2nd DB and over LTA

Doglegger

Hi Folks
I kind of tried to ask this question a while back in a half-hearted thread hijacking but didn't get any luck so will try again. The web info on the LTA doesn't make this completely obvious, to me anyway.
If a first occupational pension in payment takes you over LTA and you pay the tax on the excess, how would a second DB, which comes into payment later, be taxed? Would that be paid out at 25% over your marginal tax rate?
Thanks

kidmugsy

I don't know but if it were I'd be tempted to reduce the tax by taking it earlier.

Doglegger

kidmugsy wrote: »

I don't know but if it were I'd be tempted to reduce the tax by taking it earlier.

Thanks kidmugsy. Something I did look into but unfortunately I can't do that.

hugheskevi

All of the second pension would be in excess of the Lifetime Allowance and hence subject to a tax charge.

Scheme rules and your choices at crystallisation would determine the tax free lump sum (if any) and the annual income. The value of the pension for Lifetime Allowance purposes is 20 X annual pension plus any lump sum.

The tax charge due is 55 per cent of tax free lump sum taken plus 25 per cent of the value of the pension income (using the 20 times factor). This is all payable to HMRC immediately. Your pension provider will calculate the reduction to lump sum and pension using actuarial factors required to meet the tax charge - note that when they calculate the actuarial value it will be different to factor 20.

The pension and lump sum are reduced accordingly, the money paid to HMRC and the remaining lump sum and ongoing pension is then paid to you. The annual pension is taxable income and taxed in the usual way

kidmugsy

Doglegger wrote: »

Thanks kidmugsy. Something I did look into but unfortunately I can't do that.

Have you looked into transferring it to a DC pension? On the face of it that's a lousy idea because DC pension are treated more harshly than DB for LTA purposes. But you could always hope to die before 75 so that after any LTA payment your wife could withdraw money from the pension tax-free.

Or, of course, the coming mighty crash could helpfully reduce the value.

The_Doc

There will be no tax free lump sum as the there is no LTA left. The "pot" is deemed as 20 times the annual pension. You will then need to pay 25% of that sum as it is deemed as being taken as income. If there is no AVCs attached to the DB, then the reduction in pension will be calculated using the appropriate commutation rate.

For example, a DB of £20k p/a is valued at £400K. 25% of that is £100K. If the commutation rate is 20, then this is equivalent to a £5K reduction, leaving you with £15K pension. If the commutation rate was 10, then you would lose £10K p/a.

You will thenpay income tax at your marginal rate.

Taking it early means that the pension will be less but the proportionate rate of tax will be the same. However, the commutation rate may change, so could impact the value. You would need to request this information from the scheme administrators.

Doglegger

Thanks to all the replies above which have cleared that up for me. The 2nd pension is a small military one so can't be transferred now or taken early.
Hopefully I can avoid a crash leading up to taking out the first but I may not hit the LTA if markets stagnate or drop over the next 5 years which will affect the DC portion so I may end up with a bit of headroom to squeeze this one in. I won't be doing anything deliberate myself to facilitate that.
Thanks again