Another LTA question

HeyYeah

I'm very confused about the LTA. Please can you help me to understand with this simplified example.

Imagine the LTA is £1,000,000

I have a DC pension worth £1,000,000

I move it into drawdown at 55 with 25% tax free £250,000 (£750,000 in drawdown)

At 60 I get a DB pension worth  £1000pa

Which of the following tax scenarios are correct?

A. The LTA is exceeded by £1000 * 20 i.e. £20,000 due to the DB pension

I owe £11,000 in tax. (i.e. 55% or £20,000) and I have to pay when I'm 75

B. If I have less than £739,000 (i.e. £750,000 - £11,000) remaining when I'm 75, then I have not exceeded the LTA

C. Another alternative

I hope this question makes sense! Thanks.

jamesd

Scenario A is partially correct. Your DB income is income and chargeable at the income rate of 25% not the lump sum rate of 55%. Your DB pension provider will deduct the lifetime allowance charge before paying you and pay you a reduced income. The exchange of income for capital to do this may be extremely unfavourable to you. They might let you pay the charge with your own cash instead, ask.

The charge is payable at the time benefits are taken - crystallisation - including the whole balance from which a tax free lump sum is taken,

Nothing forces you to take the tax free lump sum from all of the DC at the same time and it's likely to be sensible to do some, take the DB, then do the rest when needed so that the DC bears the charge.

Once you have the DC in a flexi-access drawdown account the growth in value of that balance is checked at age 75 and more LTA or charge is used. You avoid this by withdrawing enough so that the balance isn't higher.

Albermarle

Nothing forces you to take the tax free lump sum from all of the DC at the same time and it's likely to be sensible to do some, take the DB, then do the rest when needed so that the DB bears the charge.

Is this a typo ?should be 'so that the DC bears the charge '?

jamesd

Yes, thanks, corrected.

Albermarle

OP, In addition if you are likely to have LTA issues , it can be better to take a reduced DB pension early . The 20X factor still applies .
So if you have a DB pension at 60 of £10 K pa and you take it at 60 it will contribute £200K to the LTA.
If you take it at 55 for a reduced pension of say £7.5K pa , it will only contribute £150K to the LTA.

HeyYeah

Many thanks the very thoughtful responses. It's given me plenty to consider...