Lifetime Allowance Crystallisation When DC and DB Pension Utilised Several Years Apart?

Barbados7

Retiring at age 55 with DC pot of circa. 80% of current LTA, with intention to use for drawdown. Also have deferred DB pension with intention to utilise at scheme NRD at age 60, so five years time. The DB pension would result in a gross position far beyond the remaining 20% of current LTA (assuming calculation for LTA at 20 x first year's DB pension). Assuming that crystallisation of full DC pot of 80% LTA is necessary at move of DC pot to drawdown at 55, which will include any tax free lump sum taken at outset? Then further LTA test at age 60, which would lead to a breach of LTA at that time, which will reduce annual DB pension payment by excess tax charge over remaining 20% LTA?

Albermarle

If you take the DB pension early , the reduced annual pension , will mean a lower % contribution to LTA . Its a quirk of the system as the LTA is calculated on the initial years pension, regardless of when you take it.
Presume you realise that there is no need to crystallise the whole DC pot to start drawdown ? Not that this would help with your LTA issue though. Might even make it worse, although it could delay the pain. 

shinytop

That's the way it works as far as I understand.  You might want to look at whether it's better to take the DB pension early as it could reduce your exposure above LTA because of the favourable 20x treatment.  I did that although it was only one year early and therefore a marginal case.  I also made sure I took my DB before crystallising most of my DC; my thinking was that I had more control over when I paid any LTA excess tax.  Rather than paying it from when I took my DB pension I could put it off until 75 if I wanted. Lots of things to consider though...

Malthusian

I also made sure I took my DB before crystallising most of my DC; my thinking was that I had more control over when I paid any LTA excess tax. 

The immediate disadvantage of this approach is that DB pensions are treated more favourably than DC ones by the lifetime allowance test. DB pensions are assumed to be worth 20x the annual pension when in reality they are worth far more than that. DC pensions are assumed to be worth what they actually worth.

There are plenty of other factors to consider such as taking the hit of an early retirement penalty to reduce the lifetime allowance charge, as others have said.

The OP should take advice from an FCA-regulated independent financial adviser as lifetime allowance conundrums are extremely complex.

Johnnyboy11

Another advantage of taking the DB pension early is that you can use your Personal Allowance and get the first £12,500 tax free from age 55 onwards (assuming you have no other income source).

garmeg

Malthusian said:

I also made sure I took my DB before crystallising most of my DC; my thinking was that I had more control over when I paid any LTA excess tax. 

The immediate disadvantage of this approach is that DB pensions are treated more favourably than DC ones by the lifetime allowance test. DB pensions are assumed to be worth 20x the annual pension when in reality they are worth far more than that. DC pensions are assumed to be worth what they actually worth.

There are plenty of other factors to consider such as taking the hit of an early retirement penalty to reduce the lifetime allowance charge, as others have said.

The OP should take advice from an FCA-regulated independent financial adviser as lifetime allowance conundrums are extremely complex.

For the LTA test, the 20x multiple is used.
However in calculating the LTA charge, the DB pension in excess of LTA is valued in line with annuities (and not with a 20 x multiplier) - is this correct or did I misunderstand this aspect of the calculation?

Barbados7

Many thanks for your comments.