Lifetime Allowance tax charges

Pat38493

Hi - I have a very specific question on lifetime allowance taxes.

If a defined benefit pension scheme is cashed in and starts to be paid, and the resulting crystalisation results in the lifetime allowance being exceeded, how is this tax actually paid?

In trawling various documents on the internet I've seen some which imply that the entire tax has to be paid immediately, but other documents saying that this simply results in you getting a lower monthly pension payment than would otherwise be the case.

I'm guessing that the pension provider has to pay the entire tax on your behalf, and then do some fancy calculations to reduce your pension per month in line with the reduced total value of your benefits, but is this correct?

 

Mick70

As soon as your DB pension is triggered you should be told what % of the LTA it uses up so you will
know straightaway if you exceed it it not , it is rare for DB pensions to exceed it as the formula is 20xyour INITIAL DB annual payment (plus any lump sum) , if that is less than £1m you are fine .  As say you will it should be told this when your DB pension starts 

Dazed_and_C0nfused

If a defined benefit pension scheme is cashed in and starts to be paid

Are you transferring the DB pension to a DC pension??

Pat38493

Dazed_and_C0nfused said:

If a defined benefit pension scheme is cashed in and starts to be paid

Are you transferring the DB pension to a DC pension??

Not at the moment no.  The question is not about how I will know whether an tax is triggered, but how it would be paid if I take the DB pension on an annuity basis.   

My tentative plan is to retire early, use DC pensions until normal retirement age and then start taking my DB pension.  Depending on growth rates over the next 10 years it might be that I exceed the lifetime allowance at that time as I guess it’s cumulative on top of tha DC that has already been taken.

the question is whether is would be landed with a large tax bill that I would have to pay at that time, or is it more that the monthly pension payment would just be less

Tranferring Db to dc pension is something I might consider but obviously I would take professional financial advice before and I am well aware that the typical advice would be “never do this unless you have some very specific reasons why it might make sense for you personally”

zagfles

The DB scheme would reduce your benefits to pay the LTA charge, there might be an option for you to pay the charge yourself but then it would be from outside the pension. Ask the scheme how they handle it and what their current factors are for reduction in benefits.

Albermarle

The usual advice seems to be to try and engineer it so the LTA is paid via a DC pension .
I am not really sure why, but seems to be more beneficial and more straightforward.

I guess there will be a possibility that you might not use up all your DC pensions anyway and will still have some left. Or if markets turn negative you might not see the expected growth .

ould be paid if I take the DB pension on an annuity basis.   
You can not take a DB pension on an annuity basis .
An annuity is something you buy with a pot of money .
A DB pension gives a similar result ( guaranteed income for life) but best not to refer to it as an annuity as it can confuse people.

FatherTireseus

zagfles said:

The DB scheme would reduce your benefits to pay the LTA charge, there might be an option for you to pay the charge yourself but then it would be from outside the pension. Ask the scheme how they handle it and what their current factors are for reduction in benefits.

I was going to reply but zagfles has summed up what I would have said, very succinctly and I don't think I can improve on their answer!

CTFC

Pat38493 said:

Dazed_and_C0nfused said:

If a defined benefit pension scheme is cashed in and starts to be paid

Are you transferring the DB pension to a DC pension??

Not at the moment no.  The question is not about how I will know whether an tax is triggered, but how it would be paid if I take the DB pension on an annuity basis.   

My tentative plan is to retire early, use DC pensions until normal retirement age and then start taking my DB pension.  Depending on growth rates over the next 10 years it might be that I exceed the lifetime allowance at that time as I guess it’s cumulative on top of tha DC that has already been taken.

the question is whether is would be landed with a large tax bill that I would have to pay at that time, or is it more that the monthly pension payment would just be less

Tranferring Db to dc pension is something I might consider but obviously I would take professional financial advice before and I am well aware that the typical advice would be “never do this unless you have some very specific reasons why it might make sense for you personally”

Why use the DC part to fund early retirement, taking the DB early will reduce annual benefit by typically 4-5% per year taken early and consequent LTA liability by the same amount (e.g a 20k pa pension taken 5 years early takes a 20% reduction to 16K pa so the LTA used  moves from 400K to 320K ) You get 16k pa for an additional 5 years and the DC pot remains available for drawdown whenever you need it or potential legacy. Of course the spouses pension gets reduced by the same factor. Thats  how it worked for me anyway, I suppose some schemes may differ.

Mick70

On this subject .
say IF your DB triggers and say arguments sake it’s £25kpa get letter from the trustees to say it uses 50% of the LTA , i take it this % doesn’t change as your dB pension increases each year with rpi ?    Meaning “theoretically” you could still build up a 500k pot , although I know be almost impossible .    

Also will the db% change if the LTA amount, £1m is changed by the govt ?

zagfles

Mick70 said:

On this subject .
say IF your DB triggers and say arguments sake it’s £25kpa get letter from the trustees to say it uses 50% of the LTA , i take it this % doesn’t change as your dB pension increases each year with rpi ?    Meaning “theoretically” you could still build up a 500k pot , although I know be almost impossible .    

Also will the db% change if the LTA amount, £1m is changed by the govt ?

RPI increases aren't a BCE. Above RPI are, or can be. Google BCE3 for details.

Pat38493

CTFC said:

Pat38493 said:

Dazed_and_C0nfused said:

If a defined benefit pension scheme is cashed in and starts to be paid

Are you transferring the DB pension to a DC pension??

Not at the moment no.  The question is not about how I will know whether an tax is triggered, but how it would be paid if I take the DB pension on an annuity basis.   

My tentative plan is to retire early, use DC pensions until normal retirement age and then start taking my DB pension.  Depending on growth rates over the next 10 years it might be that I exceed the lifetime allowance at that time as I guess it’s cumulative on top of tha DC that has already been taken.

the question is whether is would be landed with a large tax bill that I would have to pay at that time, or is it more that the monthly pension payment would just be less

Tranferring Db to dc pension is something I might consider but obviously I would take professional financial advice before and I am well aware that the typical advice would be “never do this unless you have some very specific reasons why it might make sense for you personally”

Why use the DC part to fund early retirement, taking the DB early will reduce annual benefit by typically 4-5% per year taken early and consequent LTA liability by the same amount (e.g a 20k pa pension taken 5 years early takes a 20% reduction to 16K pa so the LTA used  moves from 400K to 320K ) You get 16k pa for an additional 5 years and the DC pot remains available for drawdown whenever you need it or potential legacy. Of course the spouses pension gets reduced by the same factor. Thats  how it worked for me anyway, I suppose some schemes may differ.

Good points and could be correct.  As I am not planning to retire for another 2-4 years, I have only had one discussion with a financial advisor about this and we generally agreed to wait until I was nearly wanting to retire to investigate this.  His general comment was that you can for example use your DC to bridge the gap between when you retire and when you take your DB and eventually state pension but this was really only a high level discussion without any number crunching behind it yet and we didn’t really discuss lifetime allowance issues in that talk.  I did some rough calculations after that and I calculated that if growth rates are average more than about 4% per year, I will be getting close to the limit around the time I am thinking of retiring if I add up all he pension schemes I am in.