Lifetime Allowance Question

wtiasa1997

I am recently retired & I am under State Pension age. All of my pension savings are in Money Purchase pension funds which I have not yet accessed and in total these amount to £1,130,000. I have no Lifetime Allowance (LTA) Protection on my pension funds.

As I currently have no ongoing income from any source, I may drawdown some of my pension funds or alternatively live off savings for the time being. 

However, I am also considering taking a 25% Tax Free Lump Sum from my pension funds up to the current LTA of £1,073,100 & then investing this TFLS in Fixed Rate bank/building society accounts paying monthly interest of approx 4 - 4.5% pa in order to generate an ongoing income for me of just under £1,000 per month. This monthly interest would in effect be tax free as it is within my Personal Allowance. I appreciate that any decision by me to take the TFLS would mean that I am removing it from a tax efficient pension fund and this may have potential Inheritance Tax implications on death as it would form part of my estate.     

My question is if I do take a TFLS now of £268,275 (ie 25% of £1,073,100) then am I correct in saying that I will have no LTA tax charge to pay as the £268,275 TFLS will use up (but will not exceed) 100% of my available LTA? Therefore it will only be when I take future benefits from the remaining pension fund (or age 75 if earlier I don't take any future benefits) that I will be subject to a potential LTA tax charge at that time on the excess benefits above the LTA?   

Pablo7474

In a nutshell yes, but you’d also need to watch out for the second test on the drawdown fund. 

Albermarle

Yes and it is a good time to fully crystallise, as investment values are a bit depressed.

gm0

When you take TFLS for 25% to100% LTA the 75% is marked for income (crystallisation).  Google BCE (Crystallisation events) and read about them on the government site.  No LTA charges payable for doing this. Don't die with a lot of TFLS in your hands but you know that.

Other key facts

1.  No TFLS on amounts over the LTA.  All is taxable.

2.  The value of the 75% bit on the day you took the TFLS matters.  If it grows inside the pension as you age towards 75 then LTA charge will apply to ALL that "crystallised" growth if it is not drawn out.  The solution being to draw it out between the years 55-75 making use of nil rate and basic rate bands each year before you reach BCE5A and 5B.  A strategy which mixes other income sources and TFLS but leaves the 75% untouched can run into this issue if not aware.

3.  25% LTA charge levy on the above LTA portion when it is touched for income - or if not touched at age 75 whichever is sooner

NedS

Have you taken any pensions under the "Small Pots" rule yet? You can take up to 3 Small Pots (up to a maximum of £10k each) which are excluded from the LTA. Some providers (notably HL) will carve out 3 x £10k pots from your DC fund for you to take under the small pots rule, effectively increasing the LTA by £30k.

If your current provider will not do this for you, do a partial transfer of £30k from the remaining uncrystallised funds to HL and let them take care of it for you.

caveman8006

Note that if you have no other sources of taxable income other than your intended fixed rate deposits, then you get an additional £6,000 tax-free allowance specifically for interest on top of your £12,570 personal allowance. This would allow you to possibly cream off any growth in crystalized pension pot over the coming years up to a combined total of £18,570 pa for pension and interest income without paying any tax (and it would be a good idea to draw down this excess each year from the crystalized pot even if you don't have any growth in the pension in a particular year, as the tax-free allowance would otherwise go to waste and it will give you more headroom for future growth)
 

YellowStarling

NedS said:

Have you taken any pensions under the "Small Pots" rule yet? You can take up to 3 Small Pots (up to a maximum of £10k each) which are excluded from the LTA. Some providers (notably HL) will carve out 3 x £10k pots from your DC fund for you to take under the small pots rule, effectively increasing the LTA by £30k.

If your current provider will not do this for you, do a partial transfer of £30k from the remaining uncrystallised funds to HL and let them take care of it for you.

Does the £30k (3 * £10k) limit apply to the value of the pot(s) at the point they are created/carved out of the initial pension or does it factor in future growth of these small pots too?  If the latter, are you suggesting the 3 * £10k pots are the first tactic?  I.e. take these as effective lump sums first and that leaves the LTA untouched and ready to be applied on the remaining fund next.

Albermarle

or does it factor in future growth of these small pots too?  I

No, they have got to be less than £10K when you take them.

MoneySavingGerbil

YellowStarling said:

NedS said:

Have you taken any pensions under the "Small Pots" rule yet? You can take up to 3 Small Pots (up to a maximum of £10k each) which are excluded from the LTA. Some providers (notably HL) will carve out 3 x £10k pots from your DC fund for you to take under the small pots rule, effectively increasing the LTA by £30k.

If your current provider will not do this for you, do a partial transfer of £30k from the remaining uncrystallised funds to HL and let them take care of it for you.

Does the £30k (3 * £10k) limit apply to the value of the pot(s) at the point they are created/carved out of the initial pension or does it factor in future growth of these small pots too?  If the latter, are you suggesting the 3 * £10k pots are the first tactic?  I.e. take these as effective lump sums first and that leaves the LTA untouched and ready to be applied on the remaining fund next.

The £30k (3 * £10k) applies at the point that you take each 10K under the small pots rule. If you transfer £30K to HL and it grows to £33K before you access them using the small pots rule then the £3K left will count against your LTA when you access it.

Other things to be aware of

• taking £10K under the small pots rule immeidiately gives you £2.5K tax free and £7.5K taxable income. Unlike more normal methods of accessing your pension there's no option to leave the £7.5K in the pension and choose when you take it.
• taking the 3 * £10k doesn't trigger the MPAA so you could still contribute more than £4K per annum to a pension in future. Though if you're aleady at or near LTA that may not be much comfort.
  

YellowStarling

Thanks both - that's clear.