Crystallise or not if already crystallised LTA

Salford6

When moving funds into flexi-drawdown and taking  the 25% tax free amount when does the remaining 75% become classed as income,is it when i actually move it into drawdown or is it when i actually WITHDRAW it at a later date?,hopefully i would imagine when i withdraw it. 

shinytop

Salford6 said:

When moving funds into flexi-drawdown and taking  the 25% tax free amount when does the remaining 75% become classed as income,is it when i actually move it into drawdown or is it when i actually WITHDRAW it at a later date?,hopefully i would imagine when i withdraw it. 

Yes, until you withdraw it, it remains within the pension wrapper as crystallised funds.  When you withdraw, it's classed (and taxed) as income for the tax year in which it is withdrawn.

zagfles

garmeg said:

Leaving aside any uncrystallised funds set aside for 3 small pots.

If you have already crystallised exactly the LTA, whether by DB, DC or a combo.

If you had any uncrystallised funds left, which is the optimal use of these ...

(1) Leave uncrystallised until you need the funds and pay the LTA charge at that point, or
(2) Crystallise now and pay the LTA charge and moving rest to drawdown until needed.

Option (1) may be optimal in the hope (wishful) that the LTA may be abolished at some point.

Anyone got any thoughts on this?

I can't see any way 2 would be better, unless the rules changed eg the LTA charge was increased. As well as the potential for the additional LTA at 75 on growth already mentioned, there's death benefits. If you died under 75 it's possible your beneficiaries could avoid the LTA completely if they were happy to wait 2 years, this would be more tax efficient than paying the LTA charge unless they were higher rate taxpayers.

DairyQueen

Sorry to jump in on OP's thread but I have a related query and would appreciate confirmation of my understanding of the LTA rules with respect to OH's pension.

He has £1.25M protection and has used 91% on full crystallisation of his 1xDB and 2xSIPPs. Am I correct in thinking (having read this thread and others):
- he must withdraw gains equivalent to the remaining 9% before age 75 to avoid a charge?
- losses on one SIPP cannot offset gains on the other if this situation applies when he is age 75? (or dies?)
- he cannot consolidate both crystallised SIPPs on one platform?

Also, is the portfolio valued and checked against the LTA on death? If so, do different LTA/tax rules apply depending on whether death takes place prior/after age 75?

TIA

garmeg

DairyQueen said:

Sorry to jump in on OP's thread but I have a related query and would appreciate confirmation of my understanding of the LTA rules with respect to OH's pension.

He has £1.25M protection and has used 91% on full crystallisation of his 1xDB and 2xSIPPs. Am I correct in thinking (having read this thread and others):
- he must withdraw gains equivalent to the remaining 9% before age 75 to avoid a charge?
- losses on one SIPP cannot offset gains on the other if this situation applies when he is age 75? (or dies?)
- he cannot consolidate both crystallised SIPPs on one platform?

Also, is the portfolio valued and checked against the LTA on death? If so, do different LTA/tax rules apply depending on whether death takes place prior/after age 75?

TIA

Can't answer the death bit but I think the answers to the other three questions are

- Correct
- Correct, sadly
- Can consolidate but for LTA admin purposes they need to be kept separate somehow

EdSwippet

DairyQueen said:

- he must withdraw gains equivalent to the remaining 9% before age 75 to avoid a charge?

I'm not certain what you meant when you wrote this, but for clarity, he needs to taxably withdraw all nominal gains in the drawdown element that are above 9% of whatever his LTA is at age 75.

The test is based on the drawdown element's value on reaching age 75, less the amount originally placed into drawdown. The difference is the gain. Any remaining unused LTA percentage is subtracted from that gain, so in your husband's case, 9% of the higher of £1.25M (assuming he doesn't lose FP2016) and whatever the standard LTA is at that date. The remainder is subject to the 25% LTA penalty. Example 7 in this paper is a worked example:

http://accainpractice.newsweaver.co.uk/icfiles/1/7452/12132/6112669/2a5f3773ad68425bcaddfde8/lifetime allowance charge - worked examples.pdf

garmeg

EdSwippet said:

DairyQueen said:

- he must withdraw gains equivalent to the remaining 9% before age 75 to avoid a charge?

I'm not certain what you meant when you wrote this, but for clarity, he needs to taxably withdraw all nominal gains in the drawdown element that are above 9% of whatever his LTA is at age 75.

The test is based on the drawdown element's value on reaching age 75, less the amount originally placed into drawdown. The difference is the gain. Any remaining unused LTA percentage is subtracted from that gain, so in your husband's case, 9% of the higher of £1.25M (assuming he doesn't lose FP2016) and whatever the standard LTA is at that date. The remainder is subject to the 25% LTA penalty. Example 7 in this paper is a worked example:

http://accainpractice.newsweaver.co.uk/icfiles/1/7452/12132/6112669/2a5f3773ad68425bcaddfde8/lifetime allowance charge - worked examples.pdf

Example 1 seems wrong or unclear to me ...

Mr A will receive a tax free lump sum of £257,500 and Mr A will pay the tax of £92,500. The tax payable of £92,500 is the joint and several liability of Mr A and the pension scheme administrator. Mr A will normally have the choice of either paying the lifetime allowance charge of £92,500 himself or requesting that the pension scheme pays this amount to HMRC. If the £92,500 is paid by the scheme administrator, the tax itself is added to the chargeable amount. The intention is that the amount tested against the lifetime allowance should be the gross amount of benefits crystallised and not the net amount after deducting tax funded by the scheme. Mr A can choose for the tax to be payable by the scheme administrator and the £92,500 to be deducted from the tax free lump sum leaving a net lump sum of £165,000 (£257,500 less £92,500). There would be £1,142,500 (£1,400,000 less £257,500) left in the pension scheme which would be subject to income tax as and when it is withdrawn by Mr A. 

Surely the £92,500 being paid from the scheme is more beneficial to the member than being deducted from the PCLS. 
Why would anyone pay the LTA tax themselves when it is more tax efficient for it to come from the pension?

There is a double dip of tax if the member pays it from his PCLS and it would improve things for the member if LTA was crystallised first and then the balance the next day which seems to be a big discontinuity here?

EdSwippet

garmeg said:
Surely the £92,500 being paid from the scheme is more beneficial to the member than being deducted from the PCLS. 

Why would anyone pay the LTA tax themselves when it is more tax efficient for it to come from the pension?

I suppose someone might consider this if they planned to use a pension as purely an inheritance tax bypass scheme. 25% LTA penalty beats 40% inheritance tax. It does seem like a freedom that has limited usefulness, though. But then, quite a few things around pensions are similar. For example, although it's an option, it is hard to think up cases where there is a benefit from taking less than 25% in PCLS when crystallising a chunk of a defined contribution pension.

Looking more closely, there appears to be an error in Example 7, so this might not have been the best paper to cite (if you can't trust Certified Accountants, who can you trust?!). The final sentence reads:
>>> "If he reduced the value of the drawdown pension pot to less than £257,500 there would be no lifetime allowance charge on his 75th birthday, although those withdrawals would be subject to income tax as pension income in the normal way."
While strictly true, this would appear to be massive overkill. I believe this should read more like:
>>> "If he reduced the value of the drawdown pension pot so that the gains in it are less than £257,500 there would be no lifetime allowance charge on his 75th birthday, although those withdrawals would be subject to income tax as pension income in the normal way."
Or alternatively:
>>> "If he reduced the value of the drawdown pension pot to less than £1,270,000 (£1,012,500 plus £257,500) there would be no lifetime allowance charge on his 75th birthday, although those withdrawals would be subject to income tax as pension income in the normal way."

zagfles

DairyQueen said:

Sorry to jump in on OP's thread but I have a related query and would appreciate confirmation of my understanding of the LTA rules with respect to OH's pension.

He has £1.25M protection and has used 91% on full crystallisation of his 1xDB and 2xSIPPs. Am I correct in thinking (having read this thread and others):
- he must withdraw gains equivalent to the remaining 9% before age 75 to avoid a charge?
- losses on one SIPP cannot offset gains on the other if this situation applies when he is age 75? (or dies?)
- he cannot consolidate both crystallised SIPPs on one platform?

Also, is the portfolio valued and checked against the LTA on death? If so, do different LTA/tax rules apply depending on whether death takes place prior/after age 75?

TIA

If death is after 75 there is no LTA test. All LTA tests are at or before 75, with one exception (BCE3) which is where a scheme pension (eg DB) increases by more than a permitted margin.

For death under 75 the only BCEs are on uncrystallised funds so if everything is crystallised no LTA charge. There doesn't appear to be the BCE5a equivalent on death.

jamesd

garmeg said:

EdSwippet said:...

http://accainpractice.newsweaver.co.uk/icfiles/1/7452/12132/6112669/2a5f3773ad68425bcaddfde8/lifetime allowance charge - worked examples.pdf

Example 1 seems wrong or unclear to me ...

Mr A will receive a tax free lump sum of £257,500 and Mr A will pay the tax of £92,500. The tax payable of £92,500 is the joint and several liability of Mr A and the pension scheme administrator. Mr A will normally have the choice of either paying the lifetime allowance charge of £92,500 himself or requesting that the pension scheme pays this amount to HMRC. If the £92,500 is paid by the scheme administrator, the tax itself is added to the chargeable amount. The intention is that the amount tested against the lifetime allowance should be the gross amount of benefits crystallised and not the net amount after deducting tax funded by the scheme. Mr A can choose for the tax to be payable by the scheme administrator and the £92,500 to be deducted from the tax free lump sum leaving a net lump sum of £165,000 (£257,500 less £92,500). There would be £1,142,500 (£1,400,000 less £257,500) left in the pension scheme which would be subject to income tax as and when it is withdrawn by Mr A. 

Surely the £92,500 being paid from the scheme is more beneficial to the member than being deducted from the PCLS. 
Why would anyone pay the LTA tax themselves when it is more tax efficient for it to come from the pension?

There is a double dip of tax if the member pays it from his PCLS and it would improve things for the member if LTA was crystallised first and then the balance the next day which seems to be a big discontinuity here?

Is it more or less tax efficient, though? "the tax itself is added to the chargeable amount". 

Where it says "Comparison of example 1 to example 2" it's really comparing 1 and 3 and you should do that.

If from the PCLS there's no direct extra charge and he'll end up paying LTA charge of 25% (assuming drawdown) and 20%, 40% or 45% on withdrawing alternative taxable money.

If from the rest of the pension an extra lifetime allowance charge at 55% must be paid on the £92,500 to provide that lump sum, comparable to 25% LTA charge then paying 40% income tax. Whether that's cheaper depends on the income tax rate.