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MX5huggy

No LTA test on death post 75.

From https://www.thepfs.org/news-insight/news/articles/drawdown-planning-and-the-lifetime-allowance-tests/94262

Death benefits and the LTA charge.  

There are is no further LTA tests on death before age 75 on funds already in drawdown.  They can be passed onto beneficiaries free of all taxes.  Any uncrystallised funds are subject to an LTA test on death.  Where there is an LTA charge, where it is available the 25% LTA charge on income is far more favourable than the 55% lump sum option. This is because the funds can be placed into beneficiary’s drawdown and then all taken immediately free of further tax if required.

As all benefits are tested or re-tested at age 75 there are no further LTA tests on death benefits post 75. 

Workerdrone

So having sorted out the other half with a tax free £18.5k until SPA, and my confusion over LTA/Crystalisation events and IHT having been cleared up, I now just wanted to sanity check my part of the plan. Putting all the assumptions aside am I missing something obvious here in my quest to minimise my tax?

So fund of £1,119000k at 60. I crystallise the whole pot and take 119k from the from the tax free lump sum to buy a silly car. This leaves me with £160750 of the tax free cash of which I will squirrel away 20k each side of the tax year into both mine and my wife's S&S ISA for the next few years.

So I now have:

1.) A silly car bought tax free
2.) 160k in ISA's
3.) £839k left in my pot but now crystallised

So I now take £12750 from my taxable pension fund, but don't pay tax on it as that's the personal allowance.
I then draw from my ISA's £14750 per year tax free
Total tax free income for the next 7 years being £27500
Assuming I can make 7% return annually on the ISA (3% inflation 4% growth) I reckon after 7 years that leaves about £70.5k in the ISA

So now I arrive at 67.

And remember my assumption was that (all things being well) the personal allowance 22 years from now (Taking into account the current 5 year freeze), then growing at 2.5%pa should be £1.85m

Meanwhile I've been drawing down from my £839k pot at £14750 per year. If I can manage to keep a growth rate of 7% my pot now sites at £1.252m. As long as I keep the size of the remaining pot before 75 to less than £1.85m I shouldn't face an LTA charge

At 67 I am still drawing £12750 from the taxable element of the pension fund hence still no tax to pay
I can now reduce the tax free amount I am drawing from the ISA to £7278.64
So total tax free income so far £20028.63
SPA kicks in giving a further £9339.2 taking income up to £29367.84 of which only £9339.2 is taxable at 20%
So I only pay tax of £1845.84.
This leaves me with a tax free income of £27522 (Yes I screwed up the sums somewhere and gained an extra £22)
I still have £70.5k in the ISA but this should now grow a bit faster due to the lower rate of drawdown. I am aware this is subject to IHT
I still have £1.252m in the pension pot which is outside of IHT.

This all seems to good to be true. What am I missing?

najan49

What you are missing is that BCEs use up a %age of the LTA, not a nominal figure. So when you crystallised your pension at the outset, you used up 100% of your LTA - they could increase the LTA to £10m the next day and you’ve still used it all.

In order to avoid paying the 25% tax you need to keep your flexi-drawdown amount at £839k.

Albermarle

AS above .
To avoid a further LTA charge at 75 , you need to withdraw all investment growth from the drawdown pot.
This  means you will have to pay some income tax on the withdrawals ( you can't escape it)
One option is to move the pot into lower risk , lower growth investments , although you might be sacrificing £10 to avoid paying £2 tax .

Workerdrone

najan49 said:

What you are missing is that BCEs use up a %age of the LTA, not a nominal figure. So when you crystallised your pension at the outset, you used up 100% of your LTA - they could increase the LTA to £10m the next day and you’ve still used it all.

In order to avoid paying the 25% tax you need to keep your flexi-drawdown amount at £839k.

Just checking my understanding.

So I assume the point at which the first BCE event occurs locks your rate of LTA for life. Even If I crystallise only half at the current LTA, then the LTA rises before crystallising the second amount. Its still the first LTA rate which I am stuck with?

Workerdrone

Albermarle said:

AS above .
To avoid a further LTA charge at 75 , you need to withdraw all investment growth from the drawdown pot.
This  means you will have to pay some income tax on the withdrawals ( you can't escape it)
One option is to move the pot into lower risk , lower growth investments , although you might be sacrificing £10 to avoid paying £2 tax .

I think this is the point I am a bit confused on. So say I crystalise a pot of the full LTA of £1.073m and keep it in Flexi access drawdown. Now lets says a ridiculous thing happens and the growth goes crazy between then and 75. So even though I am drawing from my pot its worth 1.5m at 75 or 2m or 3m. Are you saying I need to pull all that excess cash out (and pay the appropriate income tax as I do so) Before 75 in order to prevent the LTA charge on the excess. 

But after 75 it can grow as much as it likes and be passed down?

najan49

Workerdrone said:

najan49 said:

What you are missing is that BCEs use up a %age of the LTA, not a nominal figure. So when you crystallised your pension at the outset, you used up 100% of your LTA - they could increase the LTA to £10m the next day and you’ve still used it all.

In order to avoid paying the 25% tax you need to keep your flexi-drawdown amount at £839k.

Just checking my understanding.

So I assume the point at which the first BCE event occurs locks your rate of LTA for life. Even If I crystallise only half at the current LTA, then the LTA rises before crystallising the second amount. Its still the first LTA rate which I am stuck with?

If you crystallise 50%, you’ve used 50%, and have 50% remaining. Again, if the LTA goes up to £10m tomorrow (don’t worry, it won’t) you’ve still got 50% available to use, but now that’s worth £5m instead of £0.5m.

Workerdrone

najan49 said:

Workerdrone said:

najan49 said:

What you are missing is that BCEs use up a %age of the LTA, not a nominal figure. So when you crystallised your pension at the outset, you used up 100% of your LTA - they could increase the LTA to £10m the next day and you’ve still used it all.

In order to avoid paying the 25% tax you need to keep your flexi-drawdown amount at £839k.

Just checking my understanding.

So I assume the point at which the first BCE event occurs locks your rate of LTA for life. Even If I crystallise only half at the current LTA, then the LTA rises before crystallising the second amount. Its still the first LTA rate which I am stuck with?

If you crystallise 50%, you’ve used 50%, and have 50% remaining. Again, if the LTA goes up to £10m tomorrow (don’t worry, it won’t) you’ve still got 50% available to use, but now that’s worth £5m instead of £0.5m.

Thanks, It's so hard trying to understand this. Theres lots of examples on crystalising all or crystallising none, but I didn't realise the part you crystallise is at the prevailing rate of LTA at the time.

If I understand you correctly. I can take £119k tax free which in effect crystallises £476k of my initial £1.19m pot. This leaves £643k uncrystallised. So I can draw from my crystallised £357k. In future when I need to access the £643k that BCE will be subject to the prevailing rate of LTA at the time which all being well should have grown with inflation.

I hope I finally understand this. Anyone else care to confirm?

Albermarle

Are you saying I need to pull all that excess cash out (and pay the appropriate income tax as I do so) Before 75 in order to prevent the LTA charge on the excess. 

Yes , no total escape from HMRC once you get into this wealth bracket. You just have to think of all the tax relief you gained earlier.

Albermarle

Workerdrone said:

najan49 said:

Workerdrone said:

najan49 said:

What you are missing is that BCEs use up a %age of the LTA, not a nominal figure. So when you crystallised your pension at the outset, you used up 100% of your LTA - they could increase the LTA to £10m the next day and you’ve still used it all.

In order to avoid paying the 25% tax you need to keep your flexi-drawdown amount at £839k.

Just checking my understanding.

So I assume the point at which the first BCE event occurs locks your rate of LTA for life. Even If I crystallise only half at the current LTA, then the LTA rises before crystallising the second amount. Its still the first LTA rate which I am stuck with?

If you crystallise 50%, you’ve used 50%, and have 50% remaining. Again, if the LTA goes up to £10m tomorrow (don’t worry, it won’t) you’ve still got 50% available to use, but now that’s worth £5m instead of £0.5m.

Thanks, It's so hard trying to understand this. Theres lots of examples on crystalising all or crystallising none, but I didn't realise the part you crystallise is at the prevailing rate of LTA at the time.

If I understand you correctly. I can take £119k tax free which in effect crystallises £476k of my initial £1.19m pot. This leaves £643k uncrystallised. So I can draw from my crystallised £357k. In future when I need to access the £643k that BCE will be subject to the prevailing rate of LTA at the time which all being well should have grown with inflation.

I hope I finally understand this. Anyone else care to confirm?

Yes you are correct but hopefully the £643K will also have grown at least as fast as inflation , probably more, and the LTA limit may or may not grow with inflation.  It is not such a big problem , what would you prefer .

1) The £643 K to have grown by £100K and you have to pay £40K tax ( I am simplifying ) 
2) The £643 has not grown at all 

Option 1) is better even though you had to pay more tax .