LTA Thoughts Please

zagfles

One thing to bear in mind is that taking deferred DB pension early with early retirement reduction would use less LTA as it's based on the 20x the pension when it comes into payment. But obviously this has other implications eg income tax on a high amount if you get a salary as well as a pension plus lower DB pension albeit paid for longer. So complicated calculations needed.

BennyBrownBoy

Thanks Pat - been doing some Googling whilst on the forum and found the following from a site on LTA:

BCE 6 – relevant lump sums

This is one of the surprisingly broad BCEs, covering four different types of lump sum pension payments: PCLS (tax free cash), serious ill-health lump sums, uncrystallised funds pension lump sums (UFPLS), and lifetime allowance excess lump sums. Despite the different rules and taxation which apply to each of those lump sums, they are all tested using BCE 6. In each case, the amount being tested is simply the value of the lump sum being paid to the recipient. BCE 6 can only occur before age 75.

I may well be completely misunderstanding this but it seems to suggest that UFPLS lump sums - my £20K chunks - would be tested against LTA when I take them. Therefore I seem to be able to "delay" an LTA charge by this approach as opposed to crystallising the whole DC pot up front and taking 25% tax free?

Would this effectively mean I could take my £200K in £20K UFPLS chunks over 10 years, leaving £140K uncrystallised (plus growth), which then wouldn't be tested until I was 75 - where presumably there would be a charge (25%?) - to pay?

zagfles

BennyBrownBoy said:

Thanks Pat - been doing some Googling whilst on the forum and found the following from a site on LTA:

BCE 6 – relevant lump sums

This is one of the surprisingly broad BCEs, covering four different types of lump sum pension payments: PCLS (tax free cash), serious ill-health lump sums, uncrystallised funds pension lump sums (UFPLS), and lifetime allowance excess lump sums. Despite the different rules and taxation which apply to each of those lump sums, they are all tested using BCE 6. In each case, the amount being tested is simply the value of the lump sum being paid to the recipient. BCE 6 can only occur before age 75.

I may well be completely misunderstanding this but it seems to suggest that UFPLS lump sums - my £20K chunks - would be tested against LTA when I take them. Therefore I seem to be able to "delay" an LTA charge by this approach as opposed to crystallising the whole DC pot up front and taking 25% tax free?

Would this effectively mean I could take my £200K in £20K UFPLS chunks over 10 years, leaving £140K uncrystallised (plus growth), which then wouldn't be tested until I was 75 - where presumably there would be a charge (25%?) - to pay?

Yes, bear in mind it works on percentage LTA used, so every time you crystallise it's the amount crystallising divided by current LTA value. If you delay crystallisation you're likely to pay more LTA tax if your investments grow by more than the LTA rises (which at the moment is zero as it's frozen).

Also note that tax free cash is limited to 25% of remaining LTA, so it's the lower of 25% of fund or 25% of remaining LTA.

Pat38493

zagfles said:

Pat38493 said:

Pretty much yes - at least that's my understanding.

At that point everything you have left in your pot would be uncrystallised so would be subject to LTA, either when you withdraw it, or when you reach age 75.

If you unfortunately die before age 75, that uncrystallised amount would pass to your nominated beneficiary (subject to discretion of pension fund trustee I think) in full with no LTA (and I think even with no income tax liability to the beneficiary on withdrawal if I understood correctly).

LTA does apply on death under 75 if funds designated within 2 years, but no income tax.

If not designated within two years, no LTA but income tax instead.

Over 75, no LTA as that would have already been sorted at 75, but income tax.

designated?  what does that mean?  

RogerPensionGuy

A few points.

Activating pensions early to potentially reduce the % of LTA used on these occasions may possibly reduce the 25% LTA overlimit charges but, allowing a DB to cook normally means its bigger and in the long run, may be the better option.

Also Activating a DC pot or chunking out may mean this pot being used when units are lower than the longer term average. 

I'm in a situation not unlike the OP and am talking myself out of activating a DB scheme next month knowing it will go up 5% in April and fully away of the X 20 for LTA % consumption.

I just like seeing the DB roll up in PA value every day I delay activation.

I was 99% going to activate the DB pot next month due the maths but, at the budget tail end of 2022 the LTA was one of the few freezes or new rules getting made or extended from April2026 to April2028 and my view is changes will be made so the LTA is not frozen till April 2026.

I'm hoping the LTA will be raised espically when inflation increases have made the Current LTA too low, it was like 1.5/1.8M 10 or twelve years ago, now it's about 1.1M

Anyone here got any views on where the LTA will be moving or going to these next 2/3 years?

NedS

RogerPensionGuy said:

I'm hoping the LTA will be raised espically when inflation increases have made the Current LTA too low, it was like 1.5/1.8M 10 or twelve years ago, now it's about 1.1M

Anyone here got any views on where the LTA will be moving or going to these next 2/3 years?

I agree it may potentially be too low, especially if inflation sits at 5-10% between now and 2028 2026, but the LTA has been frozen until 2028 2026 so expect it to be further eroded in real terms by inflation, especially if you have an uncapped DB pension rising at 10% per year contributing x20 to your LTA usage.

EdSwippet

NedS said:
... but the LTA has been frozen until 2028 ...

Hmm. Investment Sense says extended to 2028, but Willis Towers Watson says no, still 2026.

One of them must be wrong, but which?

zagfles

Pat38493 said:

zagfles said:

Pat38493 said:

Pretty much yes - at least that's my understanding.

At that point everything you have left in your pot would be uncrystallised so would be subject to LTA, either when you withdraw it, or when you reach age 75.

If you unfortunately die before age 75, that uncrystallised amount would pass to your nominated beneficiary (subject to discretion of pension fund trustee I think) in full with no LTA (and I think even with no income tax liability to the beneficiary on withdrawal if I understood correctly).

LTA does apply on death under 75 if funds designated within 2 years, but no income tax.

If not designated within two years, no LTA but income tax instead.

Over 75, no LTA as that would have already been sorted at 75, but income tax.

designated?  what does that mean?  

For drawdown, see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088660

NedS

EdSwippet said:

NedS said:
... but the LTA has been frozen until 2028 ...

Hmm. Investment Sense says extended to 2028, but Willis Towers Watson says no, still 2026.

One of them must be wrong, but which?

Yes, I think you are correct - upon closer examination I think the freeze is until 2026. People were expecting it to be extended in the Autumn Statement in Nov 2022 along with other allowances and thresholds where freezes were extended, but it didn't happen.

RogerPensionGuy

RogerPensionGuy said:

A few points.

Activating pensions early to potentially reduce the % of LTA used on these occasions may possibly reduce the 25% LTA overlimit charges but, allowing a DB to cook normally means its bigger and in the long run, may be the better option.

Also Activating a DC pot or chunking out may mean this pot being used when units are lower than the longer term average. 

I'm in a situation not unlike the OP and am talking myself out of activating a DB scheme next month knowing it will go up 5% in April and fully away of the X 20 for LTA % consumption.

I just like seeing the DB roll up in PA value every day I delay activation.

I was 99% going to activate the DB pot next month due the maths but, at the budget tail end of 2022 the LTA was one of the few freezes or new rules getting made or extended from April2026 to April2028 and my view is changes will be made so the LTA is not frozen till April 2026.

I'm hoping the LTA will be raised espically when inflation increases have made the Current LTA too low, it was like 1.5/1.8M 10 or twelve years ago, now it's about 1.1M

Anyone here got any views on where the LTA will be moving or going to these next 2/3 years?

Just reread my post, not very clear.

My point being as the LTA freeze was not extended from 2026 to 2028 I think we will actually see the LTA freeze being removed at anytime soon and allow it to rise at least in line with inflation or more.

If the LTA isn't pushed up or allowed to rise soon we will see many people stopping or never starting pension contributions.