LTA and 25% tax free rules

martynhall1

Hi, I withdrew a 25% tax free lump sum of £268,275 from my main retirement fund in Feb 2022, which I understand is the maximum amount that I can take under current LTA rules. Now that we are into a new tax year I want to start drawdown on a separate SIPP ( current value £100k) for the next 2 years, leaving my retirement fund to grow.

As I am now fully retired, I will be withdrawing circa £4500 month gross per month. I will be a basic rate tax payer for 2022/23 tax year, so am I correct in stating  that I cannot claim any of this tax free?
thanks hall2056

MallyGirl

In order to withdraw you will need to crystallise and since you have already used the full LTA then it is not just that you don't get the tax free bit, you will also be liable to tax for exceeding LTA.

EdSwippet

Just to put some numbers on MallyGirl's reply ...

Now that you have used up your entire lifetime allowance, to realise £4500 gross from an uncrystallised pension requires you to crystallise £6000. Of that, you will lose £1500 in LTA penalty. You would then pay tax on the remaining £4500 at 20%. This leaves you £3600, with £2400 lost to tax, for an effective 40% tax rate.

Depleting £100k at £6000/month will last you around 18 months, and six months short of your two year target. Alternatively, if you can manage with less than £3600 net per month, then withdrawing £4500/month as initially stated would leave you with £2700 after tax, but might (just about, depending on asset performance) last you the planned two years.

Note that UFPLS is not available to you now that you have used your full lifetime allowance. More an administrative annoyance rather than anything else, though. UFPLS is nothing more than crystallisation and drawdown both rolled into one. You can do them separately, just with a bit more admin.

One final thought. Have you checked that you are not eligible for Fixed Protection 2016? You may well have made pension contributions since April 2016, but if not, that could still be available to you, and it would definitely help your case.

Flugelhorn

Is IP2016 still an option or has the date gone for that? I know it was very handy for me as gave a an extra 250K before the LTA was breached and I was able to continue adding to the pension. 

tiring33

If you've withdrawn a 25% tax free lump sum of £268,275 then you will have crystallised £1,073,100 of your pension fund, leaving £804,825 of crystallised funds to be withdrawn whenever you want subject to normal income tax rules. Assuming you don't have LTA protection you will also have used up 100% of your LTA.

You can withdraw whatever monthly amount you want from your crystallised funds subject to standard yearly tax bands/charges, but no further tax free sum will be available on your withdrawals (apart from the nil rate income tax band of course).

It is only when you come to crystallise additional funds (if you still have uncrystallised funds in your pension) that you will incur a 25% LTA charge on these funds as they are crystallised i.e. moved into drawdown. Any uncrystallised funds left in your pension will automatically crystallise and incur the 25% LTA charge when you turn 75.

If you are withdrawing funds from a separate SIPP, these will be uncrystallised funds which means you will need to crystallise them prior to withdrawal and incur an LTA charge in the process.

gm0

You may well plan to draw crystallised funds as income from your main pension. This happens without LTA charge from the already crystallised 75% left behind in there. And it would be prudent to do so and plan the years from now to age 75 carefully (along with the arrival of State Pension).  Full use of the basic rate band and avoiding excess in the wrapper at age 75 is the goal.   Recycle to S&S ISA if not consuming.  Give it away if worried about IHT. 

Any growth in this main pension amount will be measured at age 75 and if bigger than the value at crystallisation and not drawn as income prior will be hit with the 25% LTA charge on the crystallised growth.

This largely optional penalty tax is in addition to the above LTA 25% on the other untouched SIPP which happens whenever you do it. Now. At 75.  Or any time in between.  You can tax manage the crystallised one.  You are stuck with the above LTA consequences on the other one unless the rules are changed in some future shake up.  Don't hold your breath.

Protection certificates would have helped if secured in time and the relevant rules on contributions followed but this has it's own issues.  Fixed protection