How does lifetime allowance work?

cralol

I am 35. My pension pot is currently at £250,000. I contribute £2,100 per month to it and it's invested primarily in a US stock market index tracker.

If I were to model on, say, 5% annual growth, then my pension pot will be £1.5M by the time I reach age 55.

If I then retire at that point (age 55) and stop paying into the pension, leaving the £1.5M invested and draw down from it, at, say, £25,000 per annum, I am presumably consuming my lifetime allowance at a rate of £25,000 per annum, which means that 20 years later, by age 75, I have used £500,000 of my ~£1M lifetime allowance. Correct so far hopefully?

I then understand that, at 75, you then pay a tax based on anything beyond your lifetime allowance. So if my pension pot has subsequently grown from £1.5M to, say, £2.5M by 75 and I've already drawn down £500K of LTA (between ages 55 and 75), what amount of tax would I pay at 75?

I would appreciate help understanding this calculation.

Dazed_and_C0nfused

How would you be extracting £25,000?

Each time you crystallise some of your fund (which you have to do to extract some money) I think that will be a BCE trigger.

This might be a start.

https://adviser.royallondon.com/technical-central/pensions/benefit-options/lifetime-allowance/

MX5huggy

No it will be tested against the LTA whenever you take anything out (55 if that is your plan). LTA may rise by the time you are 55.

as you are under 40 open  and use a LISA. 

https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/lifetime-allowance-for-pension-savings

gm0

Complex.

The LTA operates as a % when slices of pension are "marked for income" (taking TFLS via FAD and setting up a 0 or higher income on the 75%. Or as income is taken out crystallised in slices UFPLS bit at a time, 25% tax free, 75% income taxed on each slice.  Either way the value accessed (crystallised) consumes a % of LTA and it is the % that is tracked. 

Essentially each time a chunk of pension is touched.  The amount consumes the relevant % of the then current allowance.

The cash value of the allowance is (sometimes) indexed - so that moves over the years. Some people fixed their allowance (with a protection certificate such as when the LTA has been cut in a major way).  This has happened several times.  The price of entry to protection is typically stopping contributons and no more tax relief but even this varies across many types of protection

When you "run out" of allowance i.e. reach 100% crystallisation via either access method then two things happen

No more tax free cash on amounts above 100% LTA
A 25% penalty tax on anything else you "touch" when you touch it i.e access it for the first time

Then when you reach age 75 two further things happen again.  BCE5A, 5B.

Anything untouched (uncrystallised by that date half way through a long retirement - such as a separate above LTA portion) or just the full residue of a DC pension managed via UFPLS slices.  Let's call that A

And crystallised growth after income extracted if there is any.  Let's call that B (its the value of a DC pot at the time age 75 less the value of the 75% as it was when first touched (after 25% TFC removed via FAD when originally started. 
If you draw your income to nominal growth B will be zero or deeply negative and treated as zero for this calculation (capital has been depleted) by half way through.  B being negative does not offset A

At age 75 Calculate (Sum of A,B) - (Subtract any still unused allowance % x allowance value at the time - your best guess on what % of years indexation will happen and to what extent)  x 25% = LTA charge taken as income (or 55% taken as lump sum)

There are other BCE as alternatives to age 75, death, DB pensions etc. Go and look them up and understand the ones likely to be relevant to you

It will all change before you get there

marlot

>> If I then retire at that point (age 55) and stop paying into the pension, leaving the £1.5M invested and draw down from it, at, say, £25,000 per annum, I am presumably consuming my lifetime allowance at a rate of £25,000 per annum...

That's one way to do it.

Alternatively, you could 'crystallise' the whole £1.5m at age 55.  

75% of the pot can stay invested.  It is simply marked as crystallised.  So you'll still have £1.125m left invested.

Of the remaining 25%, most of it (72%) comes to you as a tax free lump sum.  The rest is paid as LTA tax.

You then draw down from the £1.125m as and when you need money.  You'll be charged income tax on each withdrawal at whatever rate you pay.

Note that at age 75, you need to ensure you've drawn enough of the growth to keep the £1.125m below £1.125m (or you'll get another LTA test).

cralol

Thanks for the replies so far. So, if I am understanding this correctly:

* I can withdraw cash amounts from my pension pot ("crystalisation"?) as often as I like from age 55 onwards. These will not be taxed (beyond normal income tax) unless I exceed the Lifetime Allowance (£1,073,100).

* If my wishdrawals exceed the Lifetime Allowance then each withdrawal above the allowance will be subject to 25% tax and income tax.

* My remaining pension pot ("uncrystalised") will automatically be assessed against Lifetime Allowance at age 75, at which point anything which takes me above the Lifetime Allowance would face a one-time tax of 25%.

--

Areas I'm still confused about:

1. Can someone confirm the definition of "crystalisation". I had previously understood this to mean a cash withdrawal from my invested pension pot, but there was a post above suggesting I can crystalise the lot but still leave it invested - which has thrown me a bit.

2. If I crystalise everything at 55, but leave it all invested, is this entire amount now in a tax free container? i.e. can it continue to grow and I can draw down from it as I wish without being subject to any further Lifetime Allowance scrutiny. It would simply be income tax at that point?

3. If I don't crystalise it all at 55, and leave the majority uncrystalised and continuing to grow, and then pay 25% on everything above Lifetime Allowance at age 75, is that the final tax I would pay, or would I be assessed on any additional growth or withdrawals beyond age 75?

EdSwippet

cralol said:

I am 35. ... If I then retire at that point (age 55) and stop paying into the pension, leaving the £1.5M invested and draw down from it...

FYI, the (unprotected) minimum pension access age is scheduled to rise from 55 to 57 in 2028. Famously vowel-free and uppercase-free company abrdn explains:

Minimum pension age rise confirmed - abrdn

cfw1994

Well done, that is a reasonably decent pot by your age 👍

20 years is a long time in pensions 😉

You talk about crystallising at 55: it is already 57 for you, that could change again 🤷‍♂️

In your shoes, I would consider making sure to have S&S ISAs as loaded as possible: you can draw on them when you want, and that can bridge any gap between any state pension or DC accessible pot and when you might want to retire. 

JoeCrystal

Personally since you are few decades away, I don't think you should worry about LTA! Rules changes all the time. Most important thing is to save for short term, medium term and long term in moderation. And enjoy life as well!

Albermarle

JoeCrystal said:

Personally since you are few decades away, I don't think you should worry about LTA! Rules changes all the time. Most important thing is to save for short term, medium term and long term in moderation. And enjoy life as well!

For example at the moment it is frozen for another 4 ? years. So even with just inflationary growth and no real growth, one is  getting closer to it all the time. What will happen in future - nobody knows.

P1Fanatic

cfw1994 said:

Well done, that is a reasonably decent pot by your age 👍

20 years is a long time in pensions 😉

You talk about crystallising at 55: it is already 57 for you, that could change again 🤷‍♂️

In your shoes, I would consider making sure to have S&S ISAs as loaded as possible: you can draw on them when you want, and that can bridge any gap between any state pension or DC accessible pot and when you might want to retire. 

I was going to say the same thing. Personal pension age is already increasing to 57 in 2028 and likely to increase further as the aim is to keep it 10yrs before State Pension Age (which is planned to increase to 68 in 2044).

Likewise my aim is to use S&S ISA to cover age 55 to Personal Pension age and S&S LISA to supplement personal pension age 60 to State Pension ago.