Lifetime Allowance tax on funds - how is it calculated?

Trevor108

I have a SIPP consisting of uncrystallised funds and also crystallised funds where I've already taken some TFLS, which has reduced my available Lifetime Allowance (LTA) to 66.6%.
I understand that if I crystallise the remainder of this allowance, any further crystallisations would be subject to a 25% tax and would wipe out much of the benefit of any TFLS I get.
This then brings me to 2 questions that I hope someone can answer:
1) Does it make more sense to crystallise as much as possible (below the LTA threshold) before age 75, to get the most benefit of TFLS but leaving little or no allowance to offset against the tax at that test point? Or, to crystallise just enough to maintain a modest income and leave a large allowance to offset against any tax due at age 75?
2) Anything I have left uncrystallised (above the LTA) at age 75 would be taxed at 25% and additionally, any funds I have that are already crystallised, would be taxed on their growth, but how is this latter element worked? e.g. hypothetically, if I'd crystallised £1.5m over its lifetime and I'd drawn £1m as income but the crystallised fund had grown through investment to £700k, would I pay the LTA tax on the £200k growth or would there be no tax due because the £700k left in the crystallised fund at age 75 was less than the £1.5m I'd originally crystallised? 

Any help on understanding these points would be much appreciated.

MallyGirl

A quick search on here would bring back lots of queries about the LTA.

This was mine which gained lots of useful help:

https://forums.moneysavingexpert.com/discussion/6294316/lta-basics/p1

Albermarle

The second point is easy to answer .
It is only on the difference between when the pot is crystallised and its value at age 75.
So as long as you withdraw all growth in that period there is no chance of getting hit again.

Trevor108

Albermarle said:

The second point is easy to answer .
It is only on the difference between when the pot is crystallised and its value at age 75.
So as long as you withdraw all growth in that period there is no chance of getting hit again.

Thanks for the reply, so if I understand this right, as long as I draw more in income by age 75 than my crystallised fund has grown by, there would no LTA tax payable on this element. Please could you confirm if my understanding is correct?

Trevor108

MallyGirl said:

A quick search on here would bring back lots of queries about the LTA.

This was mine which gained lots of useful help:

https://forums.moneysavingexpert.com/discussion/6294316/lta-basics/p1

Thanks for your reply, I'll take a look at the link.

zagfles

Re 1), if you're at the LTA (ie remaining uncrystallised funds would exactly use remaining LTA if crystallised now) it would usually make sense to fully crystallise, since any uncrystallised growth would create an LTA charge. Whereas crystallised growth wouldn't provided withdrawn.

If you're well above the LTA it would depend on circumstances, objectives etc. Any growth would increase the LTA charge, but any fall would reduce the LTA charge, so if eg you're ahead of where you want to be you could consider remaining uncrystallised as a hedge against market falls. Of course any growth would increase the LTA charge, so if you assume growth (above the indexation of the LTA, currently frozen) then crystallising early would win.

Crystallisation would mean managing the TFLS outside the pension, so may pay tax on dividends and growth while you drip feed it into an ISA, but likely to be less than the extra LTA charge if it grew uncrystallised inside the pension.

gm0

Whether you *need* to crystallise the above the LTA line element to access income (the no TFLS portion) is deeply material to the question. 

The implication of the rules is that if you have 1-2 x LTA in your 50s then you need to work out your income plan for retirement to SP, SP to 75 and how you will manage an inconvenient early death/IHT with the chunk of TFLS 250k dropping into your estate alongside ISAs, House etc. so generating a latent 40% IHT liability.  Of course if you consume - yachts, ferraris, champagne and dancing or you give this money to your heirs or Battersea Dogs Home early - they may appreciate that and the "problem" 40% goes away via the PET rules (7 years).

The general tone of media coverage and advice on pensions is not to take TFLS and this is (broadly) true because of a) sustainability of retirement income b) IHT considerations for the larger DC cases. 

But for around LTA cases the growth inside the pension is levied via the penalty charge at 75 if undrawn and so taking 1/4 out of this taxed growth equation via TFLS can make a lot of sense (using S&S ISA recycling to hold the same investments without the 25% of all real and inflationary returns levy - provided you have

1) income plan 55-67, 67-75, post 75. 
2) Understand IHT implications and how your behaviour - downsizing, gifting, heirs etc.  relates.

This is where the crystallise early to LTA scenario and use your full basic rate band xN years recommendation comes from.

The penalty on 25% of value of the above LTA portion is a lost cause.

Growth in DC funds during retirement on the other hand - you need a plan for.

Albermarle

Trevor108 said:

Albermarle said:

The second point is easy to answer .
It is only on the difference between when the pot is crystallised and its value at age 75.
So as long as you withdraw all growth in that period there is no chance of getting hit again.

Thanks for the reply, so if I understand this right, as long as I draw more in income by age 75 than my crystallised fund has grown by, there would no LTA tax payable on this element. Please could you confirm if my understanding is correct?

Yes correct .