How is LTA tax applied at age 75?

Sterlingtimes

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 😜

I have recorded all of my information but many will not have any idea. I have never been requested to evidence the figures that I have passed across over the various DB and DC schemes.

pip895

Sterlingtimes said:

I think that if I die before 75 then there is no additional LTA tax

Only if you die after 75 is that the case if you die before 75 your pension is checked against the LTA - or at least that is my understanding of it.. I think it is only uncrystallised funds though..

Albermarle

Sterlingtimes said:

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.

The usual lifespan figure quoted is that a 65 year old man will on average live for another 20 years and that a couple at 65 will have a 25% chance of one of them living beyond 95.

Also it is sometimes commented that having to pay LTA tax is actually a sign of success, and not something to get too stressed about.

zagfles

Sterlingtimes said:

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. 

No, just the LTA charge is taken on your 75th. Income tax applies to drawdown as normal, like it did before 75, ie at the time you draw income.

zagfles

Albermarle said:

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.

BCEs are reported to HMRC so it'd be easy for them to check everything has been declared as it should.

Sterlingtimes

pip895 said:

Sterlingtimes said:

I think that if I die before 75 then there is no additional LTA tax

Only if you die after 75 is that the case if you die before 75 your pension is checked against the LTA - or at least that is my understanding of it.. I think it is only uncrystallised funds though..

I have been working very much on the basis that the crystallised funds are tested at age 75. If this is not the case then all of my concerns disappear.  

Sterlingtimes

zagfles said:

Sterlingtimes said:

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. 

No, just the LTA charge is taken on your 75th. Income tax applies to drawdown as normal, like it did before 75, ie at the time you draw income.

That is a relief. Thank you. I am gradually getting the hang of this.

pip895

Sterlingtimes said:

pip895 said:

Sterlingtimes said:

I think that if I die before 75 then there is no additional LTA tax

Only if you die after 75 is that the case if you die before 75 your pension is checked against the LTA - or at least that is my understanding of it.. I think it is only uncrystallised funds though..

I have been working very much on the basis that the crystallised funds are tested at age 75. If this is not the case then all of my concerns disappear.  

Its just the growth on crystallised funds that are tested - so you may need to take some income from the drawdown to stop it growing beyond your allowance.  However it seems you can avoid that test by not making it to 75 but you do need to crystallise the pot.