Exceeded LTA no point crystallising the rest?

garmeg

If one has exceeded the LTA by crystallising that much pension then there is no point crystallising any more (and paying an LTA charge) unless you actually need the money is there?

If LTA charge is 25% we can see that future crystallised amounts net of LTA charge don't depend on when you crystallise

(0.75 x Funds) x Growth = (Funds x Growth) x 0.75

This is assuming the investment medium and LTA charge percentage are unchanged.

There is always the hope that LTA may be abolished (minuscule) so one reason for not crystallising I guess. Thoughts on my logic anyone?

shinytop

That's how I understood it but doesn't crystallising early allow some of the growth be moved outside the pension wrapper and therefore not be part of the age 75 BCE?  Of course, there may be other tax implications of doing this and growth might not be positive.   

garmeg

shinytop said:

That's how I understood it but doesn't crystallising early allow some of the growth be moved outside the pension wrapper and therefore not be part of the age 75 BCE?  Of course, there may be other tax implications of doing this and growth might not be positive.   

I was more looking like the funds staying in the pension until 75 anyway, crystallised or uncrystallised. I don't think it makes any difference to the value at 75 whether you crystallise now or wait until 75?

I don't know.

bowlhead99

garmeg said:

shinytop said:

That's how I understood it but doesn't crystallising early allow some of the growth be moved outside the pension wrapper and therefore not be part of the age 75 BCE?  Of course, there may be other tax implications of doing this and growth might not be positive.   

I was more looking like the funds staying in the pension until 75 anyway, crystallised or uncrystallised. I don't think it makes any difference to the value at 75 whether you crystallise now or wait until 75?

I don't know.

If you crystallise now you would be presumably crystallising at a lower value than if you crystallised at 75, but it stands to reason that paying 25% now and watching the rest double is functionally the same as having it all double and paying 25% on the bigger number.

If the 25% changes to some other figure in future of course, all bets are off. And the OP premise is that you have already used up 100% of the LTA so them increasing the allowable amount of it at some point later may not be useful unless they abolish the concept altogether -depends what they do with the rules.

If you ultimately plan to remove the money from the pension (rather than let someone else inherit it inside a pension post-75 when you pop your clogs), it can be worth considering doing that sooner rather than later just from the perspective of utilising tax brackets and allowances out in the 'outside the pension' world.

For example, if you take £50k out now then you're suffering the LTA charge early, but what's left over might fit into your ISA allowance between now and early April to continue being invested in the same sort of assets with no further tax worries, and the amount being taxed as income now may still be in the 'normal' higher rate tax bracket.

However if you leave it a couple of decades growing at an arbitrary 7% compound, you have £193k. While that might suffer the same standard 'LTA charge' as a percentage as the £50k does today, taking that amount of money all at once is the sort of thing that might push you into additional rate tax in the year of receipt (45% instead of 40%) or have your personal allowance restricted due to getting over £100k total income in a year (60% marginal rate instead of 40%)? And fitting the net of a £50k pension withdrawal into a couple of years' ISA subscription allowance is do-able for some, but doing it with the net of a much bigger £193k is not -unless they quadruple the allowances over the period in which your pension is growing.

That won't be relevant for some (e.g. if the plan is to just get to 75, pay the LTA, and later let someone inherit it into their own pension and extract it at low rates as part of their own retirement planning).

I'll caveat the above with the comment that I'm not close to LTA myself so not fully researched all possible consequences

caveman8006

Surely you are much better off crystallising at start and taking out investment growth as taxable income each year?
Eg. Assuming LTA is round £1m for simplicity, and you have pot of £1.1m at age 55. If you crystallise £1m and use up full LTA at start you leave £750k in drawdown and £100k uncrystallised. If you achieve nominal growth of 5% pa, and do nothing, then at 75 you would have drawdown pot of £1.99m and uncrystallised pot of £265k. LTA tax of (£1.99m-£750k)*0.55 +£265*0.55 = £827,750. (NB you would not be taxed at 25% as the amount would far exceed higher rate tax band, so would attract higher rate income tax on top).
Alternative 1: as above draw all investment growth from drawdown pot  (£750k*0.05 = £37,500 pa) and pay c £5,000 pa tax (£100,000 over 20 years). Still pay 55% of £265k uncrystallised pot so total tax £245,750.
Alternative 2: Crystallise whole pot at 55 paying £25k LTA charge and putting £825k into drawdown. Pay tax on annual investment growth of £41,250 (about £5,750 pa or £115,000 over 20 years)  so £140k in total and nothing further to pay at 75.
Of course, the £35,500 post tax annual withdrawal might exceed one person's ISA allowance, so could be difficult to achieve same tax-free investment growth on that part of wealth, and there might be IHT to pay on that portion at death after 75...

garmeg

caveman8006 said:

Surely you are much better off crystallising at start and taking out investment growth as taxable income each year?
Eg. Assuming LTA is round £1m for simplicity, and you have pot of £1.1m at age 55. If you crystallise £1m and use up full LTA at start you leave £750k in drawdown and £100k uncrystallised. If you achieve nominal growth of 5% pa, and do nothing, then at 75 you would have drawdown pot of £1.99m and uncrystallised pot of £265k. LTA tax of (£1.99m-£750k)*0.55 +£265*0.55 = £827,750. (NB you would not be taxed at 25% as the amount would far exceed higher rate tax band, so would attract higher rate income tax on top).
Alternative 1: as above draw all investment growth from drawdown pot  (£750k*0.05 = £37,500 pa) and pay c £5,000 pa tax (£100,000 over 20 years). Still pay 55% of £265k uncrystallised pot so total tax £245,750.
Alternative 2: Crystallise whole pot at 55 paying £25k LTA charge and putting £825k into drawdown. Pay tax on annual investment growth of £41,250 (about £5,750 pa or £115,000 over 20 years)  so £140k in total and nothing further to pay at 75.
Of course, the £35,500 post tax annual withdrawal might exceed one person's ISA allowance, so could be difficult to achieve same tax-free investment growth on that part of wealth, and there might be IHT to pay on that portion at death after 75...

I was planning on using the crystallised pot as intended ie draw an income such that the value at age 75 is no greater than when crystallised so no LTA Tax is due on that.

It was the uncrystallised funds in excess of LTA I was trying to look at. I guess this is your second example. Probably no point waiting in the hope the LTA is abolished.

arnoldy

If you are over the LTA it strikes me as sensible to ensure you face only one LTA charge - at 75. 
I'd only take yearly lump sums from retirement to 75 (and 25% would be tax free). 
At 75 assess the whole thing for LTA, and pay an LTA once and once only. In the meantime all your funds are in a tax shelter and you can hope they abolish LTA. 

Chickereeeee

A related question, I wonder if someone could clarify for me.
Say I crystallise my pension pot early (e.g. at 65) and use up my entire LTA.  At 75, there is another LTA calculation. Assume all real growth has been drawn down, but inflation has ticked up considerably. Even though LTA would have risen by CPI, as 100% of LTA has been used, that would be of no benefit, and any growth due to inflation would then be taxed for being in excess of LTA. Is that correct?
Whereas, if only 80% of LTA is used at 65, then the 'unused' 20% would have risen with CPI by 75.

EdSwippet

Chickereeeee said:

Say I crystallise my pension pot early (e.g. at 65) and use up my entire LTA.  At 75, there is another LTA calculation. Assume all real growth has been drawn down, but inflation has ticked up considerably. Even though LTA would have risen by CPI, as 100% of LTA has been used, that would be of no benefit, and any growth due to inflation would then be taxed for being in excess of LTA. Is that correct?

Yes.

Albermarle

EdSwippet said:

Chickereeeee said:

Say I crystallise my pension pot early (e.g. at 65) and use up my entire LTA.  At 75, there is another LTA calculation. Assume all real growth has been drawn down, but inflation has ticked up considerably. Even though LTA would have risen by CPI, as 100% of LTA has been used, that would be of no benefit, and any growth due to inflation would then be taxed for being in excess of LTA. Is that correct?

Yes.

So in this case , you ideally need to withdraw everything as income over and above what was originally crystallised.

Chickereeeee

So if you have an income portfolio that delivers healthy dividends, but only grows at about inflation rate, you could be hit by an LTA charge, purely depending on if inflation is high or low over the period.
Seems harsh.