Benefit Crystallisation event and LTA

Madeinireland

When you take a tax free lump sum from your pension I understand that the pension is measured against the lifetime allowance. I understand that principle but...

Is the designation of the fund into drawdown a separate event that causes a measurement against the LTA? and if so does it happen at the same time or can a number of years pass before it happens.

I have a DC pension that I would ideally like not to touch and would like to let it grow to let it be inherited for the benefit of my kids but just trying to understand how best to manage the tax on that. Also when you have a SIPP in this state is there a provider that does not charge on an ongoing annual basis for drawing down ah hoc amounts - perhaps with a charge on each occasion you decide to drawdown?

Thanks...

MK62

Hmmm.....not sure if this is what you are asking, but the amount you crystallise at the time is tested against your LTA....this amount includes up to 25% tax free cash with the remainder going into a drawdown account.

So, if you crystallise 400k, then that 400k is tested against your remaining LTA........after that, up to 100k can be taken as tax free cash, with the remainder, at least 300k, going into a drawdown account.

anselld

For DC taking the lump sum and designation to drawdown happen at the same time as a single BCE - 25% tax free cash and 75% to drawdown.

AFAIK all SIPPs charge an annual fee whether the fund is in drawdown or remains uncrystallised.

MK62

PS its similar for UFPLS lump sum withdrawals too.......the whole withdrawal is tested against your remaining LTA, and a fixed 25% of said withdrawal is tax free.

However, no drawdown account is created as there is nothing to put in it....the whole UFPLS withdrawal is taken by the member

EdSwippet

anselld wrote: »

For DC taking the lump sum and designation to drawdown happen at the same time as a single BCE - 25% tax free cash and 75% to drawdown.

This. Receiving the 25% PCLS is a consequence of moving the SIPP into drawdown.

However, and I suspect this is at the core of the OP's question, there is no need to actually draw any taxable income from the 75% of things moved into 'drawdown'. You can immediately defer this until needed, where it could (if useful) remain entirely unmolested by both you and the taxman until the second LTA test at age 75, or death.

anselld wrote: »

AFAIK all SIPPs charge an annual fee whether the fund is in drawdown or remains uncrystallised.

Yup. Most also increase their charges once you crystallise some or all of a SIPP, even where you are taking no regular taxable withdrawals. For example, Interactive Investor's annual SIPP fee doubles, from £120 to £240.

Madeinireland

Hi Ed,

But isn’t it possible to have a crystallised fund that is not in drawdown? I will have crystallised fund that ii said to me wouldn’t be in drawdown when I transferred it in - so I assume there charges would remain at £120 until I decide to go down the drawdown route - unless I have misinterpreted.

Thanks...

gm0

Not an advisor but here are my thoughts.

To look at the scenario of leaving it untouched there is a key calculation you need to do to understand the long term tax treatment as best you can on "today's rules" and whether LTA "matters to you".

What will the nominal value be of the fund at 55 (or your age to first take benefits if it's higher) - and 75 if you get the "expected" long term growth for your investment mix (be it bold or cautious) between now and then. 20+ years is long enough for long term averages to be a proxy but you are still guessing at the future and the inflationary environment.

Important note - this is all estimates of nominal (actual) cash value. Both real returns + inflation.

The LTA limit for the compare is (in theory) indexed to CPI but clearly the government of the day need to keep doing that vs cutting it even more than they have already. Some people have a "protected" individual/fixed protection amount based on registering and freezing contributions. These aren't indexed and will disappear when the other one eventually catches up.

Do the compare at both ages. If below/marginal at 75 for the additional 25%/55% charge this is not an issue.

If close at 55 and well over at 75 - locking in the crystallisation before it grows over *may* be best for you. All you then need to do is "draw" gains (paying marginal rate of income tax) so that the value stays below the limit for the 75 test. Read the other recent thread on TFLS/FAD and UFPLS to understand the difference. Spoiler - UFPLS doesn't work for funds close to the LTA upon retirement as the inflationary and real growth gains are likely to eat too much of the LTA leaving a larger penalty tax than taking TFLS + FAD route earlier.

The techniques available do allow crystallisation at your choice of timing so market volatility can in theory be used to "make best use" of the limit available by those with the timing flexibility to do so. Both the benefit of indexation of the LTA and market volatility. All this subject to managing investment mix, what is realised "in the dip" to payout the TFLS element or a whole UFPLS etc. You can spreadsheet it - there is portfolio impact on returns (to have bonds and cash available to extract vs selling equities low.

Bit hazy on this bit - so far as I am aware there is no route to just take the 25% tax free and leave an uncrystallised fund but a selection of techniques to take TFLS (once or progressively) and leave a crystallised one. You can of course take 25% of fund value (to LTA) as a UFPLS (and pay marginal income tax on 75% of it) and leave 75% funds uncrystallised but this won't be at all attractive for most but the option exists.

I am not an IHT expert but my understanding is this (Health warning applies)

1. The TFLS comes inside your estate when you take it. Consume, disperse, plan appropriately.

2. Age matters more than crystallisation now - age when you die affects the income tax paid by your nominated beneficiaries for the pension fund which is outside your estate.

Of course - your situation may be more complex and professional advice may be needed on the best approach or the admin. This is a corner case if you look at the statistics on the ONS site for private pensions. Be wary therefore of scheme and customer services admin.

The other thing to be aware of if you are still semi-retired and saving is that the rules are very specific on the clamp to permitted saving once you start drawing (MPAA). If the ability to carry on saving specifically in a pension wrapper matters to you then the range of things you can do is further constrained.

I've ignored taking 25% PCLS and lining up a deferred annuity purchase as this route seems at odds with your stated goals re potentially heritable fund

MK62

Madeinireland wrote: »

Hi Ed,

But isn’t it possible to have a crystallised fund that is not in drawdown? I will have crystallised fund that ii said to me wouldn’t be in drawdown when I transferred it in - so I assume there charges would remain at £120 until I decide to go down the drawdown route - unless I have misinterpreted.

Thanks...

If that is what they are telling you, I would get that in writing, just in case.

Their charge sheet doesn't specifically mention already crystallised pots which are transferred in, but it does say you will be charged the drawdown fee on funds "in drawdown" even if you take "nil" income.
"Funds in drawdown" is generally accepted to mean crystallised funds.....if they treat transferred in crystallized funds differently, then I would expect their charges sheet to say so tbh.

Madeinireland

Yes MK62 - I agree that their charges sheet says what you said. He did say this on the phone and that when I transfer it in, if I were to want to go into drawdown, I would have to complete a specific form so effectively wouldn’t go into drawdown until I did that - hence all my questions about whether this was a separate event in terms of LTA.

Actually if I take the tax free lump sum isn’t it the case that I could also elect to buy an annuity so I presume I can’t have automatically elected for drawdown?

This fund will effectively be transferred from a AVC fund that sits alongside a DB scheme so the tax free part would be already taken - this is just the residual amount that goes beyond the 25%.

As you say probably best to get it in writing.

Thanks...

Madeinireland

Thanks gm,

I had a look on the other thread which helps.

One further question for all - is there a BCE on death or is ok to go flat out after that? - Would the fund get hit with a further LTA test after?

Thanks...

david78

This is my understanding:

When you crystallise an amount (say £4000) and take 25% tax free cash (£1000) and move 75% (£3000) into drawdown, the transfers happen simultaneously but there are two Benefit Crystallisation Events:

BCE1 - moving money into drawdown (£3000 crystallised).
BCE6 - payment of tax free cash (£1000 crystallised).

Pension payments/withdrawals from the drawdown account are not BCEs and do not qualify for a further 25% tax free cash!

Another BCE occurs at age 75:

BCE5A - the value of the drawdown account (less an amount equal to the total value of all BCE1 events) is tested against the remaining life time allowance at that time.