How is LTA tax applied at age 75?

Sterlingtimes

Through DB and DC pensions, I  have at age 65 used 100% of my LTA. I have made various crystallisations over the years valued a £440,000 after deducting the tax-free lump sum.

The pension may reduce any potential exposure to Inheritance Tax so I may be tempted to live off other means and leave the DC pension untouched.

My £440,000 has already grown to £470,000. If this grows at 5% per year until my 75th birthday, my pot would be valued at £765,000.

I presume that LTA tax would apply at 25% of (£765,000 - £440,000) = £81,250.

Now how would the £81,250 be taken? Are all of my withdrawals at age 75 free of LTA tax until I (or my descendent) have taken £440,000 or does a proportionate tax apply? 



 

Albermarle

The pension may reduce any potential exposure to Inheritance Tax so I may be tempted to live off other means and leave the DC pension untouched.

All other things being equal and assuming you are a basic rate taxpayer , it is basically a choice between losing 40% IHT when you are dead or losing 40% in LTA tax when you are alive.

Probably better to enjoy your retirement and spend the growth in the DC pot , assuming there is some growth of course .

Also a  big prolonged market slump would mean that your problem may never materialise anyway.

zagfles

Sterlingtimes said:

Through DB and DC pensions, I  have at age 65 used 100% of my LTA. I have made various crystallisations over the years valued a £440,000 after deducting the tax-free lump sum.

The pension may reduce any potential exposure to Inheritance Tax so I may be tempted to live off other means and leave the DC pension untouched.

My £440,000 has already grown to £470,000. If this grows at 5% per year until my 75th birthday, my pot would be valued at £765,000.

I presume that LTA tax would apply at 25% of (£765,000 - £440,000) = £81,250.

Now how would the £81,250 be taken? Are all of my withdrawals at age 75 free of LTA tax until I (or my descendent) have taken £440,000 or does a proportionate tax apply? 

The scheme would normally pay the LTA charge of £81250 from your drawdown pot at the BCE, ie when you turn 75, AIUI. So your pot would be reduced to £683750. You'd also need to declare it on self assessment. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm086000

Flugelhorn

My financial adviser said the money just disappears off the total as soon as I hit 75

cfw1994

Flugelhorn said:

My financial adviser said the money just disappears off the total as soon as I hit 75

I assumed that is kind of how it worked...

But I am curious on the mechanics of this in action....& specifically when it is not all held within just one pot.

Let's imagine that DC pot is Pot-A.
Then let's assume some of your %LTA was used up by a DB Pot-B and Pot-C along the way.

How do the administrators of Pot-A know what was used by Pot-B and Pot-C?

zagfles

cfw1994 said:

Flugelhorn said:

My financial adviser said the money just disappears off the total as soon as I hit 75

I assumed that is kind of how it worked...

But I am curious on the mechanics of this in action....& specifically when it is not all held within just one pot.

Let's imagine that DC pot is Pot-A.
Then let's assume some of your %LTA was used up by a DB Pot-B and Pot-C along the way.

How do the administrators of Pot-A know what was used by Pot-B and Pot-C?

Usually they ask the member to declare what LTA they've used so far. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm081000#process

cfw1994

zagfles said:

cfw1994 said:

Flugelhorn said:

My financial adviser said the money just disappears off the total as soon as I hit 75

I assumed that is kind of how it worked...

But I am curious on the mechanics of this in action....& specifically when it is not all held within just one pot.

Let's imagine that DC pot is Pot-A.
Then let's assume some of your %LTA was used up by a DB Pot-B and Pot-C along the way.

How do the administrators of Pot-A know what was used by Pot-B and Pot-C?

Usually they ask the member to declare what LTA they've used so far. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm081000#process

Thanks for the link 👍
“How a scheme administrator establishes these details is not prescribed by legislation.”

I do find that slightly bizarre 😜

Albermarle

cfw1994 said:

zagfles said:

cfw1994 said:

Flugelhorn said:

My financial adviser said the money just disappears off the total as soon as I hit 75

I assumed that is kind of how it worked...

But I am curious on the mechanics of this in action....& specifically when it is not all held within just one pot.

Let's imagine that DC pot is Pot-A.
Then let's assume some of your %LTA was used up by a DB Pot-B and Pot-C along the way.

How do the administrators of Pot-A know what was used by Pot-B and Pot-C?

Usually they ask the member to declare what LTA they've used so far. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm081000#process

Thanks for the link 👍
“How a scheme administrator establishes these details is not prescribed by legislation.”

I do find that slightly bizarre 😜

This has come up  before in previous threads. In fact I think I asked a very similar question myself.
It seems to come down to trusting the client/pension receiver being honest, and having the right info to report.
I assume somewhere behind the scenes HMRC will be able to check somehow, but that is not really clear AFAIK.

Sterlingtimes

zagfles said:

Sterlingtimes said:

Through DB and DC pensions, I  have at age 65 used 100% of my LTA. I have made various crystallisations over the years valued a £440,000 after deducting the tax-free lump sum.

The pension may reduce any potential exposure to Inheritance Tax so I may be tempted to live off other means and leave the DC pension untouched.

My £440,000 has already grown to £470,000. If this grows at 5% per year until my 75th birthday, my pot would be valued at £765,000.

I presume that LTA tax would apply at 25% of (£765,000 - £440,000) = £81,250.

Now how would the £81,250 be taken? Are all of my withdrawals at age 75 free of LTA tax until I (or my descendent) have taken £440,000 or does a proportionate tax apply? 

The scheme would normally pay the LTA charge of £81250 from your drawdown pot at the BCE, ie when you turn 75, AIUI. So your pot would be reduced to £683750. You'd also need to declare it on self assessment. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm086000

Thank you. That answers my question. I think that I also read into your answer that income tax on my gain would also fall due on my 75th birthday. So now I would be forced into the 40% band or quite possibly higher. 

Sterlingtimes

Albermarle said:

The pension may reduce any potential exposure to Inheritance Tax so I may be tempted to live off other means and leave the DC pension untouched.

All other things being equal and assuming you are a basic rate taxpayer , it is basically a choice between losing 40% IHT when you are dead or losing 40% in LTA tax when you are alive.

Probably better to enjoy your retirement and spend the growth in the DC pot , assuming there is some growth of course .

Also a  big prolonged market slump would mean that your problem may never materialise anyway.

Thank you for this. Upon investigation, I have read that a 65-year-old English male has an 83% chance of reaching age 75. But I do have a chronic condition to consider. I still think that I have a reasonable prospect of reaching 75 when the taxman's dagger comes into play. I think that if I die before 75 then there is no additional LTA tax, no income tax for my wife or son and the pension acts as an IH shield. Additionally, I could have paid some 20% income tax unnecessarily.

However, I think that the answer here may me worry far more about getting the taxman's birthday card for my 75th.

Sterlingtimes

Flugelhorn said:

My financial adviser said the money just disappears off the total as soon as I hit 75

Thank you. Your response is consistent with the others here. It is a nasty pospect.