Will the second LTA test even be there in 17 years time??

John467

There is some good information being shared on this forum, so although this question is impossible to answer, I am interested if anyone has any better information than I do.


Most people think the LTA second test at 75 yrs is highly flawed (pay in at 20% tax relief when young, and potentially end up with 55% tax charge later in life being the most extreme possibility), but no matter what we think, it effects peoples decisions right now. (17 yrs in advance in my case).


So will it even exist when we get there?


The specific details of my case are less important, but in case it helps as an example:- I am 58yrs and having to make decisions now, based on current rules. That is fine, the rules are there and can be studied for a decision today. However making decisions on something in 17 yrs time is way more difficult, not because the rules are unclear, just that they may not even exist when I get there.


If the test at 75yrs no longer existed then, I would now transfer out about 50%/70% of my DB scheme and put it into draw down, then take the rest as annual payments. (Using up exactly 100% of my LTA). If the test at 75yrs is still there in 17yrs time, my action would be significantly different and I would be taking the DB scheme + some PCLS cash. That would be less efficient but would avoid a heavy tax hit at 75yrs, Of course default is to act on the current rules, but that would cost me dearly if the second LTA test is scrapped later on.


So a huge difference in my decision !!


So my situation is not important to the question itself, but what do you think? Will the second LTA test even be there in 17yrs?

Albermarle

In my opinion will probably still be there , although it might shift to an older age ( 80?)
One distinct possibility is that a future left leaning government might even reduce it , or more likely stop increasing it with inflation. The LTA only affects a small minority so a change could easily be slipped in under the radar, unlike say removing the 25% tax free lump sum.

Pension_Geek

As you say, no one really knows. One would have to question the wisdom of making massive financial decisions based on predictions you get from people on a forum.

John467

Thanks for the quick replies.


I tend to agree when you say:-

Pension_Geek wrote: »

One would have to question the wisdom of making massive financial decisions based on predictions you get from people on a forum.

But unfortunately I have to make a massive financial decision one way or the other. I have unofficial opinions from two different IFA's, one said it will be there, another said unlikely and all LTA's could be scrapped before we get there anyway.


At this point any opinion is valid, as long as it is only taken as an opinion no more (unless the pensions minister happens to hang out on this forum of course)

coyrls

John467 wrote: »

I would now transfer out about 50%/70% of my DB scheme and put it into draw down, then take the rest as annual payments. (Using up exactly 100% of my LTA).

Is a partial transfer out of your DB scheme even an option? I don't think it's commonly offered.

Triumph13

Scrapping the LTA is a difficult thing to do politically as it is so easy to paint as 'helping the rich'. Against that is the damage to the economy in general, and the health service especially, caused by people retiring / reducing work to avoid it. In today's adversarial attitude any opposition will be more interested in bashing the government over the former than supporting it over the latter.

As to the test at 75, I think the best we can probably hope for is some indexation for crystallised funds as the current situation where unused LTA is indexed, but the measure for crystallised funds isn't will be a complete nightmare if we get moderate to high inflation.

MK62

My opinion is that it the LTA test at 75 will still be there.....but really, who knows??


I have to ask though, why do you fear a heavy LTA charge hit at 75, if you have not exceeded your LTA at 58?

John467

Thanks for the replies, just to answer the question:-


Why do I fear a high LTA charge hit at 75, if not exceeded your LTA at 58? Well that is as I have Fixed Protection 2014 which does not adjust with inflation, so unfortunately without an increase of any sort it will still be at the same level as today,and probably wont be overtaken by the current LTA levels by then, even though they increase with CPI.


Is a partial transfer out of your DB scheme even an option? Yes I am quite lucky in that it is. Quite rare but very useful.


Triumph13 I think you are spot on when you say: ''I think the best we can probably hope for is some indexation for crystallised funds as the current situation where unused LTA is indexed, but the measure for crystallised funds isn't will be a complete nightmare if we get moderate to high inflation''
In my case that is my problem now as FP14 (or any other fixed protection) is not indexed linked, so having reduced the LTA those who had already paid in enough to breech it on retirement were silenced by the offer of protection for the contributions they had already made.
What was less well publicised is that essentially 'kicked the can down the road' as no adjustment for inflation would ever be made, hence when those people reach 75yrs, many will be hit with huge tax bills. Essentially the goal posts were moved, but the impact delayed.

Triumph13

It doesn't just hit people with fixed protection, it's anyone who reaches the LTA. In my own case I'll probably be slightly over LTA at 55 when I crystallise, take 25% of my DC funds as TFLS and put the rest into drawdown. As I will have no remaining LTA the indexation of LTA won't affect me. At 75 they will compare what I still have in drawdown to the nominal value 20 years earlier and take 25% of any excess as LTA charge. If inflation is low then I should be able to get all growth out without paying HRT. If it's high then I'm stuffed.

And I realise that most people would think breaching the LTA is a very nice problem to have - which is why I think doing anything about it would be difficult politically. The fact is though that any tax they get off me through the LTA will probably be less than the tax I would have paid if I'd kept working longer - which I would have been much more likely to do if the LTA hadn't been there.

ex-pat_scot

Triumph13 wrote: »

And I realise that most people would think breaching the LTA is a very nice problem to have - which is why I think doing anything about it would be difficult politically. The fact is though that any tax they get off me through the LTA will probably be less than the tax I would have paid if I'd kept working longer - which I would have been much more likely to do if the LTA hadn't been there.

I might, with a bit of a following breeze, be there by 55 or at least within touching distance.

I am sure that in 25 years' time, the rules will be markedly different for AA, LTA, FP etc. However I see a chill wind blowing on anyone with assets now, and in the medium term future. If it's like this under a Con govt then Lord knows what it will be like in 4 years' time or whenever the other lot get in.

It will significantly change my behaviour in the run up to 55 and / or LTA, to the detriment overall of the HMRC tax take. Sadly I do not work in a sector where I can plead "public good" like the poor doctors battling LTA and AA edge cases. (they aren't getting anywhere, in spite of concerted BMA lobbying, so frankly i doubt anyone else is going to manage it).

It's nuts. A bit like the Laffer curve effect on overall tax take when reducing top rate from 50% to 45%, but since when has ever tax policy been logical or sensible (or fair)?

jamesd

The age 75 test is in two relevant parts:

1. any uncrystallised benefits
2. increase in pot value

You avoid an increase in pot value by taking money out.

If desirable it's possible to use VCT buying to offset the income tax cost of the drawing.

This suggests to me that since you're crystallising it all with 100% LTA use you can avoid issues at 75.

The LTA is set on an implicit assumption that those affected can be thought of as rich. I don't expect it to go away.