Crystallisation calculation

NoMore

Instead of making numbers up that sometimes are irrelevant and sometimes don't make sense, lets just simplify your question:

What happens when you have used 100% of your LTA and what happens at the age 75 LTA test ? 

Does that sum up what questions you are actually asking.

Barry_Bear

No, that doesn't sum it up. If my numbers don't make sense, please correct them. I was using a working example with figures so I can check what I've read elsewhere. I also want to check the various implications of having a SIPP valued at £1.5m which is more than the LTA but having withdrawn less than 100% of the LTA.

The previous replies have suggested that the only calculation done at each crystallisation event is to sum all previous crystallisation amounts as a percentage of the LTA, and check that total is less than 100%. But there may be more to it, for example, PensionBee suggest it's the amount "withdrawn" that matters (i.e. you take UFPLS and crystallise £100,000 and withdraw £25,000 tax free and leave £75,000 invested, then only the £25,000 is counted against the LTA), but with Flexi Access Drawdown the whole £100,000 crystallised is counted towards the LTA. This is how I interpret their examples, I'm seeking clarification on which figures are counted towards the LTA.

Then elsewhere it suggests that "withdrawals" (however you interpret that figure) are not the only factor, but that it is the total value of the SIPP at every crystallisation event that matters. So if the SIPP is valued at more than the LTA, as in my example, then an LTA charge is due regardless of whether your total withdrawals have exceeded the LTA.

So this is why I was asking for confirmation / correction on the following example:
You've used 58.6% of the LTA, the SIPP is £1.5m, £1.0 m crystallised, £500,000 uncrystallised. The LTA is £1.073m.

If you've used 58.6% of the LTA does it follow that you have 41.4% of the current LTA available therefore £444,222 unused LTA and you can:
- withdraw income from the £1m crystallised at your marginal tax rate
- crystallise a further £444,222 without paying the excess LTA tax charge
- £55,778 of uncrystallised funds (500,000-444,222) can only be crystallised if the LTA excess tax rate is paid on that amount 

Is that correct?

What happens if you are in the above position at age 75, do you have to pay an LTA excess charge now, if so is the excess tax charge calculated on £55,778?

If you can confirm, or correct the above if it's wrong, it would be appreciated.

EdSwippet

Barry_Bear said:

... PensionBee suggest it's the amount "withdrawn" that matters (i.e. you take UFPLS and crystallise £100,000 and withdraw £25,000 tax free and leave £75,000 invested, then only the £25,000 is counted against the LTA), ...

The parenthesised clause is definitely wrong. For tax and LTA purposes, UFPLS is just a partial crystallisation of £X followed by an immediate withdrawal, 25% of £X tax free and 75% of £X taxable. Wrapping it up into one package for (some pandering chancellor's perceived notion of) convenience doesn't change its nature.

Can you point us to the PensionBee document that you've read?

Barry_Bear

EdSwippet said:

Barry_Bear said:

... PensionBee suggest it's the amount "withdrawn" that matters (i.e. you take UFPLS and crystallise £100,000 and withdraw £25,000 tax free and leave £75,000 invested, then only the £25,000 is counted against the LTA), ...

The parenthesised clause is definitely wrong. For tax and LTA purposes, UFPLS is just a partial crystallisation of £X followed by an immediate withdrawal, 25% of £X tax free and 75% of £X taxable. Wrapping it up into one package for (some pandering chancellor's perceived notion of) convenience doesn't change its nature.

Can you point us to the PensionBee document that you've read?

That example was from Fidelity:
https://www.fidelity.co.uk/lifetime-allowance/#2531364
See the 2 examples they provide.

This is one of the things that isn't clear. When the word "withdrawn" is used in the context of calculating the amount of LTA used, is it actually the amount "crystallised" that matters?

Notepad_Phil

Barry_Bear said:

EdSwippet said:

Barry_Bear said:

... PensionBee suggest it's the amount "withdrawn" that matters (i.e. you take UFPLS and crystallise £100,000 and withdraw £25,000 tax free and leave £75,000 invested, then only the £25,000 is counted against the LTA), ...

The parenthesised clause is definitely wrong. For tax and LTA purposes, UFPLS is just a partial crystallisation of £X followed by an immediate withdrawal, 25% of £X tax free and 75% of £X taxable. Wrapping it up into one package for (some pandering chancellor's perceived notion of) convenience doesn't change its nature.

Can you point us to the PensionBee document that you've read?

That example was from Fidelity:
https://www.fidelity.co.uk/lifetime-allowance/#2531364
See the 2 examples they provide.

This is one of the things that isn't clear. When the word "withdrawn" is used in the context of calculating the amount of LTA used, is it actually the amount "crystallised" that matters?

The two example are talking about two different sums, so I think that is what has confused you. The UFPLS is of £25,000 (not £100,000) so it's £6,250 tax free lump sum with taxable £18,750.

NoMore

Its still on the amount crystallised, not necessarily withdrawn, just that when you use UFPLS then you withdraw the whole amount you specify to crystallise (25% of which is tax free), FAD allows you to crystallise and not draw out the whole amount crystallised and instead perhaps only withdraw the tax free part)

So UFPLS of £25k involves a withdrawal and crystallisation of £25k of which 6.25k is tax free and £18.75k is taxable. This is done all at once, 25k will be withdrawn from the pension. 25K is used up by the LTA.

FAD (in their example) - crystallise 100K, but only withdraw the 25k tax free but 100k is used up of the LTA, with 75K crystallised still in the pension.

I understand now where you are getting confused, but its always the amount that's crystallised, the withdrawal amount will be dictated by the method and will not affect the LTA.

EdSwippet

Barry_Bear said:

You've used 58.6% of the LTA, the SIPP is £1.5m, £1.0 m crystallised, £500,000 uncrystallised. The LTA is £1.073m.

If you've used 58.6% of the LTA does it follow that you have 41.4% of the current LTA available therefore £444,222 unused LTA and you can:
- withdraw income from the £1m crystallised at your marginal tax rate
- crystallise a further £444,222 without paying the excess LTA tax charge
- £55,778 of uncrystallised funds (500,000-444,222) can only be crystallised if the LTA excess tax rate is paid on that amount 

Is that correct?

What happens if you are in the above position at age 75, do you have to pay an LTA excess charge now, if so is the excess tax charge calculated on £55,778?

If you can confirm, or correct the above if it's wrong, it would be appreciated.

Broadly and up to a point, yes. However, it relies on a few things that need clarifying.

Up to age 75, LTA percentages are consumed only by crystallisations (either flexi-access or UFPLS, doesn't matter; already discussed upthread). On crystallisation below the LTA -- that is, where your LTA percentage used is below 100% -- you take 25% of the amount tax free, and the 75% remainder moves to a taxable 'drawdown' element. On crystallisation above the LTA, you pay 25% LTA penalty tax, get no tax free lump sum, and the 75% remainder again moves to a taxable 'drawdown' element.

So far, so good. What about at age 75? Here there is an effective forced crystallisation and LTA test, but one that uniquely covers both uncrystallised and crystallised but undrawn elements. So, how you reached your example starting point of "SIPP is £1.5m, £1.0 m crystallised, £500,000 uncrystallised." at age 75 really matters.

Assuming (unrealistically!) a static LTA of exactly £1.073m, let's say that at age 60 you crystallised £628,836 out of an exactly £1.073m pot. So, £157,195 tax free, £471,583 to drawdown, 58.6% LTA used, and £444,212 remaining uncrystallised. Fifteen years of investing later, your £471,583 crystallised has grown to £1m and your £444,212 uncrystallised has grown to £500k.

At this point, you face an LTA test on the uncrystallised £500k plus all the growth in your crystallised £1m (so £1m - £471,583 = £528,417), for a total of £1,028,417. You do however still have 41.4% LTA headroom remaining, so you can subtract this, £444,222, leaving £584,195. Your LTA charge would be 25% of this, so £146,049.

However, had you (taxably) drawn down all of the growth on the crystallised element before age 75, so that this element was worth no more than £471,583, your LTA charge would then indeed be 25% of £500k less your remaining £444,222 LTA headroom, so 25% of £55,778, giving £13,945.

Barry_Bear

EdSwippet. Really helpful and appreciated, thank you!

gravlax

According to BestInvest the lifetime allowance is applied to how much you save into your pension. Not on the amount you take out.

The lifetime allowance

The lifetime allowance is a limit to the amount you can save in your SIPP or other pension over your lifetime. The allowance is currently £1.0731 million – you will pay tax on any pension savings you make in excess of this.
https://www.bestinvest.co.uk/pensions/sipps/sipp-allowance

Are they right? Is the lifetime allowance a limit / penalty on the amount you save, the amount you crystallize (whether it's all withdrawn or not), or the amount of crystallised cash you withdraw?

Notepad_Phil

That's wrong - it may be the amount of pension savings that you can build up (which includes growth of the savings you make) but it's not the amount of savings that you put into your pension.

I think possibly the best definition I've seen is "The Lifetime Allowance (LTA) is the limit on the amount of pension benefit(s) that you can take from all of your registered pension arrangements, before you incur a tax charge on the value of your pension above the LTA."

Note you could actually fall fowl of the lifetime allowance without actually withdrawing anything at all, as at age 75 your pension is tested to see whether it has gone above the LTA at that time - this includes the growth of any crystallised funds and anything that has been left uncrystallised.