LTA Thoughts Please

NedS

RogerPensionGuy said:

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.

I agree the longer it is frozen, the greater the chance of it having unintended consequences. Consider an employee aged 50 with maybe 25 years in a DB scheme who has a deferred pension of £20,000 and an NRA of 65. If inflation averages 5% over the next 15 years, that modest £20k DB pension with 3 x lump sum will equate to £911k of LTA in 15 years at NRA, and that's without considering any pension arrangements they may have during the next 15 years.

So at some point the LTA will have to rise or it risks taxing average earners which is clearly not the intent. Part of the issue is that it's also a tax on excessive growth (successful investing) within a tax free wrapper - so capital gains are tax free up to a point - as long as you aren't too successful.

Take a pension saver who contributed £10k/year for the last 25 years and averaged 10% per year return - they have a pot of £1.17M after 25 years and have exceeded the LTA

Pat38493

zagfles said:

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

So in essence, this means that in this scenario, the person you gets the pension after death, cannot access it until 2 years later if they want to avoid LTA?

EdSwippet

NedS said:
So at some point the LTA will have to rise or it risks taxing average earners which is clearly not the intent.

I think this is exactly the intent. It is an almost perfect stealth tax. Virtually nobody understands it, and absolutely nobody can reliably plan around it.

Pat38493

EdSwippet said:

NedS said:
So at some point the LTA will have to rise or it risks taxing average earners which is clearly not the intent.

I think this is exactly the intent. It is an almost perfect stealth tax. Virtually nobody understands it, and absolutely nobody can reliably plan around it.

If it is, it probably isn't very well thought through because I don't think the enforcement mechanisms and systems around LTA are suitable for a "mass" tax that nearly everybody would have to pay.  It would become a huge mess.

Albermarle

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

Although the freeze in LTA will drag more people into the net, you are still only talking about a small ( but growing) minority.

Your average person on an average wage with auto enrolment is unlikely to be having any problems with LTA any time soon. Even your typical public sector worker building up a much better DB pension, is still going to be way off troubling the limit.

Seems unlikely that any of these would not start contributing to a pension because of fear of LTA.In any case 99% of them would have no/little idea what it was anyway .

Take a pension saver who contributed £10k/year for the last 25 years and averaged 10% per year return - they have a pot of £1.17M after 25 years and have exceeded the LTA

Again, only maybe the Top 10% of earners could even think about putting £10K pa in a pension, regularly for 25 years.

NedS

Albermarle said:

Take a pension saver who contributed £10k/year for the last 25 years and averaged 10% per year return - they have a pot of £1.17M after 25 years and have exceeded the LTA

Again, only maybe the Top 10% of earners could even think about putting £10K pa in a pension, regularly for 25 years.

Agreed. However, the point I think this makes, which I think is interesting, is that I have seen the LTA compared to the AA as two limits that essentially aim to achieve the same thing - to limit how much wealthy folks can ultimately deposit into pension schemes and obtain tax relief on. The point this comment makes is that the LTA is effectively set at a level substantially below the AA when considered over a longer time frame and with not unreasonable levels of investment returns. Again, I would argue that it is not unreasonable to consider folks earning £60k/year or above might want to pay £10k/year into their pensions from age 40-65, and with more and more workers being drawn into HRT, the number affected is not unsubstantial.
So although the AA may be set at £40k, which allows occasional large contributions, the effective long term contribution rates are set much lower via the LTA, and the concept that capital gains within a pension wrapper are tax free are only true up until a point.

zagfles

Pat38493 said:

zagfles said:

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

So in essence, this means that in this scenario, the person you gets the pension after death, cannot access it until 2 years later if they want to avoid LTA?

Yes, though for some people it'd be better to pay the LTA tax anyway rather than income tax. (income tax applies if you leave it over 2 years)

zagfles

EdSwippet said:

NedS said:
So at some point the LTA will have to rise or it risks taxing average earners which is clearly not the intent.

I think this is exactly the intent. It is an almost perfect stealth tax. Virtually nobody understands it, and absolutely nobody can reliably plan around it.

When the LTA and AA were introduced on "A-day" in 2006 they were set at levels where only the very highest earners maybe top 0.5% would be troubled by them. But then came so-called "austerity" and "we're all in it together" so at a time the govt was cutting stuff like benefits they also had to show they were hitting higher earners as well, hence the LTA reduction, AA reduction and "high income" child ben tax.

RogerPensionGuy

Maybe the LTA and the AA just needs a sensible adjustment to the rules.

40K AA up until total DC pot is say 1.5M and then limit AA to Maybe 10/15K PA in today's numbers.

All the above should be increased with some inflation or average wage inflation or whatever but, certainly not frozen or tampered with negatively every few years.

Anonymous101

zagfles said:

EdSwippet said:

NedS said:
So at some point the LTA will have to rise or it risks taxing average earners which is clearly not the intent.

I think this is exactly the intent. It is an almost perfect stealth tax. Virtually nobody understands it, and absolutely nobody can reliably plan around it.

When the LTA and AA were introduced on "A-day" in 2006 they were set at levels where only the very highest earners maybe top 0.5% would be troubled by them. But then came so-called "austerity" and "we're all in it together" so at a time the govt was cutting stuff like benefits they also had to show they were hitting higher earners as well, hence the LTA reduction, AA reduction and "high income" child ben tax.

Always the thin end of the wedge. What once was only for the wealthy eventually becomes used / applied to the middle classes. Its true for "luxury" good and also sadly for taxes!