How does lifetime allowance work?

Albermarle

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. 

Although on the other side ,40% tax relief on pension contributions may not last forever, so maybe better for the OP to fill their boots now and top up ISA's later ( assuming they are getting higher rate relief of course ).

gm0

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.


UFPLS slices are a crystallisation where all the income is taken.  FAD slices are a crystallisation where (most of the time) 25% is taken and the rest is "marked for income".   A full LTA crystallisation of 1m would "mark" 750k and generate 250k TFC. 

Accessing a chunk, some or all, of a pension is the event.  Taking income *is* such an event with UFPLS as each piece is a slice being accessed.  And it is *not* an event (with FAD) income because the whole chunk on which TFC is taken is "marked" at the FAD crystallisation event at the begining.  The phasing of income thereafter makes no difference and is not crystallisation until that chunk is exhausted and another new slice of pension is touched. 

Normally income is phased over a long period with FAD.  Yet Phased FAD (and then choosing to take *all* the income straight away) and UFPLS (which always does it) are the same thing.  This is the limiting case at one end

FAD taking TFC only and *no* income from the 75% is the other limiting case.  This matters because TFC only and not 1p income more is the edge beyond which the annual allowance is crimped for DC pensions (Money Purchase Annual Allowance).  From 40,000 to 4,000.  If still employed in early retirement this could be an unwelcome tax trap.  

Below the LTA letting the allowance grow and letting the uncrystallised funds grow and getting "more" allowance ultimately is more efficiently done with UFPLS slices for income.  Where providers have a reasonably efficient small slices crystallisation admin for UFPLS. Not all do.

At or slightly above the LTA the situation changes and it may depending upon your broader circumstances be more efficient to crystallise 100% to LTA.  People seek to optimise further - crystallisation "in a dip" (but when will it be), lowest risk (and growth) part of the portfolio in the "above LTA" pension so that less of the growth is penalised and the high growth assets are in a not subject to LTA wrapper.

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?

With FAD and a large crystallisation.  Normally the TFC is taken (there are rare circumstances where people don't but very unusual as the right to do it later it is lost. So income tax inefficient. So 75% is "marked for income".  25% is in your hands tax free (but now inside your estate for IHT).

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?

If you are subject to the age 75 tests i.e. did not die prior and do the death rules and then your estate passing on then there are no more LTA rules post age 75.  Income tax etc. continue as normal.  IHT rules when you ultimately die (pension outside estate currently). 

I suggest you go to the HMRC site and review the list of BCE

cfw1994

Albermarle said:

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. 

Although on the other side ,40% tax relief on pension contributions may not last forever, so maybe better for the OP to fill their boots now and top up ISA's later ( assuming they are getting higher rate relief of course ).

It’s possible that 40% relief could disappear, of course.  I personally doubt it, but who knows.
I guess my point was to build up a non-pension buffer to give some funds available prior to the age of 57/58 for the OP.
Frankly I wasn’t thinking about any of that in my 30s, so I imagine they will be absolutely fine!
Concentrate on enjoying a full and fun life 👍