LTA confusion

lisyloo

I am probably confused, so please correct me.
This question has come up as I've read a few people planning to retire when they hit LTA.


If you go all the way to LTA, isn't there a risk that your fund will grow faster than you can drawdown? (if you don't want to pay higher rate tax), so you exceed LTA later on (at BCA event at 75 say).
So I'm thinking
LTA is £1,000,030
Lets suppose you draw down £45K per annum wanting to stay below higher rate tax.
That means any annual growth above 4.5% will take you above LTA.

Please correct me, I'd be delighted to be educated and be shown the error of my ways.

strickersuk

But the LTA should now rise by CPI, so for 2% CPI you'd need a growth of just under 7% to breach. In the unlikely event of that happening, then draw some more and pay tax! I think the bigger worry is future governments changing the goal posts but then you could always crystallise and protect it.

EdSwippet

lisyloo wrote: »

I am probably confused, so please correct me. ... If you go all the way to LTA, isn't there a risk that your fund will grow faster than you can drawdown?

You are not confused. Because the LTA penalty is applied to both real and inflationary growth, there is a genuine incentive to manage drawdown so as to be below it at age 75, even at 40% or even 45% income tax rates (because both are lower than the 55% headline LTA penalty rate).

From this paper produced by Scottish Widows:

The rules encourage clients to take income. If they take income withdrawals of at least the equivalent of any growth there will be no increase in value and there can be no LTA charge at age 75.

As there are no limits on the amount of income that be taken via drawdown an LTA charge at the point of the second LTA test is largely optional. Where the client's total funds are in excess of the LTA, the investor has the choice of taking withdrawals that are subject to income tax or facing the 25% LTA charge at age 75 plus income tax charges later on the withdrawals. The former would usually be more favourable.

However, waiting until just before age 75 and withdrawing a large lump sum could lead to high rates of income tax. The key would be to manage the income over the years to take the income in as tax efficient a way as possible.

EdSwippet

strickersuk wrote: »

But the LTA should now rise by CPI, so for 2% CPI you'd need a growth of just under 7% to breach...

When you crystallise a pension you 'use up' the LTA. So somebody who crystallises fully at the LTA today gets no benefit from any future LTA uprating for inflation in the years to age 75.

Once a pension is crystallised at the LTA so that it is 'used up', the tax rules then strongly encourage drawdown of both real and inflationary gains.

lisyloo

But the LTA should now rise by CPI, so for 2% CPI you'd need a growth of just under 7% to breach.

I don't think that's correct.
The thread I was reading (about magic number) was not people saying I'll stop when I reach £1,030,000,
It was people saying they'll stop when they reach the LTA at the time.

marlot

Its certainly something to keep an eye on - and if you look likely to breach, get the excess removed before you get to 75.


That's assuming the LTA still exists then, of course. A recent commons select committee recommended abolishing it. It'll probably come too late for me - I'm about to request my DB pensions early when I stop work at 55. Without the LTA tax I'd leave the DB pensions until they naturally pay out.

lisyloo

You are not confused.

So is it generally considered a good idea to stop before you hit LTA.
That begs the questio of course of how much before.
Is there any consencus, even a range?

marlot

strickersuk wrote: »

But the LTA should now rise by CPI, so for 2% CPI you'd need a growth of just under 7% to breach. In the unlikely event of that happening, then draw some more and pay tax! I think the bigger worry is future governments changing the goal posts but then you could always crystallise and protect it.

I think the OP is meaning that they've crystalised below age 75, but are then facing the additional BCE at 75 - so they'll have used up all their LTA.

lisyloo

Its certainly something to keep an eye on - and if you look likely to breach again, get the excess removed before you get to 75.

According to this moving in a drawdown arangement is an BCA (edit)
https://www.aegon.co.uk/support/faq/pension-technical/Benefit-crystallisation-event3.html


So let's say you reach 55 today, Have £1,030,000 take 25% lump sum and move 75% into a drawdown arrangement.
Then you've use 100% of LTA but are ok as you crystallised it all.
Is that correct?


In which case you can go right up to LTA? as gains post crystallisation don't count?

Aegis

lisyloo wrote: »

I am probably confused, so please correct me.
This question has come up as I've read a few people planning to retire when they hit LTA.


If you go all the way to LTA, isn't there a risk that your fund will grow faster than you can drawdown? (if you don't want to pay higher rate tax), so you exceed LTA later on (at BCA event at 75 say).
So I'm thinking
LTA is £1,000,030
Lets suppose you draw down £45K per annum wanting to stay below higher rate tax.
That means any annual growth above 4.5% will take you above LTA.

Please correct me, I'd be delighted to be educated and be shown the error of my ways.

This is correct, and very confusing. In such a position, you then need to question whether it makes sense to crystallise in full and manage the growth as best as possible, or whether you should instead defer your crystallisation decision until some point in future, only crysallising what you need in a given year.

Judwin

You can draw more than £45K from an uncrystalised pension pot and remain a basic rate tax payer. Remember the TFLS/PCLS of 25%. You could draw out up to £60K p/a. Your pot would then have to grow by 6%+CPI per year to get back to £1M.


You'd still be in LTA problems though. Withdrawing 60K uses up 6% of your £1M LTA. If your pot keeps growing back to £1M every year, and you keep withdrawing 60K/6% every year then after 17 years you'll have used all 100% of your LTA up, and still have a £1M pot.


I think the better option is to crystallise the whole £1M pot on day one, and take the 25% PCLS. So you get £250K out, and start drawing down from the remaining £750K. You'd need to withdraw all the growth from the £750K every year up till you're 75. 6% on £750K would be £45K p/a.


The issue then is what to do with the £250K lump sum. Various options, but in the end it's a nice problem to have.


The other issue is that the state pension (£8.5K ish) will kick in at age 67/68 and require you to reduce your drawdown to £36.5K ish if you're determined to stay a basic rate tax payer.


Needs a spreadsheet to investigate the options.