Trying to understand pension LTA?

RogerPensionGuy

Hi.

I'm very confused.com.

If we can assume the LTA today is 1Million pounds.

My DC pot is also 1Million pounds.

Today I take out 125K tax free cash.

So today I have crystallised 500K or say 50% of the LTA.

I do nothing for many years.

The LTA gets increased to 2Million pounds on April the 6th 2026.

Is my remaining LTA 50% of the 2Million or 87.5% of the 2Million?

I've read and read and I thought the answer was 87.5% but now think it's only 50% 

I'm sure someone will post the correct answer.

Thanks in advance. 

NoMore

Your remaining LTA is 50% of the 2 million. 

RogerPensionGuy

The more I understand the LTA, the less I like it.

I'm about to stop paid employment and the freezing of the LTA with such little notice is a problem for me I think.

My DC pot is just about 1.1Million and was intending to scoop out 268K and thinking I would of used only 25%LTA and let the pot grow a bit and hopefully the LTA would be raised soon and use that for my best interests.

I will have to go back to the drawing board.

I've another question or view for anyone please?

What will the LTA do over these next 10 years?

My own view is, in 2025/26 they will confirm that it won't increase after the freeze period and I think a good chance that they will reduce it to 800 or 900K unfortunately, I just think it's seems a great revenue stream for the government and the history of the LTA the last 15 years looks like they can just keep trimming it down.

Any views most welcome. 

EdSwippet

RogerPensionGuy said:

The more I understand the LTA, the less I like it.

Welcome to the club.

RogerPensionGuy said:

My DC pot is just about 1.1Million and was intending to scoop out 268K and thinking I would of used only 25%LTA and let the pot grow a bit and hopefully the LTA would be raised soon and use that for my best interests.

If over age 55, it may -- depending on your future plans, family circumstances, and so on --  be a good idea to crystallise to 100% of the LTA now. That way, you avoid as far as possible the growth in the funds being subjected to the 25% LTA penalty. Some will suggest waiting for a market dip that takes you under the LTA. It's a possibility, but does not represent a reliable plan.

Once above the LTA, tax rates on growth in investments held outside a pension are lower than the tax you would pay on withdrawals from the pension. True for an unwrapped general investing account, and even more so for an ISA. Ideally, moving the tax-free lump sum from crystallising into ISAs is what you want to aim for, although this will take several years at £20k/year (£40k for a couple). A pull in the opposite direction is that pensions are protected from IHT, so something else to consider.

A forum search will show up multiple recent threads discussing the above. It comes up fairly regularly here.

RogerPensionGuy said:

What will the LTA do over these next 10 years?

Nobody knows. In the past 15 years the LTA has been introduced and index linked, reduced and not index linked, reduced a second time and not index linked, reduced a third time but index linked, and not reduced but no longer index linked for half a decade (at least). It's a political football, and a tool much beloved of chancellors not least because it is an almost perfect stealth tax. Most people don't notice that it will hit them until it is too late.

Albermarle

My own view is, in 2025/26 they will confirm that it won't increase after the freeze period and I think a good chance that they will reduce it to 800 or 900K unfortunately, I just think it's seems a great revenue stream for the government and the history of the LTA the last 15 years looks like they can just keep trimming it down.

I do not think it will be reduced . Much easier to just keep not increasing it with inflation.

It is there for a reason. To limit rich people using pensions as a way of avoiding tax . 

I just think it's seems a great revenue stream for the government 

I don't think Rishi Sunak would agree with you. Subsidising private pension pots with tax relief is a big drain on the Treasury and tax from LTA is not that significant in this context. Also they miss a lot of IHT , due to pensions not being counted . The IFS have said that the pensions tax regime in the UK is indefensibly generous , so I can only see future legislation/tax changes going one way .

zagfles

Albermarle said:

My own view is, in 2025/26 they will confirm that it won't increase after the freeze period and I think a good chance that they will reduce it to 800 or 900K unfortunately, I just think it's seems a great revenue stream for the government and the history of the LTA the last 15 years looks like they can just keep trimming it down.

I do not think it will be reduced . Much easier to just keep not increasing it with inflation.

It is there for a reason. To limit rich people using pensions as a way of avoiding tax . 

I just think it's seems a great revenue stream for the government 

I don't think Rishi Sunak would agree with you. Subsidising private pension pots with tax relief is a big drain on the Treasury and tax from LTA is not that significant in this context. Also they miss a lot of IHT , due to pensions not being counted . The IFS have said that the pensions tax regime in the UK is indefensibly generous , so I can only see future legislation/tax changes going one way .

Agreed, the LTA isn't really punative for those who get higher rate tax relief on their pension contributions (ie most people who exceed the LTA) and don't pay higher rate tax in retirement. You can go quite a bit above the LTA and still have a pot where a sensible withdrawal rate wouldn't push you into higher rate tax. If you get higher rate relief and pay basic rate tax in retirement you get a big tax advantage below the LTA and above it's neutral, or positive if you use sal sac due to NI savings.

RogerPensionGuy

Another question plz?

The LTA is changed to 800K as of April2022 in my question. 

My current DC pot is 1.2Million, I can probably just use a fixed protection route and keep inputting into my DC pot and maintain the £1.073,100 LTA, so happy daze.

My wife's pot is 850K, if she wants to maintain the £1.073,100 LTA, she needs to apply for a protection and then cannot get anymore inputs to her DC pot.

Are both my examples correct?

Thanks in advance.

RogerPensionGuy

And another question trying to make it clear in my mind?

If my pot is currently £1,073,100 and I take maximum 25% tax free out.

I have now used 100% of my LTA. 

The 800K(approximately) in the sipp grows and grows over time, lets say it gets to 1.5Million at age 75 and no withdrawals, the LTA will be used at this point and 25% of that 700K groath will be taken by the government, is this correct?

Likewise, pot grows happily over time and I say draw out 50K PA, at 16 years I've used that 800K and then continued drawing, am I correct that from now on, every withdrawal will pay a 25% charge until I'm 75 and then the LTA BCE will be applied, any LTA overlimit will be removed at that point and then going forwards from this point, I will no longer be paying an 25% on any withdrawals?

I've read a lot about the LTA and still don't think I can fully understand this item unfortunately. 

Hopefully me posting possible seniaros on here, people will confirm if my understanding is correct, so thanks in advance.

A bit of information that I got from the TAPAS people that people may find helpful, if a person activates a DB pension and say they have used 50% of the LTA using the X 20 calculations, happy daze, then unfortunately that DB scheme falls in the PPF and their pension gets a 10% reduction under the rules, their LTA 50% data isn't adjusted to as I had hoped to 45% of LTA used.

I have a DB pension and have decided not to activate it early before scheme NRA to avoid any possibility of getting my used LTA % stuck at a value and suffer a 10% DB pension cut.

I hope the above is helpful to some.

Cheers Roger.

QrizB

I don't think you've said how old you are but let's assume you've just turned 55.

If you have a SIPP pot of £1073100 and you crystallise it, you use up your full LTA. You'll get £268275 TFLS and the remaining £804825 will remain invested in the SIPP.

If that SIPP gains £700k and you don't withdraw anything, in 20 years when you are 75 the SIPP will be worth £1.5M and you'll pay LTA tax on the £700k growth.

If you withdraw £50k pa from your SIPP, when you get to 75 you will have withdrawn £1M, your SIPP will be worth £500k and there won't be any LTA tax to pay. (The £50k pa will be taxable income and taxed at your marginal rate.)

There are people here who are better at this than I am and if they disagree with me, you should listen to them.

RogerPensionGuy

QrizB said:

I don't think you've said how old you are but let's assume you've just turned 55.

If you have a SIPP pot of £1073100 and you crystallise it, you use up your full LTA. You'll get £268275 TFLS and the remaining £804825 will remain invested in the SIPP.

If that SIPP gains £700k and you don't withdraw anything, in 20 years when you are 75 the SIPP will be worth £1.5M and you'll pay LTA tax on the £700k growth.

If you withdraw £50k pa from your SIPP, when you get to 75 you will have withdrawn £1M, your SIPP will be worth £500k and there won't be any LTA tax to pay. (The £50k pa will be taxable income and taxed at your marginal rate.)

There are people here who are better at this than I am and if they disagree with me, you should listen to them.

Tks for post.

Assuming the LTA is still 1.073,100 or I was protected at me being 75, HMRC will collect any overlimit LTA in the pot as 75 is another BCE as I understand it.

This LTA looked so simple to me at first look and the more I try to fully understanding it, the more confused I feel.

And for the record I'm about 57 years old, holding off activation of a DB scheme until achieved my NRA in that scheme of 60.

I'm lucky having a sensible DC pot also, so trying to workout the best way of sequencing of both these vehicles, my nice problem is that I cannot avoid the LTA charges unless it rolls up unless I get divorced and do pension sharing, for information, my wife only has a DC pot of 100K and same age.

I was happy enough when the LTA was increasing with inflation but, now I think it will go down or get stuck at current value for many many years, HMRC have a monster cash take available that only grows and grows as time slides by, I just look at how the LTA was invented and ramped down over these last 15 years, with so much tax take required these next few decades, the LTA will be doing plenty of the so called heavy lifting for tax income.

Cheers Roger.

Albermarle

QrizB said:

I don't think you've said how old you are but let's assume you've just turned 55.

If you have a SIPP pot of £1073100 and you crystallise it, you use up your full LTA. You'll get £268275 TFLS and the remaining £804825 will remain invested in the SIPP.

If that SIPP gains £700k and you don't withdraw anything, in 20 years when you are 75 the SIPP will be worth £1.5M and you'll pay LTA tax on the £700k growth.

If you withdraw £50k pa from your SIPP, when you get to 75 you will have withdrawn £1M, your SIPP will be worth £500k and there won't be any LTA tax to pay. (The £50k pa will be taxable income and taxed at your marginal rate.)

There are people here who are better at this than I am and if they disagree with me, you should listen to them.

What you say is correct . The test at 75 only looks at how big the remaining crystallised pot is, compared to what it was when it was crystallised . It does not matter how much it has grown , as long as this growth has been taken as income.

I just look at how the LTA was invented and ramped down over these last 15 years, with so much tax take required these next few decades, the LTA will be doing plenty of the so called heavy lifting for tax income.
Something had to be done to prevent rich people abusing the very generous higher rate tax relief on pension contributions .
It might have been simpler just to remove higher rate tax relief, or reduce the Annual allowance, but either would have probably been more unpopular , although probably would have saved the treasury a lot more money in the short term at least , so LTA it is I am afraid.
It seems doubtful that LTA will do much heavy lifting ( compared to other forms of tax ) as the average pension pot in the UK is between £25K and about £150K , depending on how it is measured statistically.