LTA - trying to understand net result of (additional) tax hit

zagfles

jamesd said:

zagfles said:

We're talking about your idea to drawdown an extra £3600 above the basic rate band and pay £3600 gross back into the pension. That makes zero difference to your net income, it makes zero difference to the total size of your pension pot, all it does is move £3600 from your crystallised pot to your uncrystallised pot.

We're discussing what I, as a person not expecting to exceed the LTA, do, and what might be useful in that situation, because that's what I was describing. In that case there is at least the usual 6.25% a year gain from making pension contributions with basic rate relief and taking them out again with basic rate tax and a 25% tax free lump sum.

Well I suggest you make that clear in a thread discussing the effects of exceeding the LTA. People who don't understand these things fully or who haven't thought through the implications of what they're doing properly might think it's a good idea to recycle £3600 through their pension regardless of the LTA.

With no tax free lump sum over the lifetime allowance and the lifetime allowance charge there would need to be a fairly strong trust motivation to do it in that situation because the anticipated result is negative, if we ignore inheritance tax effects. I don't see a reason in that case to do the paying in of 2880 to withdraw what would with no tax free lump sum be 2880 on the way out at basic rate, with LTA charge on top.

What would this "strong motivation" be then? What if we don't "ignore inheritance tax effects"? I'll simply stick with "it's a very bad idea" in all situations where you have or will exceed the LTA. I've explained it all above. Perhaps I've missed something?

jamesd

Agreed on the first point so I added the text "as someone unlikely to exceed the LTA" to the start of the relevant paragraph.

You've missed the value of creating a multi-generation trust that has far reduced taxation compared to trusts in general. That's a  benefit for people with many millions of Pounds and inheritance tax concerns for themselves and their future generations. It's also well outside the scope of the sorts of values we normally see discussed here, which tend not to be much above the LTA. The trust-related benefits are why for some people it can even make sense to contribute to pensions without any tax relief and still pay the LTA charge on those contributions.

This Which article has an introduction to the general taxation of trusts. That starts out as 20% initially plus 6% of the amount over the IHT nil rate band charged every ten years the trust exists and on withdrawal. The once-off LTA charge can beat that if you're contemplating a long term trust. If you're over the LTA by a bit this won't matter but if it's several million that you're wanting to put into trusts the LTA charge will be substantial but the regular IHT saving will be greater.

zagfles

jamesd said:

Agreed on the first point so I added the text "as someone unlikely to exceed the LTA" to the start of the relevant paragraph.

You've missed the value of creating a multi-generation trust that has far reduced taxation compared to trusts in general. That's a  benefit for people with many millions of Pounds and inheritance tax concerns for themselves and their future generations. It's also well outside the scope of the sorts of values we normally see discussed here, which tend not to be much above the LTA. The trust-related benefits are why for some people it can even make sense to contribute to pensions without any tax relief and still pay the LTA charge on those contributions.

This Which article has an introduction to the general taxation of trusts. That starts out as 20% initially plus 6% of the amount over the IHT nil rate band charged every ten years the trust exists and on withdrawal. The once-off LTA charge can beat that if you're contemplating a long term trust. If you're over the LTA by a bit this won't matter but if it's several million that you're wanting to put into trusts the LTA charge will be substantial but the regular IHT saving will be greater.

I was specifically challenging your plan to recycle £3600 in and out of a pension when the LTA is exceeded. That makes no difference to the overall size of the pension pot, it just "uncrystallises" some of it. What benefit is that to anyone who inherits?

jamesd

I have no plan to pay 2880 into a pension accompanied by withdrawing 3600 when I'm over the LTA. Nor did I when I wrote the post you're writing about.

zagfles

jamesd said:

I have no plan to pay 2880 into a pension accompanied by withdrawing 3600 when I'm over the LTA. Nor did I when I wrote the post you're writing about.

You suggested there might be an inheritance benefit in some cases. I think you are wrong. I think there is never any inheritance benefit in inheriting a pension pot of the same size but which is more uncrystallised. But it's probably easier to get a politician to admit they were wrong