LTA and NHS Pension

andyrpsmith

Hi All, I am due to retire with 40.41 years in the NHS 2008 scheme.

Trying to calculate my final reckonable pay is a mini nightmare as it is the average of the best three years over the last 10, revalued via a pension uplift table and taking into account increment date and leaving date - phew.

My question here is about LTA. I will be over this years LTA even after taking the minimum lump sum I have to take (as I transferred in from the 1995 scheme). I also have some AVC's I took out before joining the NHS they are worth as of today £35,080 and are sitting with Scottish Widows.

If I take the max lump sum I may come under the LTA by about £30K (difficult to know exactly due to the complex reckonable pay calculation). If I use the projected figures the NHS give based on 2017/2018 financial year they predict a pension of £51,669.84, + (min) lump sum of £95,309.94 based on 40.41 years service. Commutation is 12:1 so I calculate the reckonable pay used is £88,511 (51669.84 + 7942.50 (commutation to get min lump sum) x60/40.41}.

They predict a pension of £38,322.21 if I choose the max lump sum of 255,481.46
This would give capital value as 38322.21 x 20 + 255481.46 = 1,021,925.66 (£33,074 under this years LTA of 1,055,000)
If I have to take the AVC value £35080 it would take me over the LTA.
My question is if I do not take the AVC but hold it for 2020 (Scottish widows have say this may be possible) would the LTA be reset next year to give me a higher value? If my LTA is used up this year with just the nhs pension. Do I have any additional LTA next year as it will be increased above this year £1,055,000? I hope this makes sense what i am asking/

Thanks
Andy

menziesthefish

Short answer is 'no'.

The LTA is calculated on a percentage basis. So if you draw benefits equivalent to 100% (or more) of this year's LTA, even if the monetary value of the LTA increases next tax year, it will not provide you with any extra capacity to draw from your pensions as you will still have used 100% of your allowance.

Pension_Geek

You will pay higher rate tax on the AVC (except the 25% PCLS) regardless of when you take it. So you could UFPLS it.

If you don't take it first and use all of your relevant LTA, then you won't be able to take any PCLS. Therefore, you'd have to either take it as lump sum and pay LTA excess charge of 55% or take it as income and you'd pay LTA excess of 25%. However, if you do the latter, you'll pay higher rate tax.

If you really want to take the AVC and have the PCLS you's need to crystallise it first, but this would reduce the LTA you have for your NHS scheme. The NHS scheme does have a facility to pay the 25% LTA excess charge over a number of years, depending on your age.

andyrpsmith

Thank you both for the analysis. So I am fixed with the LTA value at the time of first crystallisation which will be 9 Dec 19. Did'nt know what UFPLS is so had to look it up. I don't mind not taking any PCLS from AVC as I won't need any more cash - the NHS scheme will provide all I would need and a good pension. Looks like the best option is to defer taking any part of the AVC until next year (It grows by about £1000 a year all on its own) and use the lump sum commutation to avoid LTA charge as much as possible especially as I do not know my final reckonable pay to do an accurate calculation. Having a sizeable cash sum allows me to leave it to my family if I die too soon (I do have raised blood pressure & type 2 diabetes - both well under control), it could boost my pension by £1000 a month for 20 years if I need it, I could get 3-4K/year interest on it. Also my £7K state pension kicks in 2020.

Pension_Geek

Should you die before age 75, the pension will be paid tax free to your beneficiary, but if you die after age 75, it will be at the recipients marginal rate. HOWEVER, if you die after age 75, there would be an age 75 BCE (benefit crystallisation event) and at that point there would be a LTA excess charge due.

zagfles

Pension_Geek wrote: »

Should you die before age 75, the pension will be paid tax free to your beneficiary, but if you die after age 75, it will be at the recipients marginal rate. HOWEVER, if you die after age 75, there would be an age 75 BCE (benefit crystallisation event) and at that point there would be a LTA excess charge due.

This applies to drawdown pensions. Scheme pensions paid to dependants are taxable as income whenever they're taken. So any dependants pension paid from the NHS scheme will be taxable on the recipient (but won't count for the LTA).

zagfles

andyrpsmith wrote: »

Thank you both for the analysis. So I am fixed with the LTA value at the time of first crystallisation which will be 9 Dec 19.

Not quite - you use a percentage of the LTA at the time of crystallisation. So if you use up 90% of the LTA this year, you have 10% left, and if the LTA increases next year, you could crystallise 10% of the new higher LTA next year without breaching it.

zagfles

Pension_Geek wrote: »

You will pay higher rate tax on the AVC (except the 25% PCLS) regardless of when you take it. So you could UFPLS it.

If you don't take it first and use all of your relevant LTA, then you won't be able to take any PCLS. Therefore, you'd have to either take it as lump sum and pay LTA excess charge of 55% or take it as income and you'd pay LTA excess of 25%. However, if you do the latter, you'll pay higher rate tax.

If you really want to take the AVC and have the PCLS you's need to crystallise it first, but this would reduce the LTA you have for your NHS scheme. The NHS scheme does have a facility to pay the 25% LTA excess charge over a number of years, depending on your age.

The OP has the option and seems to favouring the max TFLS option, which would not put him/her into higher rate tax on its own.

£38.3k pension plus £7k state pension still leaves £4k+ basic rate band spare (I'm assuming the OP isn't Scottish).

Also OP would only just breach the LTA even with the AVC.

So OP - if you take the £38.3k pension plus max TFLS, then you could transfer the AVC to somewhere allowing drawdown (assuming current arrangement doesn't), crystallise immediately taking the TFLS and pay a small LTA charge, and then drawdown £4k a year from the AVC to keep you in the basic rate band.

However this isn't necessarily the best option. The commutation rate is pretty bad, unless your life expectancy is low, it might actually be better to take the higher pension despite the additional tax for breaching the LTA, however it's a complicated equation that would depend on loads of factors, assumptions and guesses...similarly you could delay crystallisation and hope the LTA increases by more than the AVC grows...

Flugelhorn

Did you check whether you are eligible for IP2016 ?

andyrpsmith

Yes at the time the LTA was £1M I took out an IP for £1,017,000 max I could at the time. Next year the LTA went up to £1,030,000. Many thanks.

Flugelhorn

andyrpsmith wrote: »

Yes at the time the LTA was £1M I took out an IP for £1,017,000 max I could at the time. Next year the LTA went up to £1,030,000. Many thanks.

ah - so not a lot of help there bother

I have same problem with AVCs so interested in thread - still trying to decide what to do