Lifetime allowance

UncleZen

Can someone explain to me the lifetime allowance?

I understand that the figure is £1,055,000 for tax years 2019/20

So lets keep the figures nice and round, and call it £1m, and lets say that the value of my pension is £250k does that make it 25% of the lifetime allowance? And if I have 2 pensions at £250k and £100k, thats 35% of the allowance?

And that if all my pensions are > than £1m I get to pay more tax when I take them?
Im not clear on all this

Thanks

gm0

You have the essential point. HMRC site has guidance but it is more than a bit arcane at first reading.

This is indeed a (low) limit to pension saving of a fund cash value (low as a maximum in the sense of what annuity this limit would now buy) and yet still quite huge vs distribution of actual DC funds out there (ONS data).

£1m limit is indeed across all of your pensions not for each one.
Don't count ISAs, cash savings, unwrapped investment shares etc. towards the total. It's pensions specific (at the moment - though beady eyes in the treasury have "simplification" of long term tax sheltered saving in their sights)

Final salary funds are calculated across to an equivalent value.
Cash funds are the simply the values at the time the LTA is tested as per your example.

When you choose to start to take your pension >55 (or whatever it is by then) - there are a series of events which consume your "£1m" allowance (actual value at the time likely indexed at CPI though the goverment may take indexation holidays as is their wont for fiscal drag on tax generally).

The events which cause the remaining LTA to be "tested" - are called BCE in the jargon)
When you read up on this it will introduce the term "crystallisation" - "benefit crystallisation event" this means starting to take benefits by earmarking part of a fund for drawdown in most cases).

If your funds and allowance are not exhausted by 75 then it is tested again.

Cash value left at 75

DANGER WILL ROBINSON - there are 20 years of inflation and real investment return to add to the retirement cash value.

Your LTA limit is in theory indexed at CPI - might be enough to offset the inflation - might not be - see RPI/CPI controversy)

So to determine if you have LTA tax issues ultimately you need to project forward inflation and investment returns and your planned extraction profile to age 75 to estimate value at the last test.

Should you go over LTA pre or at 75 there is a 25% penalty tax before income tax (this is a political clawback because you are deemed to have had retrospectively "too much" tax relief on the way in - or rather less agreeably you invested wisely at your risk or lived at a time with a lot of inflation.
25% is the penalty for taking pension income. Lump sum is hit with 55% (again pre income tax).

Forum advice seems to be if you are lucky/prudent enough to have got close pre retirement then you need to get crystallised before it grows far past the limit and take enough out 55-75 so that the government gets nothing with its retrospective taxation change. Certainly you would look to use tax free cash and your 20 years of income tax allowance and basic rate band and not draw "lumpy and late" (paying a load more tax than needed).

If you are far from retirement this will change 6 more times before then.

There are policy reasons for most of the rules to stop plutocrats pumping pensions and skipping a load of income tax, investment gains, IHT and then shoving the benefits into family trusts etc. But as with any finely targeted spiteful too clever for its own good design it catches some of the right people and some of the wrong ones. e.g. The NHS senior doctor early retirement fiasco is tied in with this and the reduced annual allowances for saving.

UncleZen

OK, thanks for your answer. The main reason I ask this question is because I got a quote from the company that runs a FS DB pension for a former job. It said that the %age of the LTA was 64%.
That got me wondering if my other pension investments pushed that up to near 100%.
So I phoned aviva where I have 2 small pensions; 1 was quoted as < 1% of LTA and the other I didnt get an answer to, because I had to dial again and wait 15mins on the phone, but my guess would be <2% of LTA as it was 2x the value of the first one.
Then I phone SW where I have a DC pot of about 270K they said the % of LTA was zero as Im "not taking the pension" - so now I'm all confused (im not taking any pension ATM).

gm0

Complexity.

Sorry - consumer not IFA and not familiar with DB (not applicable to me) not sure on conventions of % LTA quotes for DB.

However you can have a go to work this out for yourself roughly and/or go the IFA route if its helpful to optimise remaining saving/drawing sequence.

From my experience most providers of DC funds won't be giving you anything that useful on % of LTA just a fund value (now) or the rather useless regulated pension projection. Fund value is what you need.

Based on how much is "used up by DB" - you can look at current fund values of the others, what (if anything) you plan to save into DC from now to retirement, inflation inclusive investment return on the DC funds to 55 (or date you choose) and then to 75 (with the planned draw alongside). This will tell you if you have more than 36% LTA at retirement and whether you will be hit later by the growth based on DC draw or untouched and lived off the DB.

Sequencing taking the right ones in the correct order is a topic all of its own. Can't do it without working out your other income position in retirement and your family and IHT situation, death benefits on the DB etc. etc.

But the "Is it a problem question ?" i.e. Do I need help sorting this calculation is a relatively simple projection (use your choice of inflation say 2-3% and a long term equity return - such as 5-6% on the DC funds and compare them with the cpi indexed £1m pro-rated down to the 36% left. Good enough to determine if you need to look at it more carefully in developing an overall financial plan.

Hope this helps

TcpnT

I'm not sure whether the figure from the DB admnistrator would be using the current value of your deferred DB pension or a projection to retirement age (You don't state your proximity to retirement). It doesn't really matter which as it won't make a huge difference to the overall calculation. The contribution of a DB pension to LTA is commonly 20x the accrued annual pension so it sounds like you have a deferred DB pension of around 33K per year. The 64% needs to be added to the percentage LTA value of any DC pensions to arrive at your current total LTA percentage.

Bear in mind though that the the LTA penalty tax of 25% on income or 55% on lump sums only applies to the amount above the current LTA value and even then only when those sums are crystallised in a BCE as mentioned above. There is never any penalty on any amount below the LTA allowance.

EdSwippet

UncleZen wrote: »

... I got a quote from the company that runs a FS DB pension for a former job. It said that the %age of the LTA was 64%.

For LTA purposes, DB pensions are generally valued at 20x annual payout (modulo some fiddling about with commencement lump sums). This 64% infers you might receive £33,760 or so annually from that, less if you take a tax free lump sum from it first. Sound about right?

UncleZen wrote: »

That got me wondering if my other pension investments pushed that up to near 100%. So I phoned aviva where I have 2 small pensions; 1 was quoted as < 1% of LTA and the other I didnt get an answer to, because I had to dial again and wait 15mins on the phone, but my guess would be <2% of LTA as it was 2x the value of the first one.

If these are DC pensions, what are their current values (balances)? The answers you received suggest minimal, under £10k say, but do check. If you do have small pensions, under £10k, and it looks like you are going to run into LTA problems, investigate the 'small pots' withdrawal rules.

UncleZen wrote: »

Then I phone SW where I have a DC pot of about 270K they said the % of LTA was zero as Im "not taking the pension" - so now I'm all confused (im not taking any pension ATM).

SW are telling you here what proportion of the LTA you have used up. You only use it up when you crystallise a DC pension and take the 25% tax free lump sum. So 0% used, then.

However, if you were to crystallise it today, say, it would use 25.59% of your LTA (assuming you have the standard £1055k). Add to the 64% from your DB pension -- ignoring the tiny(?) pensions you mentioned above -- and you're now at 89.59%. Call that 90%, then. Perhaps 93% with the tiny pensions added in too.

That's close enough to want to pay attention here. How old are you (over or under age 55) and are you still contributing to pensions? If you project your current DC pensions forwards at (say 4%) real growth, adding in new annual contributions if applicable, you should get an idea of whether or not you're likely to run into LTA problems.

This whole area is ridiculously complicated, far more so than is warranted, so don't worry about not getting it right away. It took me ages to wrap my head around it.

UncleZen

Currently aged 58, intending to retire at 62, possibly earlier, contributing to the SW pension and current workplace pension, just started, so it'll be peanuts so far.

The DB income at 62 is just under 30K with no lump sum, and as an aside there is a £100k AVC that I could take an annuity from (they dont mention drawdown).

The 2 DC pensions are minimal, one is about 8k, the other about 15k

DairyQueen

It looks like you are not at risk of breaching the LTA unless your pension contributions between now and your chosen retirement age (62 - first crystallisation event), plus investment growth, exceed the current LTA plus inflation.

On the information provided, and assuming inflation/investment growth both at annual 3%:

DB value for LTA purposes at age 62 = £30k x 20 = £600k
AVC = £100k plus 3% growth x 4 years = £112,550
DCs = £23k plus 3% growth x 4 years = £25,887

Total = £728,437 at age 62

LTA at age 62 (assume 3% annual inflation on current £1,055,000 allowance) = £1,187,400.

Plenty of wriggle room there.

shinytop

Doesn't OP also have a £270k SW pension? If so that would make the LTA question more 'interesting'.

DairyQueen

shinytop wrote: »

Doesn't OP also have a £270k SW pension? If so that would make the LTA question more 'interesting'.

I just reviewed posts and, yep, you are right, that would push the total closer to the LTA,

Even so...

£270k at 3% growth over 4 years = an additional £303,887.

At around £1,042,324 total that's still well under the (projected) LTA of £1,187,400. Having said that, in the OP's position I would be watching investment growth and inflation.

OP would also need to be careful about investment growth from ages 62 thru 75. May be worth crystallising sooner, taking max TFC, and/or drawing down up to 20% income tax limit in retirement to be on the safe side.

My OH took LTA protection in 2016 and needed to crystallise his non-DB this year in order to provide some headroom before age 75.

GunJack

Or, take DB and max lump sum from AVC, take max TFLS from the combined DC pots (why not combine them into one pot to make it easier?), and draw down enough per year to give income of £50k p.a. to really live it up? Who cares about a small amount of income at 40% tax, especially if it gives you a more comfortable & fun retirement AND avoids any LTA charges??

Or, do similar to the above (with some fiddling around on the drawdown amounts) but retire before 62 - think if I was in the OP's position work probably wouldn't see me for dust as soon as the DCs were combined and the tfls was in the bank

It's one thing I just don't get with some people, is the "avoid any/40% tax at any cost" attitude...if you're having to pay a bit of 40%, it also means you've got more in your pocket to party