Life Time Allowance (LTA) tax

Sterlingtimes

I am 65 and have, following an unexpected event, exceed my LTA. Let us say that I have £350,000 crystallized in SIPP and have £10,000 uncrystallised (exceeding LTA).

I understand that 25%, if taken as income (i.e. this is the case if you buy an annuity or take a regular income via drawdown), or, 55%, if taken as a lump sum  (i.e. this is the case if you take an uncrystallised fund lump sum).

If I start taking income from my SIPP, how would the tax apply? Is the £10,000 taxed first?

kuratowski

At the benefit crystallisation event (e.g. when you designate the funds for drawdown) the lifetime allowance charge is applied to the £10k.
If you're taking income, then it's 25% so £2500 is deducted by the SIPP provider, and sent on to HMRC.  After that the remaining £7500 worth of income is taxed at your marginal income tax rate, just like your normal pension.  For example, if your marginal tax rate is 20% then you would be left with 7500 x (1 - 20%) = £6000.
If you took a lump sum, then it's 55% so a charge of £5500 is deducted and you receive £4500.  This would be a better option if your marginal income tax rate is higher than 40%.
The LTA charge is standalone, it does not part of your income tax liability for the year, so it can't be offset against anything else.

That's my understanding anyway, and I'm very sure if I'm wrong someone will quickly pipe up, this is a great place for learning

Edit to add: this LTA Charge I have described has no effect on the 350k already crystallised.  But to avoid a further LTA charge at the extra benefit crystallisation event at age 75, you need to withdraw all the growth in your 350k crystallised pot between the time you accessed it and age 75.  Ugh.

ukdw

If you have £350k crystallised and £10k uncrystallised and then take £10k income or buy an annuity this will usually come out of the £350k and will be taxed at your marginal rate.  

You won't have to pay the 25% or 55% LTA tax on the £10k uncrystallised until you specifically crystallise it or withdraw it as a lump sum, or until you reach age 75.  

anselld

If you have only exceeded the LTA by 10k you can transfer it to Hargreaves Lansdown and take it as a small pot.  Small pots do not affect the LTA.  You can in fact transfer 30k and take three small pots.

pip895

I am confused - why have you exceeded your LTA?  Is there a DB pension in play - or have I missed something??

Sterlingtimes

pip895 said:

I am confused - why have you exceeded your LTA?  Is there a DB pension in play - or have I missed something??

I will try to explain. I have two DB pensions, a crystallised SIPP in a former employer's pension and the remainder in a HL SIPP.. I was on course to reach 100% LTA through successive crystallisation but then got an unexpected GMP related step-up on a DB pension that increased my DB LTA.

Sterlingtimes

kuratowski said:

At the benefit crystallisation event (e.g. when you designate the funds for drawdown) the lifetime allowance charge is applied to the £10k.
...
Edit to add: this LTA Charge I have described has no effect on the 350k already crystallised.  But to avoid a further LTA charge at the extra benefit crystallisation event at age 75, you need to withdraw all the growth in your 350k crystallised pot between the time you accessed it and age 75.  Ugh.

Thank you. This is helpful but I need to refine my question. Though taking my DB pensions and enacting various crystallisations, my LTA now sits at 99.99% (not 100%). For simplicity, I have stated here that £10,000 is uncrystallised. If I take no action before I am 75 and I do nothing with the £10,000, do I incur a tax charge?

Sterlingtimes

ukdw said:

If you have £350k crystallised and £10k uncrystallised and then take £10k income or buy an annuity this will usually come out of the £350k and will be taxed at your marginal rate.  

You won't have to pay the 25% or 55% LTA tax on the £10k uncrystallised until you specifically crystallise it or withdraw it as a lump sum, or until you reach age 75.  

Thank you. That is probably the answer that I need. I have subsequently explained that my LTA sits at 99.99% but not 100%. I think that you are telling me that the £10,000 can be left where it is without action and without tax until I am 75 in 10 years' time.

kuratowski

The £10k by itself is probably fine and you can indeed leave it with action.

But just to reiterate, as you only have 0.01% LTA remaining almost all growth on the £350k crystallised pot will be hit with an LTA charge at 75, so you should draw it down, unless your plan is to leave it to your heirs as an inheritance.

Sterlingtimes

kuratowski said:

The £10k by itself is probably fine and you can indeed leave it with action.

But just to reiterate, as you only have 0.01% LTA remaining almost all growth on the £350k crystallised pot will be hit with an LTA charge at 75, so you should draw it down, unless your plan is to leave it to your heirs as an inheritance.

You have been most helpful. Thank you. I understand the latter point. The safer option is perhaps to take income each year up to the top of the 20% band and should I reach 75 then this will have been a good choice, but If I die before 75 then this would be the tax that I could have avoided by using my cash before taking income from the SIPP. As for the £10,000 then someone will have a tax liability after my death. 

cfw1994

anselld said:

If you have only exceeded the LTA by 10k you can transfer it to Hargreaves Lansdown and take it as a small pot.  Small pots do not affect the LTA.  You can in fact transfer 30k and take three small pots.

Only if your provider lets you do a partial transfer.  I know my Aviva one does not.  

Not sure why….but that is their rule.

Sterlingtimes said:

kuratowski said:

The £10k by itself is probably fine and you can indeed leave it with action.

But just to reiterate, as you only have 0.01% LTA remaining almost all growth on the £350k crystallised pot will be hit with an LTA charge at 75, so you should draw it down, unless your plan is to leave it to your heirs as an inheritance.

You have been most helpful. Thank you. I understand the latter point. The safer option is perhaps to take income each year up to the top of the 20% band and should I reach 75 then this will have been a good choice, but If I die before 75 then this would be the tax that I could have avoided by using my cash before taking income from the SIPP. As for the £10,000 then someone will have a tax liability after my death. 

OP, I’m in a similar position with much of my DC pot crystallised: at the last crystallisation, my 2 DB schemes had me effectively sitting on 99%.  

Now the growth on the uncrystallised bit left in the DC pot effectively trips me over 100%.   Damn those positive markets 🤣.  
On the bright side, it has proven my decisions to take those BCE actions to be ‘right’.

My plan is to leave that uncrystallised piece alone, and to do my best to ensure any growth in the drawdown pot is taken by the age of 75, as per your bit highlighted above.
Quite the timing & mathematical conundrum, eh!