Yet another LTA question

Peter314

Does a crystallised pot benefit from inflationary increases in LTA at age 75?

Say for ease of numbers that the current LTA is £1,000,000 and a pot of that value is fully crystallised, leaving £750,000 invested. If at age 75 the LTA has increased to £1.5M, to avoid an LTA charge the amount in the crystallised pot must be no more than:

a) £750,000

b) £1,125,000 or

c) something else..?

Albermarle

If the current LTA is £1m and you crystallise a pot of £1M then you have reached 100% of LTA already . So any growth in the investments between now and age 75 will take you over the LTA. By what % will depend on the growth and the LTA at the time.
The way to avoid this is to actually take some of the pension as income, which is the general idea of pensions of course.

shortseller09

c) £1.5 million

Albermarle

shortseller09 said:

c) £1.5 million

Are you sure about this ?
If your pot has grown by £0.5 M at age 75 since being crystallised   and the LTA was £1.5M , would this not give you an LTA liability of 33.33 % , which added to the original 100% means you are 133.33% of LTA.
To be honest I am not sure about this, so will await comment from an expert !

EdSwippet

shortseller09 said:

c) £1.5 million

No, it's a) £750,000.

On the numbers given, 100% of the LTA is used on crystallisation, to produce the £25k PCLS and the £750k drawdown element. This means there's no remaining LTA percentage available at age 75, so any increases in the LTA between crystallisation and then are irrelevant.

The amount tested for BCE5A at age 75 is the value of the drawdown element less the amount originally crystallised. To avoid an LTA penalty, you need to draw all the nominal growth from the drawdown element before age 75.

Malthusian

Replies #1 and #3 are correct and #2 is wrong. In the OP's scenario any increases in the LTA are irrelevant to you because you don't have any LTA to increase - you already used it all.

a) is the correct answer.

A crystallised pot can benefit from inflationary increases in the LTA, but only if there is still LTA left to use against the age 75 test.

shortseller09

It's tested at 75 against the LTA at that time, so as long as growth hasn't taken it above that level, there should be no charge.
Unless I'm mistaken...

coyrls

Say the crystallised pot was 50% of the LTA of £1M and at 75 the LTA was £1.5M.  You now have 50% of £1.5M, i.e £0.75M of unused LTA and therefore your allowance for growth at 75 would be £0.75M.

EdSwippet

shortseller09 said:

It's tested at 75 against the LTA at that time, so as long as growth hasn't taken it above that level, there should be no charge.
Unless I'm mistaken...

The growth in the crystallised element is indeed tested against the LTA at that time, but only to the extent of the remaining unused LTA percentage you have. In the example given in the initial post, the unused LTA percentage after crystallising is 0%. And 0% of any level of LTA is £0.

shortseller09

EdSwippet said:

shortseller09 said:

It's tested at 75 against the LTA at that time, so as long as growth hasn't taken it above that level, there should be no charge.
Unless I'm mistaken...

The growth in the crystallised element is indeed tested against the LTA at that time, but only to the extent of the remaining unused LTA percentage you have. In the example given in the initial post, the unused LTA percentage after crystallising is 0%. And 0% of any level of LTA is £0.

I'm not sure I follow Ed. If you have used up 100% of your LTA by the time you reach 75, any growth in crystallised or uncrystallised funds above the LTA at that point will be liable to the LTA charge. So in the example, as long as the pot remains below £1.5 million, there would be no charge.

ffacoffipawb

shortseller09 said:

EdSwippet said:

shortseller09 said:

It's tested at 75 against the LTA at that time, so as long as growth hasn't taken it above that level, there should be no charge.
Unless I'm mistaken...

The growth in the crystallised element is indeed tested against the LTA at that time, but only to the extent of the remaining unused LTA percentage you have. In the example given in the initial post, the unused LTA percentage after crystallising is 0%. And 0% of any level of LTA is £0.

I'm not sure I follow Ed. If you have used up 100% of your LTA by the time you reach 75, any growth in crystallised or uncrystallised funds above the LTA at that point will be liable to the LTA charge. So in the example, as long as the pot remains below £1.5 million, there would be no charge.

No, it is £0.75M as stated above. Anything more than that is subject to the LTA tax.