Understanding Lifetime Allowance

Albermarle

So in essence you could get say 1.5M from a pension it it were 1.05M when you crystalised in full at say 65 and then have it pay you 450K over 10 years and you wouldn't have to pay any LTA tax even though 1.5M >> 1.073M .

Well probably if it paid out £450K over 10 years, there would not be £1.073M left in the pension pot . There would be £1.073M minus £450K + a bit of  growth.

However a more likely scenario is that you crystallise 100%, take a more modest income from it and if markets are kind you could still have over a Million left.

The point is that the LTA does not punish people for taking a decent income from a pension, as that is what a pension is for. It is there to limit how much tax relief can be gained when accumulating the pension. It is a rather blunt instrument to limit  people as to how much very generous tax relief (almost all at 40% for these large pension pots) they can gain when accumulating the pot. For most people, paying an LTA charge is just the equivalent of paying the tax relief back. 

honeststeveo

tiring33 said:

honeststeveo said:

So in essence you could get say 1.5M from a pension it it were 1.05M when you crystallised in full at say 65 and then have it pay you 450K over 10 years and you wouldn't have to pay any LTA tax even though 1.5M >> 1.073M ....

That is true. Of course the £450k you take out over 10 years will be subject to income tax. The tax man is encouraging you to use it rather than just having it sit there - that way they get their slice earlier!

Yes it will be subject to income tax but that's hard to avoid for mere mortals (tax free lump sum excepted).

I just find it bizarre that the limit is somewhat fuzzy but then I suppose income tax thresholds are per year so the person earning 100K in 1 year is tax differently to the person earning 50K for 2 years.

Sterlingtimes

tiring33 said:

The tax man is encouraging you to use it rather than just having it sit there - that way they get their slice earlier!

The tax man is also requiring us to make difficult probability assessments.

I am nearly 67, so should I aim to withdraw chunks of money annually from my fully crystallised SIPP before I am 75 to avoid LTA Tax? Well, I have diabetes (well-controlled) and leukaemia (CML) (well-controlled), so I would put my probability of reaching 75 at about 60%.  

I would grab chunks of my money from my SIPP each year within my 20% tax band, but inflation will reduce the annual grab. I may take all-in-all £70,000 taxed at 20%, i.e. £14,000. 

If I die before 75 then my £14,000 is wasted: I should have left the SIPP undisturbed.

If I die after 75 then LTA Tax will be applied to my £70,000 gain, i.e. £17,500.

Of course, my SIPP is currently an IHT-free zone, so I may be tempted to live off all other investments before I raid my SIPP.

There are so many variables here that I will need to make an annual reassessment. My temptation currently is to leave the SIPP alone and suffer the LTA Tax at 75.

If the Chancellor decides to remove the IHT exemption within the SIPP, that may upset the apple cart. 

Albermarle

If I die before 75 then my £14,000 is wasted: I should have left the SIPP undisturbed.

If you die before 75, the beneficiary of the pension will be liable for any LTA charge AIUI

If the Chancellor decides to remove the IHT exemption within the SIPP, that may upset the apple cart. 

Your pension is not included in your estate because it is held in trust by the pension trustees. Like any trust, the pension trustees can give your pension to who they like ( although in practice they will follow your instructions 99% of the time).
So I assume some major change in legislation surrounding all trusts would be needed to change the IHT status of a pension pot.
There are some rather generous rules on how beneficiary pensions are treated, that may come under scrutiny at some point.

The tax man is also requiring us to make difficult probability assessments.
That is very true but I console myself that if I do have to pay an LTA charge, I am only largely giving back tax relief that I gained in the first place. It is not as simple as that I know but it helps me to not worry about it too much. It is a 'luxury problem' in any case.

tiring33

Just to be clear - the LTA test at 75 measures growth in your crystallised funds, but you only fail this test (and pay an LTA charge) if you have exceeded your LTA. If your crystallised fund growth can be absorbed by any unused LTA % you still have left at 75 then there will be no LTA charge to pay.

As you say there are so many variables to account for in LTA planning that it's very difficult to accurately identify an optimum path. As others on this forum have pointed out, it may be best to just conclude that, if your pension savings/investments perform well enough for you to incur an LTA charge, it will be a nice problem to have

Sterlingtimes

tiring33 said:

... the LTA test at 75 measures growth in your crystallised funds, but you only fail this test (and pay an LTA charge) if you have exceeded your LTA. If your crystallised fund growth can be absorbed by any unused LTA % you still have left at 75 then there will be no LTA charge to pay.

Thank you, I am not sure that I totally understand.

I have used exactly 100% of my LTA allowance. My crystallisation valuation after the deduction of my tax-free allowance is £430,000. If my drawdown fund is valued at £860,000 on my 75th birthday, am I liable for £115,000 in LTA tax?

Albermarle

Sterlingtimes said:

tiring33 said:

... the LTA test at 75 measures growth in your crystallised funds, but you only fail this test (and pay an LTA charge) if you have exceeded your LTA. If your crystallised fund growth can be absorbed by any unused LTA % you still have left at 75 then there will be no LTA charge to pay.

Thank you, I am not sure that I totally understand.

I have used exactly 100% of my LTA allowance. My crystallisation valuation after the deduction of my tax-free allowance is £430,000. If my drawdown fund is valued at £860,000 on my 75th birthday, am I liable for £115,000 in LTA tax?

If the pot grows by £430,000 that growth will be subject to an LTA charge. 25% if taken as income ( then any income tax due) or 55% if taken as a lump sum.
So you should take at least enough income from the pot so it does not grow. 
On the other hand if IHT is an issue, if you leave it in the pension, you can avoid this on the £430K growth.
Best solution usually is just to take the income and spend/enjoy it. Could be a lot worse things to do !

Sterlingtimes

Albermarle said:

If the pot grows by £430,000 that growth will be subject to an LTA charge. 25% if taken as income ( then any income tax due) or 55% if taken as a lump sum.
So you should take at least enough income from the pot so it does not grow. 
On the other hand if IHT is an issue, if you leave it in the pension, you can avoid this on the £430K growth.
Best solution usually is just to take the income and spend/enjoy it. Could be a lot worse things to do !

Thank you for kindly posting. This rather confirms that I understood the model correctly. As my other State Pension and DB pensions increase in line with CPI and RPI capped at 5% each year with the tax bands being fixed, the amount that I can grab from my SIPP within my 20% tax band reduces. It is now only £60,000 over eight years, so that some LTA Tax would be inevitable. You are right, I might as well take it.

I would never have considered myself a candidate for IHT, but now I am starting to wonder. A property price crash could work wonders: IHT may then be avoided and my son still gets a house.