Lifetime allowance - an expensive mistake?

dw3305

I took early retirement and an immediate DB pension 20 years ago.  I was advised that I could take out a new pension contributing £3600 a year and did so.  When the lifetime allowance came in I think I calculated the value of my DB pension at around £600K and decided it wasn't going to impact me.  But I'm now approaching 75, my new pension fund is around £140K, and I've been told that the calculation is done on my current pension, which with RPI increases has probably doubled, and would exceed the lifetime allowance - so the whole of my new pension will be heavily taxed.  Is this right?

Flugelhorn

TBH I don't know and am sure someone would have the right answer, though on googling I found this:

"Q. How are pre A-day pensions in payment tested for LTA purposes?

A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is: 

• Scheme pension = 25 x annual pension amount at the date of the first post A-day BCE

• Capped Drawdown (where the first post A-day BCE is between 06/04/06 and 05/04/15) = 25 x Capped Drawdown Limit at date of BCE 

• Capped Drawdown (where the first post A-day BCE is after 05/04/15) = 80% x 25 x Capped Drawdown Limit at date of BCE

• Flexi-access Drawdown = 80% x 25 x last available capped drawdown limit (i.e. just before the plan converted to flexi-access)"

So it looks like the value for LTA purposes would be 25 times you current pension??

Albermarle

It does seem to be the case that the old pension will be valued for LTA purposes at 25X the current value .
Assuming that there have been no Benefit Crystallisation events in the meantime.

Not sure where the £600K comes from, but the calculation for LTA purposes, will be the current annual pension from the old DB pension X 25. Then = £140K from the DC pension .

Better wait though for an expert to confirm this , as it certainly looks a bit unfair if nothing else. I guess ideally the OP should have crystallised a small part of his DC pension some years ago .

squirrelpie

Flugelhorn said:

TBH I don't know and am sure someone would have the right answer, though on googling I found this:

"Q. How are pre A-day pensions in payment tested for LTA purposes?

A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is: 

• Scheme pension = 25 x annual pension amount at the date of the first post A-day BCE
  

So it looks like the value for LTA purposes would be 25 times you current pension??

Surely the implication is that the LTA value is 25 times the annual pension immediately after 6 April 2006, not the current pension? There will be some difference I expect.

Albermarle

squirrelpie said:

Flugelhorn said:

TBH I don't know and am sure someone would have the right answer, though on googling I found this:

"Q. How are pre A-day pensions in payment tested for LTA purposes?

A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is: 

• Scheme pension = 25 x annual pension amount at the date of the first post A-day BCE
  

So it looks like the value for LTA purposes would be 25 times you current pension??

Surely the implication is that the LTA value is 25 times the annual pension immediately after 6 April 2006, not the current pension? There will be some difference I expect.

Have a look at the case study here 
Lifetime allowance - how benefits are tested - Royal London for advisers

squirrelpie

Albermarle said:

squirrelpie said:

Flugelhorn said:

TBH I don't know and am sure someone would have the right answer, though on googling I found this:

"Q. How are pre A-day pensions in payment tested for LTA purposes?

A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is: 

• Scheme pension = 25 x annual pension amount at the date of the first post A-day BCE
  

So it looks like the value for LTA purposes would be 25 times you current pension??

Surely the implication is that the LTA value is 25 times the annual pension immediately after 6 April 2006, not the current pension? There will be some difference I expect.

Have a look at the case study here 
Lifetime allowance - how benefits are tested - Royal London for advisers

Ah, thanks. In which case sadly it does look like a potentially expensive mistake if there was no protection sought and no benefit crystallisation in the meantime.

Flugelhorn

squirrelpie said:

Flugelhorn said:

TBH I don't know and am sure someone would have the right answer, though on googling I found this:

"Q. How are pre A-day pensions in payment tested for LTA purposes?

A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is: 

• Scheme pension = 25 x annual pension amount at the date of the first post A-day BCE
  

So it looks like the value for LTA purposes would be 25 times you current pension??

Surely the implication is that the LTA value is 25 times the annual pension immediately after 6 April 2006, not the current pension? There will be some difference I expect.

The key is "first post A-day BCE" - this may be now if a DC pension is only just being crystallised rather than when A-day actually happened 

Flugelhorn

Again I don't know the answer but can you get IP 2016 (I had this but that was before I took pension so a bit different) ?

dw3305

The £600K is just a figure in my head, but it would have been whatever my pension was then, times whatever the multiplier was at the time.  All I really remember is that it was about a third of the original lifetime allowance.
Ultimately it's my responsibility, but it does seem unfair that I will end up paying more tax than I have had tax relief, and it wouldn't have happened if I had taken £1 out of my new pension fund any time in the ten years or more after this all started.  I do at least scan the money pages in the papers, and I don't recall ever seeing that idea mentioned.
Don't suppose there is any retrospective action I could take?

Flugelhorn

dw3305 said:

The £600K is just a figure in my head, but it would have been whatever my pension was then, times whatever the multiplier was at the time.  All I really remember is that it was about a third of the original lifetime allowance.
Ultimately it's my responsibility, but it does seem unfair that I will end up paying more tax than I have had tax relief, and it wouldn't have happened if I had taken £1 out of my new pension fund any time in the ten years or more after this all started.  I do at least scan the money pages in the papers, and I don't recall ever seeing that idea mentioned.
Don't suppose there is any retrospective action I could take?

Looks like possibility of getting IP 2016 which fixes your LTA at the level (max 1.25m) of the savings provided that it was at least a million  they use the pre A-day pension to get a figure in 2016.  If you can work out what your pension value was in 2016 it might be worth investigating this as you may save a bit of tax.
The value in 2016 would be 25*the pension then + the value of the new pot.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/individual-protection-2014-2016/

Albermarle

It seems that if the new calculation on the pre A day pension , takes you over the LTA limit on its own , there will be no LTA charge applied to that pension.  . However in this case the full amount of the DC pension of £140K , would still have it applied .