Lifetime Allowance Tax explained ?

Mick70

Morning all, new member here
I have couple of queries so will post them as two separate posts if that is ok rather than a very long winded one.
I have read about the LTA of £1.03m , theres every chance i may end up with a DC pot of £1.5m (will explain why on the other post) , anyway im trying to work out on a spreadsheet how that pot will last over the years (over 30 years) and I'm slightly unsure how to apply this LTA tax each year until the pot valuation falls below the £1.03m then i assume your annual pension is just taxed as if it were a salary .
So, say if I am looking to withdraw £45k per annum , starting at year 1 , and i want this £45k to rise with inflation (say 2%) per year , is the LTA tax applied to this 45k OR is it applied in year 1 to the full amount that is above £1.03m (i.e £0.47m x 25% LTA chg), how exactly does it work each year (until balance falls below threshold ).
Many thanks in advance, ive seen lots online but nothing showing an annual caculation of the tax where you can key in some figures and it generates the charge
Confused Mick

HappyHarry

Mick70 wrote: »

Morning all, new member here
I have couple of queries so will post them as two separate posts if that is ok rather than a very long winded one.
I have read about the LTA of £1.03m , theres every chance i may end up with a DC pot of £1.5m (will explain why on the other post) , anyway im trying to work out on a spreadsheet how that pot will last over the years (over 30 years) and I'm slightly unsure how to apply this LTA tax each year until the pot valuation falls below the £1.03m then i assume your annual pension is just taxed as if it were a salary .
So, say if I am looking to withdraw £45k per annum , starting at year 1 , and i want this £45k to rise with inflation (say 2%) per year , is the LTA tax applied to this 45k OR is it applied in year 1 to the full amount that is above £1.03m (i.e £0.47m x 25% LTA chg), how exactly does it work each year (until balance falls below threshold ).
Many thanks in advance, ive seen lots online but nothing showing an annual caculation of the tax where you can key in some figures and it generates the charge
Confused Mick

Each time you crystalise some of your pot, the amount you crystalise gets tested against your remaining lifetime allowance.

So, on your figures of crystalising £45,000 per year (with inflation) it will take at least 20 years before you have any lifetime allowance charge.

e.g. in year one, your crystallise £45,000. This uses up 45000/1030000= 4.37% of your LTA, leaving you with 95.64%.

In year two, lets say inflation is 5%.
You crystalise £45,000 x 1.05 = £47,250
The LTA is £1,030,000 x 1.05 = £1,081,500
So, you use another 47250/1081500 = 4.37% of your LTA, leaving you with 91.26%.

This carries on until you have used 100% of your LTA, at which point a tax charge happens, based on the amount you crystalise in excess of the LTA.

Note, there is also a test on your remaining pot at age 75, which is when you will most likely face the charge.

Mick70

Thanks Harry, looks like I have been working it out completely wrong on my spreadsheet !
I thought the tax hit me with immediate affect as soon as made the first annual withdrawl and then hit me year on year going forward.
so once you have used 100% of the LTA and this then triggers a tax charge how do i know what size tax charge to expect at that point ?

Albermarle

It is 55% if you take any money from your pensions over the LTA as a lump sum ,or 25% if you take it as income , but then you have to pay your normal rate of tax on top.

Due to the way the LTA works , this hit tends to come when you are older. Often at 75 when unused pension has to be counted . There are plenty of stories of people being blissfully unaware until it hits them.

Mick70

Albermarle wrote: »

It is 55% if you take any money from your pensions over the LTA as a lump sum ,or 25% if you take it as income , but then you have to pay your normal rate of tax on top.
Due to the way the LTA works , this hit tends to come when you are older. Often at 75 when unused pension has to be counted . There are plenty of stories of people being blissfully unaware until it hits them.

I still don't fully understand - the lumpsum is pretty straightforward as it is an immediate 55% tax, but if decide want an annual salary from pension , this additional 25% tax - is it an annual calculation that just snowballs until you are no longer above the LTA threshold, or age75, whichever comes first ? if so the tax bill then could be absolutely huge ? or am i still not grasping it

Triumph13

One problem with the way you are planning to go is that any above-inflation growth on your investments will get hit with the LTA. You will probably be better of crystallising the whole lot up front, paying your LTA charge and getting it out of the way.
Taking LTA as £1M to keep the sums easy, your £1.5M uncrystallised pot becomes:
£250k tax free lump sum
£125k paid to HMRC as LTA charge (25% of £500k)
£1.125M crystallised pot from which to draw down a taxable income.

This way any growth on the £1.125M is subject to income tax when you draw it, but not to any further LTA charge. You do have to draw it though as otherwise it will be hit by LTA charge at 75.

Mick70

Triumph13 wrote: »

One problem with the way you are planning to go is that any above-inflation growth on your investments will get hit with the LTA. You will probably be better of crystallising the whole lot up front, paying your LTA charge and getting it out of the way.
Taking LTA as £1M to keep the sums easy, your £1.5M uncrystallised pot becomes:
£250k tax free lump sum
£125k paid to HMRC as LTA charge (25% of £500k)
£1.125M crystallised pot from which to draw down a taxable income.

This way any growth on the £1.125M is subject to income tax when you draw it, but not to any further LTA charge. You do have to draw it though as otherwise it will be hit by LTA charge at 75.

If take an initial tax free lump sum is the LTA charge to hmrc not 55% rather than 25% ?

Triumph13

Mick70 wrote: »

If take an initial tax free lump sum is the LTA charge to hmrc not 55% rather than 25% ?

LTA only comes into play once you crystallise something over the LTA and only on the amount which is over the LTA.
In the above example you have £1m within the LTA and £500k over it. The £1m you can take as £250k TFLS and £750k into drawdown. The £500k you can either take as a further lump suum paying 55% tax, or as drawdown after paying 25% LTA charge then income tax when drawn.

Mick70

Thanks all, would love to see it all on a spreadsheet where you can change you pension pot amount on year 1 and the amount you wish to withdraw each year and see the LTA Tax effect, but this does make more sense now anyway.
Thanks for taking time out to comment, appreciated
Mick.

cfw1994

Triumph13 wrote: »

One problem with the way you are planning to go is that any above-inflation growth on your investments will get hit with the LTA. You will probably be better of crystallising the whole lot up front, paying your LTA charge and getting it out of the way.
Taking LTA as £1M to keep the sums easy, your £1.5M uncrystallised pot becomes:
£250k tax free lump sum
£125k paid to HMRC as LTA charge (25% of £500k)
£1.125M crystallised pot from which to draw down a taxable income.

This way any growth on the £1.125M is subject to income tax when you draw it, but not to any further LTA charge. You do have to draw it though as otherwise it will be hit by LTA charge at 75.

Triumph13 wrote: »

LTA only comes into play once you crystallise something over the LTA and only on the amount which is over the LTA.
In the above example you have £1m within the LTA and £500k over it. The £1m you can take as £250k TFLS and £750k into drawdown. The £500k you can either take as a further lump suum paying 55% tax, or as drawdown after paying 25% LTA charge then income tax when drawn.

Thanks for this explanation. That is useful!

I’m looking at numbers that suggest I may get close to the LTA within the next 1-3 years (I know, nice problem to have!), and have read some things that make it sound incredibly complex (for example, my first google came up with this from the man at the Pru!)

I am planning (hoping!!) to try to get future growth of the pot well above inflation: funds I chose in my Aviva scheme look to have averaged over 10% pa for the past 10 years, although I have moved some into gilts and bonds which will likely reduce that.
I think that you have clarified that taking your approach here means the LTA is swept aside, and future “improved” pot is just taxed at whatever rate one is paying as income (right?).

Obviously the future drawdown on OPs pot will then be taxed at a normal rate, but for the top ~33k of his £45k that would be 20%, which isn’t too painful I guess.

I am considering dramatically reducing my pension payments (which I ramped up a few years ago!) and stacking into ISAs for a couple of years (probs should have thought about this a year or two back!)....but then again, the pension gained from decent tax savings on the way in, so perhaps I should continue and fill it up!?

....this stuff gets complicated at the sharp end here :rotfl:

What if you wanted to buy an annuity with some of the “post BCE” drawdown pot: is that feasible/allowed?

anselld

cfw1994 wrote: »

.
I think that you have clarified that taking your approach here means the LTA is swept aside, and future “improved” pot is just taxed at whatever rate one is paying as income (right?).

If you crystallise the full LTA the next test will be at 75. If that pot is "improved" through growth which is not withdrawn it will be charged again. All remaining growth above the original crystallised pot will be subject to LTA charge.

So if you do succeed in 10% pa growth you will need to withdraw 100k+ pa in income to avoid a future LTA charge.