Yet another LTA question

coyrls

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.

If you have used 100% of the LTA then you have no unused LTA at 75 and therefore the value of the LTA at 75 is irrelevant.

zagfles

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.

If you have used up 100% of the LTA, then there's no LTA left, so the value of the LTA is irrelavent! I think you have a fundamental misunderstanding of the way the LTA works. At every BCE you use up a % of the LTA. The % is determined by the LTA at the time of the BCE. But once 100% is used, you have none left.

BCE5A applies to the growth of crystallised funds, so you can avoid it by making sure your crystallised funds at 75 are below what they were when you crystallised them. Any uncrystallised funds are tested in full under BCE5B at 75.

shortseller09

I stand corrected, apologies. 

shortseller09

If at 75 I have already used 100% LTA (80% drawdown, 20% db) I presume it is just the growth in the drawdown fund I need to keep below the crystallisation level to avoid the charge i.e. the db pension is irrelevant?

Peter314

coyrls said:

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.

If you have used 100% of the LTA then you have no unused LTA at 75 and therefore the value of the LTA at 75 is irrelevant.

Thanks for all replies. This seems to summarise things nicely, though not what I was hoping for 🙂

gm0

Protection is the only remaining subtlety not mentioned.

Protected LTAs (e.g. FP20xx, IP20xx) from the transitional relief certificates where you freeze your contributions - are not indexed like the standard one.  This is deliberate so that the transitional relief for fiddling with the value goes away after ~20-25 years.  But the value used for both tests is based on the "personal LTA" for that type of protection certificate (until it is overtaken by the standard one being indexed - 20-25 years out)

So as an example for a £1.5m fund held in FP2014 (conveniently this is also a 1.5m limit) - LTA charge still  = 0 when 100% is used up (whether all at once or in chunks (UFPLS or phased FAD) to this value - clearly growth over time is likely to generate a penalty taxed excess in this case but let's keep it simple and do it all up front when that hasn't happened yet. 

Here is the catch/opportunity - if you let it grow uncrystallised too long then there will be LTA charges on the excess over the LTA at crystallisation @ 25% taken as income, 55% as capital at or before 75 with the backstop test (bad). But if you crystallise before it grows ahead of need you dump up to 25% LTA out of the IHT shielded wrapper (also bad - don't die before you spend it).

On top of that as has been said the cash value ALSO needs to be kept below the line for the 2nd test with drawdown income. 
This involves care in income planning so that the SA basic rate income tax band is not wasted between age 55 and 75 to keep as much of the fund growth out of the penalty net as possible.  A simple spreadsheet with 20 year returns for equities and inflation will illustrate the difficulty.

This drives people approaching or just over LTA (whichever protected/unprotected one it is) to consider a "crystallise" the lot strategy - yes - even though this moves 25% out of the IHT protected wrapper into unwrapped investments when a PCLS is taken.  Likely with a view to ISA recycling at 40k/year (with a spouse). 

Growth in ISA is of course - untaxed for income and there is no concept of LTA in that wrapper.  This takes a while in my example here with 325k to rewrap at 40k/year.  Clearly other required capital + income / consumption plans and any gifting - charitable and heirs (PET) can also be used to deal with it more quickly and reduce the early death IHT overhang.  Depends on you and what you need and want to do. 

Or a phased approach can be used with a few chunks in the first decade or so of retirement.   Somebody has to buy the apochryphal journalistic lamborghini with their pension freedoms. (It won't be me)

zagfles

shortseller09 said:

If at 75 I have already used 100% LTA (80% drawdown, 20% db) I presume it is just the growth in the drawdown fund I need to keep below the crystallisation level to avoid the charge i.e. the db pension is irrelevant?

Yes, except there's BCE3 which can occur if a DB scheme in payment is increased beyond a permitted margin, though I think it's pretty rare. https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088630