LTA Question specific to me

EdSwippet

nxdmsandkaskdjaqd wrote: »

How does that tax situation work when you exceed the LTA threshold? Is everything withdrawn taxed at 25%, irrespective of your personal allowance?

For lump-sum withdrawals above the LTA, tax is a flat 55%.

For income withdrawals (annuity, or drawdown) above the LTA, an initial 25% is taken in 'lifetime allowance tax charge', and then your normal marginal tax rate is applied to the remaining 75%. For a basic rate taxpayer, this comes out to 25% + 20% of 75%, so 40%. For a higher rate taxpayer, 25% + 40% of 75%, so 55%.

Reluctantpensioner

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So have just done a quick basic calculation. £500k compounded at 7% would be £1.15M. So could be in trouble

Yes, but the LTA is going to be inflated. It is now 1055K. So in 12 years, with similar inflation, will be 1055*1.025^12=1418K. So you would have no problem [as long as the fund remains uncrystallised]. You need growth-inflation to be 7% to have a problem.

But, you are right to keep this in mind: if you get near the limit (say 80%) you might consider something like: take 25% tax free and put the rest in drawdown (this crystallisation stops you taking future benefit of LTA inflation, so only do it if you have to). Then, each year you need to draw down any growth.

You haven't got any db pensions have you? They are added too.

nxdmsandkaskdjaqd

Reluctantpensioner wrote: »

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Yes, but the LTA is going to be inflated. It is now 1055K. So in 12 years, with similar inflation, will be 1055*1.025^12=1418K.

You haven't got any db pensions have you? They are added too.

Yes I realise now that I didn't include CPI of 2.5% on the LTA. So I have no worries of going over the LTA.

No DB pensions.

nxdmsandkaskdjaqd

Just a final thought on this.

If the pension owner dies before the age of 75 (pension crystallised or un-crystallised), and the pension is under the LTA limit at that time. The fund is then passed to spouse as a tax free lump sum. For the spouse there is no LTA restrictions going forward? Is my assumption correct?

caveman8006

Yes, I think so, although the pension fund can actually be left to anybody IHT-free in these circumstances and they in turn can take an income from it income-tax free.


NB, Bizarrely, if you have a crystalized pot at death before 75 then this does NOT count as a LTA test triggering event. So, if you were to use up 100% of your LTA to crystalize a £1,055,000 pension pot at aged 55 leaving the £791,250 drawdown pot to compound at 6%pa for the next 20 years without taking any taxable income along the way it would be worth £2,537,645 which could be passed on completely tax free if you died on the eve of your 75th birthday. But if you lived to the next day, your pot would be liable to 55% LTA penalty tax on the excess of £1,746,395 - ie. £960, 518 !!


So to avoid this, unless you were reasonably certain that you are not going to make 75, you would have to take all of the gross annual investment returns (averaging on these assumptions £47,475 pa) as taxable income, effectively using up your whole basic rate tax allowance.