Crystallisation calculation

NoMore

Problem is the LTA is complicated as a tax with crystallisation and age 75 test and these articles are trying to be simple and easy to understand for people, they don't want to start trying to explain about crystallisation and the details of how it actually works, just a quick general overview, but this leads to questions and misunderstanding like in this thread.

Using the word Save is probably the worst offense, as that makes it sound like it only applies to contributions which it doesn't it applies to growth as well. 

The LTA test is triggered by certain events called Benefit Crystallisation Events (BCE), the two most common BCE are taking tax free cash and reaching age 75, there are others as well. At each BCE a calculation is made on how much LTA has been used and if you have breached it. They are listed here: Benefit crystallisation events FAQ (aegon.co.uk) Anyway I haven't even described the BCE's properly so you can see how much of a minefield it is.

Although the LTA has decreased in recent years and is frozen, the majority of people should never have to deal with it. Unfortunately those that do, articles trying to describe it simply don't help. 

Albermarle

It is clear from many posts on here , that until the concept of uncrystallised and crystallised finds is fully understood, then they will always struggle with the various systems like UFPLS; FAD; LTA etc 

Barry_Bear

NoMore said:

Problem is the LTA is complicated as a tax with crystallisation and age 75 test and these articles are trying to be simple and easy to understand for people, they don't want to start trying to explain about crystallisation and the details of how it actually works, just a quick general overview, but this leads to questions and misunderstanding like in this thread.

Using the word Save is probably the worst offense, as that makes it sound like it only applies to contributions which it doesn't it applies to growth as well. 

The LTA test is triggered by certain events called Benefit Crystallisation Events (BCE), the two most common BCE are taking tax free cash and reaching age 75, there are others as well. At each BCE a calculation is made on how much LTA has been used and if you have breached it. They are listed here: Benefit crystallisation events FAQ (aegon.co.uk) Anyway I haven't even described the BCE's properly so you can see how much of a minefield it is.

Although the LTA has decreased in recent years and is frozen, the majority of people should never have to deal with it. Unfortunately those that do, articles trying to describe it simply don't help. 

The LTA test is triggered by certain events called Benefit Crystallisation Events (BCE), the two most common BCE are taking tax free cash and reaching age 75. 

Much of the information out there says that when you access a SIPP for either ULPLS or Flexi Access Drawdown, with each crystallisation you can take "up to" 25% tax-free. So if there are situations where it is advantageous to not withdraw anything tax-free, or crystallise 0% tax free and 100% taxable, I think this would still count as a BCE? 

Would it be more accurate to say the two most common BCE are crystallising some or all of the pension and reaching age 75?

Barry_Bear

Another source of pension advice has this, which looks questionable:

The Lifetime Allowance (currently £1,073,000) is not a limit on the most that can be withdrawn in aggregate but is a limit on the value of the SIPP at any crystallisation point, or the final check at age 75.

Is the above wrong?

Earlier in this thread it has been said that a SIPP can have any value, it can be over the LTA (e.g. £2m), when you start drawdown, or at any subsequent partial crystallisation, and you won't exceed the LTA unless your total crystallisations have exceeded 100% of the LTA. So you could have a SIPP valued at £10m, and if you crystallise £1m of it, you have not breached the LTA.

MallyGirl

Barry_Bear said:

Another source of pension advice has this, which looks questionable:

The Lifetime Allowance (currently £1,073,000) is not a limit on the most that can be withdrawn in aggregate but is a limit on the value of the SIPP at any crystallisation point, or the final check at age 75.

Is the above wrong?

Earlier in this thread it has been said that a SIPP can have any value, it can be over the LTA (e.g. £2m), when you start drawdown, or at any subsequent partial crystallisation, and you won't exceed the LTA unless your total crystallisations have exceeded 100% of the LTA. So you could have a SIPP valued at £10m, and if you crystallise £1m of it, you have not breached the LTA.

True - until you hit 75 where the remaining £9m plus any remaining growth on the crystallised bit will be compared to the tiny percentage of LTA that is left and there will be tax to pay

Albermarle

 So if there are situations where it is advantageous to not withdraw anything tax-free, or crystallise 0% tax free and 100% taxable, I think this would still count as a BCE? 

When you crystallise it automatically produces 25% tax free and the pension provider will just send it to you .

In theory you could ask them not to send it but there would seem to be little point except in some very unusual scenario and their IT system would probably blow a fuse trying to handle it.

EdSwippet

Barry_Bear said:

Would it be more accurate to say the two most common BCE are crystallising some or all of the pension and reaching age 75?

Mostly this is just more woolly than what you quoted.

Technically, crystallising some of a pension and taking the tax-free lump sum is two simultaneous BCEs. Specifically, BCE 6 for the 25% tax-free, and BCE 1 for the remaining 75% drawdown element. Aegon has published a decent FAQ on the whole topic, if you really want to get into the weeds:

BCEs and valuing benefits against the lifetime allowance - Aegon

It is possible to take less than 25% tax-free, even 0%, when crystallising, but it's a struggle to think of cases where that would be anything other than a mistake. Because anything not taken tax-free can then only be taken taxably, and trading a 0% tax rate for 20%, 40%, or whatever is unlikely to be a winning strategy.

The timing of all the BCEs apart from the one at age 75 are under your control. The age 75 BCE is BCE 5. In particular, BCE 5A is the sting in the tail for the drawdown element of things, and BCE 5B for anything as yet uncrystallised.

The more you search, the more vague, misleading, or incomplete "advice" you'll find. However, if you take the time to understand the real rules that underpin all of this, and which the Aegon FAQ above lays out pretty well, you should find that it becomes easier to cut through the noise.