The LTA in Practice

jim8888

Hi

I’m interested in how the LTA works in practice. I intend to retire at 60, three years from now, when I will have a SIPP that will total somewhere around 800k. I also intend to take a DB pension at this time which, I estimate, will be worth more than 500k, so I’m over the LTA. My current plan is to take 25% tax free from the Sipp at 200k and £140k from the DB (which the pension company has outlined as being available as a tax free lump sum). My intention was then to take £19k a year from the DB, of which around £12k would be tax free under my personal allowance. My question is what would the remaining £7k of that income be taxed at? Would it be 20% basic income tax, or 55% because it’s coming from a combined pot that’s over the LTA?

(The illustration the DB pension has given me is that I can take £140k with a £19k annual income. I don’t know if i HAVE to do that, or if I can request the full lump sum but only a £12k income from the remaining fund.)

Any advice gratefully received.

Dazed_and_C0nfused

The illustration the DB pension has given me is that I can take £140k with a £19k annual income. I don’t know if i HAVE to do that, or if I can request the full lump sum but only a £12k income from the remaining fund

There is no "remaining fund".  You will have to decide, within the scheme rules, what TFLS/taxable pension income combination to take.  That is then set for life.

Some schemes will allow larger TFLS in return for paying less pension and vice versa.

Also, you don't need to estimate the LTA used from a DB scheme, it is 20 x pension + any TFLS.  So £520k in your scenario (£19k x 20 + £140k).

Pru guide here is quite useful.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/lifetime-allowance-qanda/

zagfles

You can't take that much tax free cash, it's over the LTA. The LTA isn't extra income tax, it's a charge levied at BCEs (benefit crystallisation events). 

As well at the above article, google LTA BCE for more helpful articles. You really need to understand the LTA implications of what you're doing, particularly the way the DB will be affected if you tip the LTA in the DB scheme. It might be best to take the DB first, and then tip the LTA in the DC scheme. Or it could even be sensible to take the DB early but that will depend on the early retirement reduction and your tax rate with the additional pension now.

Albermarle

https://techzone.adviserzone.com/anon/public/pensions/Guide-pension-lifetime-allowance

shinytop

zagfles said:

You can't take that much tax free cash, it's over the LTA. The LTA isn't extra income tax, it's a charge levied at BCEs (benefit crystallisation events). 

As well at the above article, google LTA BCE for more helpful articles. You really need to understand the LTA implications of what you're doing, particularly the way the DB will be affected if you tip the LTA in the DB scheme. It might be best to take the DB first, and then tip the LTA in the DC scheme. Or it could even be sensible to take the DB early but that will depend on the early retirement reduction and your tax rate with the additional pension now.

I would concur; you probably don't want an LTA charge slapped on your DB pension. I took my DB pension early and first to avoid it.  Some of the helpful info on this is in relation to NHS pensions, for example:
https://www.nhsbsa.nhs.uk/sites/default/files/2019-05/Lifetime Allowance Charge examples-20190508-(V3).pdf

cfw1994

I think I'd advise retiring now, not in 3 years!!
Glib, I know....but semi-serious: the tax tail wagging the living breathing dog?   Run free!

mark55man

taking the pension early at 57 will incur additional actuarial reduction, but this will reduce the x20. It may also reduce the lumpsum.  Getting the reduced DB 3 years early will normally become equal about 20 years down the line.  I suggest in your situation I wouldn't be too worried about being short of cash at that point.

Also you could crystallise what was left of your DC up to LTA now on the premise it (and your LTA problem) will only get larger if even cautiously invested.  You will face another LTA test at 75 (both the uncrystallized element plus growth in the crystallised element.) so you can't hide forever unless Mr Reaper makes an early appearance.  You should understand what happens to the pots in that event, its surprisingly tax efficient


You need to read some of the links so you can work out what your scenario is.  The only thing I would add is that time is your friend, and that if you carry on working you will lose the opportunity of withdrawing at Basic R ate (I'm not quite sure of the maths but LTA at HR is worse than LTA at BR).  You can't get those years back and you get those ISA allowances back

Oh, and if you have to pay a bit of tax because you DC pension has grown so large, then you are still 55p in the £ up on the deal  which isn't the worst outcome in the world   

Mickey666

cfw1994 said:

I think I'd advise retiring now, not in 3 years!!
Glib, I know....but semi-serious: the tax tail wagging the living breathing dog?   Run free!

Beat me to it - I was going to post the same thing.

The OP already has pension provision many people can only dream about, does he really need another three years of work?  

cfw1994

Mickey666 said:

cfw1994 said:

I think I'd advise retiring now, not in 3 years!!
Glib, I know....but semi-serious: the tax tail wagging the living breathing dog?   Run free!

Beat me to it - I was going to post the same thing.

The OP already has pension provision many people can only dream about, does he really need another three years of work?  

Well, I was only semi-serious: some people love their work, & planning for stepping away is a very individual thing....
Plus we don’t know lifestyle & personal circumstances....but maybe the replies give the OP some food for thought.

jim8888

Thanks for all your feedback. Just for info, I did try a year's "early retirement" at 50 when I was made redundant. I could have made it to 55 on my savings and then taken my pensions. In that year, I did all the things you read about in retirement - played golf, lived healthily, took holidays, did some voluntary work, read loads of books and generally just kicked back. But, as winter rolled back around I realised I was really missing the fulfilment and social contact of the workplace. So I went out and got a job. Haven't regretted it 

Anonymous101

jim8888 said:

Thanks for all your feedback. Just for info, I did try a year's "early retirement" at 50 when I was made redundant. I could have made it to 55 on my savings and then taken my pensions. In that year, I did all the things you read about in retirement - played golf, lived healthily, took holidays, did some voluntary work, read loads of books and generally just kicked back. But, as winter rolled back around I realised I was really missing the fulfilment and social contact of the workplace. So I went out and got a job. Haven't regretted it 

Good on you for doing what you love. My dad is in a similar boat happily working in his 70's.
With this in mind I'd think its a case of managing the LTA as best you can rather than eliminating it. That pension balance is only going one way, up.