A Basic question about LTA...

MarcoRolo

But you only get taxed extra on the amount over the LTA, correct? So any growth over that amount is still worth having, you just can’t count on being able to keep as much of it!

GDB2222

MarcoRolo wrote: »

But you only get taxed extra on the amount over the LTA, correct? So any growth over that amount is still worth having, you just can’t count on being able to keep as much of it!

If you draw growth over the LTA out as income immediately, you pay income tax on it. If you let it accumulate, you pay the 25% LTA tax charge, and then you pay income tax on the balance.

lisyloo

MarcoRolo wrote: »

But you only get taxed extra on the amount over the LTA, correct? So any growth over that amount is still worth having, you just can’t count on being able to keep as much of it!

In a previous discussion I’ve been told it would be better to increase drawdown and pay 40% income tax and avoid the LTA charge I.e. post #11

DairyQueen

squirrelpie wrote: »

Sorry, so if there was £999,970 in the account then the best policy would be to crystallize it all immediately and stop worrying? Or have I missed something? (I'm not in the OP's hypothetical position, so I haven't investigated the ramifications, but on the basis of what's been said so far it seems quite simple).

Except that all investment growth on the crystallised pot (above the LTA at the prevailing limit) would need to be withdrawn by age 75.

There is an automatic BCE at age 75. If you manage to reach 75 with LTA un-breached then you are 'safe' from HMRC for the rest of your life. If you die before age 75 then a BCE takes place and tax is due on the value that exceeds the prevailing LTA.

Example:
Age 60 (LTA = £1M). Crystallise £100k DC scheme (take 25k TFC). Uses 10% of LTA.
Age 62 (LTA = £1.05M). Crystallise £400k SIPP (take £100k TFC). Uses 38% of LTA. Total LTA used to date= 48%.
Age 65 (LTA = £1.15M). Crystallise £26Kp.a. DB scheme (no TFC taken). Uses 45% of LTA. Total LTA used to date = 93%.

This assumes that the sums left invested in the DC/SIPP drawdown accounts do not exceed their crystallised value at each BCE (i.e. they are below 75k and £300k respectively in this example). At each BCE, investment gains will be added to the uncrystallised amount and tested against the unused LTA percentage.

At Age 75 (and assuming LTA = £1.25M, and assuming the DC/SIPP were valued less than £75k and £300k at each intervening BCE) the total value of the DC/SIPP must not have increased by more than 7% (i.e. the unused percentage of the LTA) of the then prevailing LTA (i.e £87500 in this example). If the DC/SIPP were still valued at £375k at age 65, but then remained untouched until age 75, chances are the value would have increased by more than 23% in a decade, and that is all that would be needed to breach an LTA of £1.25M.

Sorry if this sounds convoluted but, as with all things pensions, nothing is ever simple.

caveman8006

Note, though, that there is no account taken of additional returns on crystalized pots if you die before the Age 75 BCE. So, if you crystalize your full LTA (let's say £1m for simplicity) at age 55, take the £250,000 tax free lump sum and leave the balance of £750,000 in a drawdown account compounding at 5% pa, then die on the eve of your 75th birthday having taken no taxable income, then your designated beneficiaries could inherit £1.99m without any tax to pay. But, if you live one more day, then the full £1.249m investment gains would be subject to a 55% LTA tax!!