Working out LTA

Pipkin1812

I’m really not a numbers person so I’m going to ask a stupid question. How do you know/work out if you’re close to exceeding the life time allowance limit?

tiring33

With Defined Contribution pensions it's easy you just add up the value of each pot. With Defined Benefit pensions it's a little more complicated (but not much) you multiply the amount the pension pays out in the first year by 20 and add any initial lump sum payments. Add all your DC values and DB values together and it if comes to more than the LTA (or will come to more by the time you take the pensions) you'll pay an LTA charge on the excess.

Pipkin1812

Many thanks. I’m in LGPS and also pay into an AVC as well as investing in a small SIPP. I guess I add these on as well? Does State Pension have to be added in when eligible too?

tiring33

You add the value of all your DB and DC schemes together but not the State pension (State pension does not count toward the LTA). Whether you will exceed the LTA and by how much will inevitably be a complicated picture.

- what will the value of the LTA be when you take your pensions? It's frozen at £1,073,100 until April 2026 so if you're taking your pensions before then it's clear, but after that....who knows.

- what will the value of your DB and DC pensions be by the time you take them? Your DB pension values may be more predictable (?) but the value of any DC pensions will depend on 1) how much they're worth now; 2) how much you're contributing; and 3) how well the funds they are invested in perform between now and when you take them i.e. put them into drawdown.

Not an easy calculation I'm afraid but you can only make some assumptions about all of the above and try to make the best decision you can about current contributions.

Albermarle

Also remember you do not have to pay any extra tax just because the value of your pensions exceed it . The LTA only starts to kick in when you actually take the DB pension or crystallise a DC pension to a value beyond the LTA. So you can delay the point at which you have to pay extra tax, but not for ever as there is a final calculation at age 75.
I wouldn't worry about it too much as if you have a big enough pension to pay LTA , you have to be in a very nice position anyway.

Pipkin1812

Thanks. I’m probably nowhere near it to be honest but wasn’t sure how it was worked out 🤣

Marcon

Albermarle said:

I wouldn't worry about it too much as if you have a big enough pension to pay LTA , you have to be in a very nice position anyway.

Quite. The hysterical headlines along the lines of 'devastating tax trap for a million pension savers' (honestly...) do rather overlook that little fact.

Croeso69

Marcon said:

Albermarle said:

I wouldn't worry about it too much as if you have a big enough pension to pay LTA , you have to be in a very nice position anyway.

Quite. The hysterical headlines along the lines of 'devastating tax trap for a million pension savers' (honestly...) do rather overlook that little fact.

There is a big difference between hitting LTA at 65 with just 10 years to the age 75 test and hitting it at 55.

Assuming you hit exactly 100% LTA at 55. You draw down the growth so there Is no extra tax at 75. However with inflation, say, averaging 3% over the 20 year period then your fund at age 75 is worth half, in real terms, what you had at 55. Hopefully if you drew down too much this could have gone into an ISA to alleviate the issue.

Whilst I think the LTA at retirement is bad, the extra test at 75 is just vindictiveness against prudent cashflow timing.