Trying to understand pension LTA?

EdSwippet

RogerPensionGuy said:

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?

Since nobody else has picked up on this, I'll offer some input. The answer to the question in your final sentence is: probably not.

The "probably" is because until it happens, nobody knows what the protection regimes, if any, will look like. And the "not" is because past protection regimes have not operated quite as you describe.

In the past, there have been two protection options:

• Individual protection. Here, the lower of the value of your pension as of the date at which the LTA decreases and the pre-decrease LTA is your own personal LTA. You can continue to make pension contributions if you like, but remember that these, plus any growth in your existing funds, will all count towards a 25% LTA penalty, and this may make them unappealing. Of most use to people with DB pensions, then, for whom the LTA rules are different (specifically, better).
  
  In your hypothetical example, this is probably what you want to use. You could also use fixed protection, but since you are already above the LTA, that would be no more beneficial to you than individual protection. Even if you didn't want to make future pension contributions, there is an opportunity loss in closing off that option with fixed protection.
  
  
• Fixed protection. This fixes your LTA at the old (pre-decrease) level. But, you lose this protection entirely if you contribute even just £0.01 into any DC pension in future. Again, DB pensions have different and better rules, I believe. An aside here: this can be a significant trap for the unwary when combined with DC pension auto-enrolment.
  
  In your hypothetical example, this would be the only protection option open to your wife.

More here: Protect your pension lifetime allowance - Gov.uk.

zagfles

I doubt they'll cut the LTA in nominal terms, the current freeze is cutting it in real terms with CPI inflation at 5.1% and RPI at 7.1%

The previous big cuts were mainly down to them trying to spread "austerity" across the income scale as best they could, with LTA cuts and child benefit caps aimed at higher earners.

Ciprico

...could I please confirm one point raised above...

If your DC pension is 1M now, and you crystalize the whole lot, so 750k in crystalised SIPP and still growing and 250k TFLS removed

The remaining crystalised 750k SIPP increases to say 1200k in the next 15 years, disregarding the 75 BCE, is the crystalised SIPP increase liable to LTA tax when withdrawn pre age 75..?

(I thought a different thread on here encouraged crystalising early to effectively remove the TFLS growth from SIPP to allow more LTA headroom)

zagfles

Ciprico said:

...could I please confirm one point raised above...

If your DC pension is 1M now, and you crystalize the whole lot, so 750k in crystalised SIPP and still growing and 250k TFLS removed

The remaining crystalised 750k SIPP increases to say 1200k in the next 15 years, disregarding the 75 BCE, is the crystalised SIPP increase liable to LTA tax when withdrawn pre age 75..?

(I thought a different thread on here encouraged crystalising early to effectively remove the TFLS growth from SIPP to allow more LTA headroom)

No, if withdrawn pre 75 there is no LTA charge. It's only if the crystallised pot is higher at 75 (or if/when you buy an annuity with it) than it was when crystallised.

The benefit of crystallising early is that growth of the pot doesn't count for the LTA provided you drawdown the growth. Obviously growth of the extracted PCLS doesn't count for the LTA either, although you may pay dividend/CGT on it.

Ciprico

Thanks for clarifying, so it is abolutely essential that one crystalises their pot if they reach £1.07m to protect investment further growth.

But with planning they could remove the growth on around £250k max prior, so be able to squeeze a little more growth out of the pot.

 

zagfles

Ciprico said:

Thanks for clarifying, so it is abolutely essential that one crystalises their pot if they reach £1.07m to protect investment further growth.

But with planning they could remove the growth on around £250k max prior, so be able to squeeze a little more growth out of the pot.

 

Don't understand what you mean by the second paragraph

Albermarle

Ciprico said:

Thanks for clarifying, so it is abolutely essential that one crystalises their pot if they reach £1.07m to protect investment further growth.

But with planning they could remove the growth on around £250k max prior, so be able to squeeze a little more growth out of the pot.

 

It is not essential - it is a strategy that is often recommended ( not quite the same thing ) 

If you do not do it , you potentially  expose yourself to more LTA tax . However 

1) You potentially bring yourself some hassle, in what to do with the large amount of  cash that you now suddenly have outside the pension
2) If markets tank long term you have probably achieved nothing positive .
3) Perhaps most importantly you have exposed a large sum to possible IHT , that was previously protected .

Of course it can be a good idea ,but still a decision to be made based on your own personal circumstances.
Also if you have to pay some LTA tax then it would not be such a big deal for everyone . All those boosters jabs have to be paid for somehow .

RogerPensionGuy

Thanks to posters but, I am still confused.

Example.

At age 55 my DC pension is 1.073M and I pull out the full 25% tax-free, so I have now used 100% of my LTA and about 805K sits in my SIPP and lets say it grows at 7% PA.

My thinking is if I draw out income over the years and the income reaches 805K as a cumulative total, I will start paying a 25% LTA charge at every withdrawal, is my thinking correct?

My thinking is I start drawing out income over the years and lets say I have taken out 605K at age 75, a BCE occurs and any funds above 200K in the SIPP gets a 25% LTA charge at this point and is taken out and then no more LTA charges every apply, is my thinking correct?

I currently think both my examples above are correct but, am interested to get views, so thanks again in advance.

Cheers Roger.

QrizB

RogerPensionGuy said:

My thinking is if I draw out income over the years and the income reaches 805K as a cumulative total, I will start paying a 25% LTA charge at every withdrawal, is my thinking correct?

No. Once funds are crystallised you don't need to worry about LTA until you're 75, when you will pay LTA charge on any amount by which your crystallised funds are larger at 75 than they were at crystallisation.

Example: you do really really well and your crystallised funds grow from 805k to 5.8M. So long as you've withdrawn that 5M of growth before you hit 75, there's no LTA charge to pay.

(Quite a lot of income tax along the way, but no LTA charge.)

RogerPensionGuy

QrizB said:

RogerPensionGuy said:

My thinking is if I draw out income over the years and the income reaches 805K as a cumulative total, I will start paying a 25% LTA charge at every withdrawal, is my thinking correct?

No. Once funds are crystallised you don't need to worry about LTA until you're 75, when you will pay LTA charge on any amount by which your crystallised funds are larger at 75 than they were at crystallisation.

Example: you do really really well and your crystallised funds grow from 805k to 5.8M. So long as you've withdrawn that 5M of growth before you hit 75, there's no LTA charge to pay.

(Quite a lot of income tax along the way, but no LTA charge.)

Thanks for that post, I viewed a youtube video this evening, it does some good examples on the LTA and much info I am interested to know, link below for anyone interested.

Cheers.

Lifetime allowance dilemmas and pension death benefits,  from AJ Bell.

PS, I couldn't post the link cos I am too new, but the description above will get it, worth a watch I think.