lifetime pensions allowance

beeza650

I've got a quick question about the lifetime allowance. I'll make it hypothetical to make the question a bit clearer.
Let's say I've just turned 55 and take 25% of my pension, £268,250, as a tax-free lump sum from a pension that's valued at £1,073,000 (just below the £1,073,100 lifetime allowance).
If my pension grows as a result of further contributions and investment performance then as long as it never exceeds £1,073,100 I don't pay additional tax on a benefit crystallisation event (or withdrawal to us mere mortals). i.e. it can increase by £268,350.
OR (and this is what I think is the case)
Can the pension only grow by £100 before additional tax is due on withdrawals?
Thanks

Croeso69

beeza650 said:

I've got a quick question about the lifetime allowance. I'll make it hypothetical to make the question a bit clearer.
Let's say I've just turned 55 and take 25% of my pension, £268,250, as a tax-free lump sum from a pension that's valued at £1,073,000 (just below the £1,073,100 lifetime allowance).
If my pension grows as a result of further contributions and investment performance then as long as it never exceeds £1,073,100 I don't pay additional tax on a benefit crystallisation event (or withdrawal to us mere mortals). i.e. it can increase by £268,350.
OR (and this is what I think is the case)
Can the pension only grow by £100 before additional tax is due on withdrawals?
Thanks

  If you have crystallised 100% LTA, any growth (even £1) will be subject to LTA tax on another crystallisation event or age 75 (whichever comes first).

So you take enough drawdown income out of the pot to keep at or below the original amount of £804,825 which is the starting value after you took out the PCLS.

In your example you have £100 headroom left (adjusted proportionately by any increase in LTA at the said event or age 75, whichever comes first. So if by age 75 the LTA has doubled then the first £200 growth in the fund is not subject to LTA tax as you had this proportion of LTA unused. Anything above the £200 growth will have LTA tax due.

beeza650

Thanks - where did the figure £804,825 come from please?
My understanding is LTA will grow in line with inflation or even be frozen. They may even hack chunks off it. One thing I guess we can be pretty certain of is that it won't increase in real terms.
My actual circumstances are £350K pension, 46 years old putting in £40K a year. It looks like I can only continue doing that for another 10 years say before the chance of exceeding LTA becomes a real concern.

Croeso69

beeza650 said:

Thanks - where did the figure £804,825 come from please?
My understanding is LTA will grow in line with inflation or even be frozen. They may even hack chunks off it. One thing I guess we can be pretty certain of is that it won't increase in real terms.
My actual circumstances are £350K pension, 46 years old putting in £40K a year. It looks like I can only continue doing that for another 10 years say before the chance of exceeding LTA becomes a real concern.

£804,825 is what is left should you crystallise 100% LTA by taking a PCLS.

TVAS

This is a first world problem meaning it is not a problem.

If you take the excess over the LTA as income you will only pay 25% tax and provided you have no income for that year no further tax is due so stop worrying about it. Further investment growth is one of the reasons why somebody is in a drawdown plan.  

beeza650

Are you absolutely certain that’s the case? I’d assumed the tax was on top of normal income tax

Albermarle

beeza650 said:

Are you absolutely certain that’s the case? I’d assumed the tax was on top of normal income tax

TVAS said 'you will only pay 25% tax and provided you have no income for that year no further tax is due '
The 25% is taken out of the pension pot and then the reminder will be taxed at your normal rate of income tax , assuming you are a taxpayer. So £100 becomes £75 and then tax at 20% = £60 

beeza650

TVAS said:

This is a first world problem meaning it is not a problem.

If you take the excess over the LTA as income you will only pay 25% tax and provided you have no income for that year no further tax is due so stop worrying about it. Further investment growth is one of the reasons why somebody is in a drawdown plan.  

My state pension is going to be one form of income. From a personal allowance of £12500, £9110 would be accounted for by state pension. That makes it very much a problem.

"Only" pay 25% tax ....only??? - that's a large amount and is on the investment return too, not just what I've paid in.

I'm hoping to take (£50,000 - £9110 = ) £40890 a year out my pension. The last thing I want is for most of that to be taxed at 40%. I may as well not have bothered risking putting it in a pension if that's the case.

Albermarle

I'm hoping to take (£50,000 - £9110 = ) £40890 a year out my pension. The last thing I want is for most of that to be taxed at 40%. I may as well not have bothered risking putting it in a pension if that's the case.

The 25% is only on the amount above the LTA . The other £1,070,000 does not have this charge .

Presume you benefitted from tax relief on your contributions ( greatly so if a higher rate taxpayer ) which will have significantly increased the size of the pot.

beeza650

Yes I benefit at that 40% level but if I pay 40% to get the money back out then it’s a lot less attractive. I know it’s a less than 40 because of the tax free lump sum, but still, the risk of dying probably outweighs the benefit 

Croeso69

beeza650 said:

Yes I benefit at that 40% level but if I pay 40% to get the money back out then it’s a lot less attractive. I know it’s a less than 40 because of the tax free lump sum, but still, the risk of dying probably outweighs the benefit 

There is no tax free lump sum over the LTA, effectively the LTA tax is the tax free lump sum that you would have got, but the government gets it instead!