LTA threshold / charge with multiple pension funds

Marcon

drjohn67 said:

Private pension was how it was sold to us 30 years ago and interestingly the term still used on gov.uk - I think it referred to pensions that are not managed by the state. 

A private pension is generally taken to mean any non-state pension provision, so could be either DB or DC. Gets even more confusing when you hear public sector schemes described as 'private pensions' ! Just to add to the fun, some commentators now use the term interchangeably with 'personal pensions', as opposed to workplace pensions - e.g. https://www.pensionbee.com/pensions-explained/pension-types/what-is-a-private-pension

Pat38493

drjohn67 said:

Private pension was how it was sold to us 30 years ago and interestingly the term still used on gov.uk - I think it referred to pensions that are not managed by the state. It was a DC type arranged by me rather than a workplace one. Left it dormant after the LTA dropped.

Thanks for explaining the 25% and 40% which had previously been described to me as 25+40% i.e. 65%. Your explanation was much clearer.

I suppose the specific detail that I hope will come through is, what happens to the TFLS for the DC if the pension is over the LTA?
It sounds like the DC pot of money is reduced by 25% at time of crystallisation. 

(Hopefully, I still get a TFLS OF 25% of the residual DC pot and then pay income tax on anything beyond that. That seems like one of the key questions to resolve with the IFA.)

P.s. It will be a second IFA meeting this time with a specialist LTA expert that he has recruited in.

Your advice has been very much appreciated because the synchronous pension claims seemed unlikely to be successful. 

See my last post - for info about crystallization of DC.

If you take all the tax free cash from the DC pots first, you will crystalize all 200K of it.  This will mean you used  around 86% of your LTA in total so you won't have any actual LTA charges until you take one or other DB pensions and if either of them uses 14% or more you will then incur LTA tax impacts (which may simply result in a reduction of the ongoing pension payable).

If they are NHS / government pensions, what is the impact if you take those a bit later?  I think with NHS you can defer taking the payments and then once you put it into payment you get a lump sum of backdated (taxable) payments in addition to any normal lump sum.

If you are above the LTA, I am actually not sure what happens to the "tax free" lump sum when you take a DB pension - I don't know if it's taxed immediately at 55% LTA tax or if you are already completely above the LTA at that point, or what happens if you breach the LTA during that transaction.

I would ask your IFA to comment on whether there is an extreme urgency here or should you wait till after your meeting.  Frankly, your chances of putting a government DB into payment next month if you have not triggered any process yet is in any case remote.

Edit - I am not necessarily saying you should take the DC pots first - this would require a much more detailed analysis which your IFA could do and would require details of your pension scheme rules for the DB pension etc.

Albermarle

I suppose the specific detail that I hope will come through is, what happens to the TFLS for the DC if the pension is over the LTA?
That is simple , no TFLS once you have reached 100% LTA.

Timescale after the IFA meeting (until the DB come in to payment )is very tight 

I will not bore you with the detail, but to get my DB ( private sector) in payment took over 4 months ( including lots of pushing from me ) and even then the first promised payment never turned up. It does not always happen, but apparently is not that unusual.... 

Pat38493

Albermarle said:

I suppose the specific detail that I hope will come through is, what happens to the TFLS for the DC if the pension is over the LTA?
That is simple , no TFLS once you have reached 100% LTA.

And what happens if the LTA is breached by taking that particular pension e.g. you were at 90% and taking the DB pension takes you to 110%.

Does this mean that if there is a mandatory lump sum, a portion of it will be taxed at 55%?

drjohn67

Thanks.
The larger of the govt DB pension is in process of being paid. 

The advice given gave me really helpful pointers and have discovered that the max tax free lump sum is limited by the amount of LTA remaining. 

Will defer the remaining  3 smaller pensions until after IFA and will anticipate a 25% reduction in their value at time of crystallisation.

I will just about be getting my money back from the DC pensions which is worth a lot less now after 20-30years. Ironic as the pension rep made a joke about people stuffing money under the mattress.

There were annual service charges which were modest. However, like a million others, the great majority went to the government (Gordon Brown’s raid and then the LTA).

Having said that, plenty of people have lost huge amounts in failing funds, so am fortunate.

zagfles

The thing I think your missing is that your remaining entitlement to tax free lump sum(s) is limited to 25% of the remaining LTA. So as you've used 67%, you have 33% left so your max PCLS over all pensions is 25% of 33% of the current LTA ie about £88.5k. Assuming you don't have any LTA protection.

If you exceed the LTA in a DB scheme, they'll usually reduce your benefits to pay the charge. It's not an extra tax on the income, it's a one off tax on the capital value. Similarly for DC they'll take the 25% tax as a one off charge and then income tax as usual on drawdown, or if you take a lump sum 55% (but no income tax).

It's good you're seeing an LTA specialist, it seems most ordinary IFAs are clueless about the LTA. They'll need to look into how the DB schemes handle exceeding the LTA, ie how much your benefits are reduced, and whether it'd be best to tip the LTA in a DC scheme.

Pat38493

@zagfles what happens then if the DB pension has a mandatory commencement lump sum and the LTA was already exceeded?  Lump sum taxed at 55% or what?

zagfles

Pat38493 said:

@zagfles what happens then if the DB pension has a mandatory commencement lump sum and the LTA was already exceeded?  Lump sum taxed at 55% or what?

Yes, see https://www.nhsbsa.nhs.uk/member-hub/lifetime-allowance

drjohn67

zagfles said:

The thing I think your missing is that your remaining entitlement to tax free lump sum(s) is limited to 25% of the remaining LTA. So as you've used 67%, you have 33% left so your max PCLS over all pensions is 25% of 33% of the current LTA ie about £88.5k. Assuming you don't have any LTA protection.

If you exceed the LTA in a DB scheme, they'll usually reduce your benefits to pay the charge. It's not an extra tax on the income, it's a one off tax on the capital value. Similarly for DC they'll take the 25% tax as a one off charge and then income tax as usual on drawdown, or if you take a lump sum 55% (but no income tax).

It's good you're seeing an LTA specialist, it seems most ordinary IFAs are clueless about the LTA. They'll need to look into how the DB schemes handle exceeding the LTA, ie how much your benefits are reduced, and whether it'd be best to tip the LTA in a DC scheme.

Thanks. 

Agreed about the specialist IFA. Some LTA advice given at an IFA presentation to a group of us at work a year ago was not particularly clear. Based upon the pointers given earlier, I stumbled across some information on Standard Life that helped me realise that my available lump sums were limited. 

It has taken the pressure off regarding some of my pensions that have not yet been applied for, and I can consider things a little more calmly with the benefit of the specialist LTA IFA. 

I had calculated the LTA charge as a reduction in pension using a 1/20th factor of the excess amount (which is luckily comparable to the NHS charges illustrated in your link so it looks like my estimate might be close).

 Once again thanks all for the great advice.

Albermarle

I will just about be getting my money back from the DC pensions which is worth a lot less now after 20-30years. Ironic as the pension rep made a joke about people stuffing money under the mattress.

This seems somewhat unlikely. You would expect over 25 years, that an invested pension fund would have increased a LOT, especially considering tax relief as well as investment growth.
Unless it was very badly invested.....