can explain all you want to know. That way you'll have information based on all the facts of your own situation.

GunJack

St James' Place usually get a slating on here for being neither Independent or value-for-money.....

Aegis

GunJack wrote: »

St James' Place usually get a slating on here for being neither Independent or value-for-money.....

And for imposing exit fees on things like pensions. Decide to change your mind in year 1 because you find out they're not as good as they say they are? 6% exit penalty.

Daniel54

Amounts above the LTA attract a charge of 25% on crystallisation.You then pay income tax at your marginal rate if you drawdown from the remainder as income.If you take the excess as a lump sum,the rules assume your tax rate is 40% and the charge is therefore 25% plus 40% of the remaining 75% which equals 55% in total.

dmelife

If you take the excess over the LTA as a lump sum it is taxed at 55%. So let!!!8217;s say your pot at the point of crystallisation is £1.25m and for simplicity the LTA is £1m then you would get £250k tax free, plus £112,500 as a lump sum after 55% tax, (no further tax to pay) leaving £750k invested for drawdown. This would be taxed at your marginal rate.
If you took the excess as income, you would pay £62,500 in tax on the £250k excess which would leave £750k + £187,500 in drawdown, taxed as income.

EdSwippet

cautious_investor wrote: »

No protection. CETV?, last dec offered at 1.25M, ... I'm considering a transfer, taking 257K tax-free and investing roughly 1m for 5 years in a SIPP ...

Just in case it is not clear from the previous replies, the LTA is a limit on the tax free lump sum. From a £1.25m pot the maximum you can now take as a tax-free lump sum is £250k if you hold no LTA protections -- that is, 25% of your LTA. To access this you would have to crystallise £1m of your pension, but you can put the £750k that remains after taking the tax-free lump sum into deferred drawdown, and you would only pay tax as and when you take withdrawals from that.

This leaves you £250k uncrystallised. Because this is above your LTA you cannot take further tax-free lump sums from it. Anything you do crystallise from it is either a) first taxed at 25% LTA penalty rate, and then your normal income tax on the remaining 75% (so 25% + 20% or 40% of 75%, giving 40% or 55%), or b) taxed at a flat 55% rate. The first of these two options is better if you are a basic rate taxpayer, otherwise they are equivalent.

cautious_investor wrote: »

Will my 257K really be tax free if I request it this May ?

So... not quite. As noted above, without any LTA protection you can now realise at most £250k tax-free from a pension.

And yes, it's a complexity minefield.

dunstonh

DB pension ( from company pot with a big deficit) is approx 39K now or 51K at age 60.

A big deficit is not necessarily a problem. The current accountancy standards they have enlarges deficits on paper.

I'm considering a transfer, taking 257K tax-free and dinvesting roughly 1m for 5 years in a SIPP with someone experienced like St James Place.

The most expensive distribution channel in the country and a tied sales company (own product). Why would you want to do that?

cautious_investor

Thank you (everyone) for the helpful replies.
What a great resource this forum is.

(i) I understand the SJP fee structure (which isn't that different to alternatives, maybe 0.4% higher ?)
(ii) Hundreds of colleagues used them and over the last 5 years have experienced phenomenal growths (typically 13% per year !)
(iii) There are no exit fees for my employee group (specially negotiated deal)
(iv) Edswippet, I mentioned £257 tax-free since lt is uplifted now, ( LTA now 1.03 with inflation) so the 25% tax-free is apparently £257K
(v) Brynsam, thanks for the warnings ... certainly useful. I think we are lucky, my employer unusually, doesnt charge for cetv's and you can ask as many times as you wish.

cautious_investor

DunstonH; Why SJP ? Simply because my older colleagues all went with them and have been very happy.

I have to say , I'm still deliberating.... Not committed till April !

Aegis

cautious_investor wrote: »

DunstonH; Why SJP ? Simply because my older colleagues all went with them and have been very happy.

I have to say , I'm still deliberating.... Not committed till April !

Just remember to shop around for better offers. SJP have slick marketing, but that's a veneer over a very limited product range and a salesforce that is still essentially commission-driven. It's rare that I can't entice a client away from SJP once I point out the fundamental differences between their restricted service and a proper independent service.

If you still go with them afterwards, then you'll have lost nothing but a bit of time, but you may well find yourself speaking to much better advisers with much better product ranges, which could make you and your family considerably better off in the long run.