Crystallise or not if already crystallised LTA

zagfles

jamesd said:

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£1,142,500 (£1,400,000 less £257,500) left in the pension scheme which would be subject to income tax as and when it is withdrawn by Mr A. 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.

You're missing garmeg's point. It's not about comparing the 25% drawdown charge and the 55% lump sum charge. It's about paying the 25% (drawdown) charge from the fund, not deducting it from the PCLS, ie instead of a net PCLS of £165k and £1,142,500 left in the scheme as in example 1, take the full PCLS of £257,500 and pay the lifetime allowance charge from the scheme leaving £1,050,000 crystallised in the scheme. That's almost certainly a far more sensible thing to do than example 1.

As in the second example here: https://adviser.royallondon.com/technical-central/pensions/benefit-options/lifetime-allowance-charge/

jamesd

zagfles said:

You're missing garmeg's point. It's not about comparing the 25% drawdown charge and the 55% lump sum charge. It's about paying the 25% (drawdown) charge from the fund, not deducting it from the PCLS, ie instead of a net PCLS of £165k and £1,142,500 left in the scheme as in example 1, take the full PCLS of £257,500 and pay the lifetime allowance charge from the scheme leaving £1,050,000 crystallised in the scheme. That's almost certainly a far more sensible thing to do than example 1. 

No, I didn't miss the point, but I was comprehensively wrong anyway.

I wrongly explained that the two examples were comparing the different ways to pay, 1 potentially being a bad way and 3 potentially a better way. Naturally the example showing a potentially wrong way will look like a bad idea. But I didn't account for the difference in lump sum desire which made me wrong in thinking that the two were just examples of different ways to pay.

But part of the point of the document is saying that "If the £92,500 is paid by the scheme administrator, the tax itself is added to the chargeable amount". Thinking LTA charge is payable on £462,500 (370,000 + 97,500) instead of £370,000. I misinterpreted that as meaning on top of the original amount, when it's just not deducted before calculating the charge, so wrong again.

garmeg

jamesd said:

zagfles said:

You're missing garmeg's point. It's not about comparing the 25% drawdown charge and the 55% lump sum charge. It's about paying the 25% (drawdown) charge from the fund, not deducting it from the PCLS, ie instead of a net PCLS of £165k and £1,142,500 left in the scheme as in example 1, take the full PCLS of £257,500 and pay the lifetime allowance charge from the scheme leaving £1,050,000 crystallised in the scheme. That's almost certainly a far more sensible thing to do than example 1. 

No, I didn't miss the point, but I was wrong anyway.

I wrongly explained that the two examples were comparing the different ways to pay, 1 potentially being a bad way and 3 potentially a better way. Naturally the example showing a potentially wrong way will look like a bad idea. But I didn't account for the difference in lump sum desire which made me wrong in thinking that the two were just examples of different ways to pay.

But part of the point of the document is saying that "If the £92,500 is paid by the scheme administrator, the tax itself is added to the chargeable amount". So LTA charge is payable on £462,500 (370,000 + 97,500) instead of £370,000.

I have reservations about whether that's correct, having just assumed it was when I wrote my first reply. But I see no mention of it at Pruadviser .  So I wonder whether the assertion is correct and if the examples at http://accainpractice.newsweaver.co.uk/icfiles/1/7452/12132/6112669/2a5f3773ad68425bcaddfde8/lifetime allowance charge - worked examples.pdf are best viewed with caution.

Hence my comment of double dip. LTA tax on the LTA tax. Then potentially LTA tax on the LTA tax on the LTA tax and so on.

If you rework example 1 with a fund of £14 million instead of £1.4 million you can see how silly it is as you would have a negative PCLS.

jamesd

garmeg said:
Hence my comment of double dip. LTA tax on the LTA tax. Then potentially LTA tax on the LTA tax on the LTA tax and so on.

Indeed. And I've expanded further on my recanting. Definitely not one of my better posts!

garmeg

jamesd said:

garmeg said:
Hence my comment of double dip. LTA tax on the LTA tax. Then potentially LTA tax on the LTA tax on the LTA tax and so on.

Indeed. And I've expanded further on my recanting. Definitely not one of my better posts!

It isn't you, I think the examples on that link are garbage!

DairyQueen

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

Thank you. My post wasn't well expressed and, yes, this is my understanding.

I will take a look at the link and have noted subsequent posts with respect to the example given.