Lifetime allowance calculation

Albermarle

If you think I’m a complete idiot 

Not at all , it is a complex subject and we can all look back and think could have done that better .

Suggest you keep an eye on the forum , it has helped a lot of people understand these things, including me .

gm0

Whatever plan you come up with your IFA.  It needs to take full account of all the rules but especially BCE5A (the age 75 2nd test).  If LTA has been exhausted or thereabouts.  Your income tax plan, inheritance (and IHT planning), property downsizing plan and LTA planning all interact.  LTA cannot be optimised in splendid isolation.

For BCE5A the growth of the 75% of the DC pot (after the 25% TFC was taken) is a baseline.  Any growth AT ALL of that value from early retirement (at crystallisation) to age 75 (so for a period of 0<x<20 years) that has not been drawn out as income along the way - is then LTA charged at age 75 at 25%. (This assumes 100% LTA was used up by earlier crystallisations). 

Clearly this situation may be desired and fine (the DC pot is IHT shielded from the 40% on your estate if that's over the threshold) and your income plans add up from the DB, TFC. topped up by flexible drawdown.  Pay up at 25%. Carry on. Sleep easy.  Heirs get a pension pot boost at the end.

Or it could be a nasty surprise and not fine - realising you could have drawn the nominal growth as income without paying the extra 25% LTA charge i.e. just paid your income taxes and spent it, gifted it to heirs or charity, or taken other actions. So your income plan and self assessment tax plan for DB + DC + SP income taken together needs to mesh properly.  And then work (more or less) for a range of possible inconvenient death dates so far as IHT goes.

If there is spare DC "drawdown income" potential and you have unused basic rate tax band - there is probably a mistake in planning from a tax optimisation perspective.  Always assuming you have income ideas for the net of tax income.  ISA recycling just creates larger IHT overhang but you may have timing considerations on capital disposal.  Everyone's plan is different. 

Your IFA should be cashflow planning this out across income sources although the compliance driven versions may not seem that helpful upon first inspection.

This is a very odd little complex corner of the tax code.  Not designed to make pension drawdown easier to work but to cap/prevent family wealth offices abusing the wrapper to IHT exempt large sums in pots never intended to be drawn as retirement income.  Pensions for Pensions not tax avoidance across generations

So do not feel stupid about it.  It was not uncommon for finance pros to get this muddled until relatively recently.   Even the Pensionwise "cheat sheet" for their guidance telephone support people doesn't really cover it to the necessary full depth.  So they end up hiding behind "take advice" (or look it up on the tax website yourself and wade through the jargon).  I found if you talk to PAS they generally have a grip on it for any queries or confident understanding. At least based on my experience. 

I have studied it for DC only and the treatment of protection certificates and LTA indexation.  There were several !!!!!! and WTAF moments.

Albermarle

Lifetime allowance - All you need to know - Royal London for advisers

Be aware this is written for financial advisors as support info ( if they need it ) for when they talk to clients . So goes through many scenarios that will not necessarily be relevant .

JoLam

Thanks both, I do feel I’m slowly getting to grips with it. I suspect I will take what I can on the remaining tax free lump sum without going over the LTA, I will try the 3 small pots transfer, I will take income up to full basic rate (which I haven’t been doing) and may be beyond that in the two years before aged 75.   I also need to switch my investments into lower risk/ lower growth investments.  Oh and I will write to Treasury to tear up the Fixed Protection.   Phew, a lot of work even with an adviser.   To think I thought retirement would be lying on the beach!