LTA abolition from 2024

zagfles

https://www.gov.uk/government/publications/abolishing-the-pensions-lifetime-allowance

Not got my head round it yet, but seems to be creating a lump sum limit of the same as the current LTA, with 25% of it available for PCLS/UFPLS and the rest available for stuff like death under 75. 

Pat38493

Just skimming through this, I might be missing something, but it looks to me like putting a DB pension into payment without any PCLS, will no longer have any impact on your available tax free cash?  

Also presumably putting a DB pension into payment with PCLS, only the PCLS will count against your TFC.

Unless I’m mistaken, previously if you put a DB pension into payment without PCLS, this would use up some of your LTA and therefore reduce the amount of tax free cash you could take from subsequent crystalization events?

So the old 20 times DB thing doesn’t exist anymore?

Or have I missed something there?

MK62

Pat38493 said:

Just skimming through this, I might be missing something, but it looks to me like putting a DB pension into payment without any PCLS, will no longer have any impact on your available tax free cash?  

Also presumably putting a DB pension into payment with PCLS, only the PCLS will count against your TFC.

Unless I’m mistaken, previously if you put a DB pension into payment without PCLS, this would use up some of your LTA and therefore reduce the amount of tax free cash you could take from subsequent crystalization events?

So the old 20 times DB thing doesn’t exist anymore?

Or have I missed something there?

It's not explicitly mentioned, but that does appear to be the implication.......assuming, like yourself, I'm not missing something too.

MK62

zagfles said:

https://www.gov.uk/government/publications/abolishing-the-pensions-lifetime-allowance

Not got my head round it yet, but seems to be creating a lump sum limit of the same as the current LTA, with 25% of it available for PCLS/UFPLS and the rest available for stuff like death under 75. 

From the quick read I've just done, that pretty much seems to sum it up......unless, as above, I missed something.

Pat38493

MK62 said:

zagfles said:

https://www.gov.uk/government/publications/abolishing-the-pensions-lifetime-allowance

Not got my head round it yet, but seems to be creating a lump sum limit of the same as the current LTA, with 25% of it available for PCLS/UFPLS and the rest available for stuff like death under 75. 

From the quick read I've just done, that pretty much seems to sum it up......unless, as above, I missed something.

There are a few questions arising though.  In the first paragraph under "proposed revisions", what does this mean "Individuals will not pay tax where lump sums do not take them above this level.".  

I think this is maybe either badly worded, or I am not fluent in government legalese, but this when I read through this in a certain way, it seems to imply that the old LTA applies to the total tax free cash you can take in future, but you can take £268k of tax free cash as a PCLS, and then another £268K from UFPLS, and so on until you reach the old LTA.  I don't think this is what is intended but this is what the current wording could be interpreted as.  There is also a section in the legislation that says that the amount of allowance you use up, only corresponds to the non taxable part of the new threshold which backs up this view.  However I'm pretty certain this is not what is meant but I don't know if it's badly worded and needs changing, or it's just my understanding.

Also there is a section which appears to remove all crystallization events by number and letter?  Does this mean that crystallization no longer exists as a concept, or is there something left there?

Similarly, I don't see anything anywhere in here about what happens when you take Tax free cash on its own and put the rest of your pot in drawdown - it's all about lump sums.  Is there a different legislation covering flexible TFC withdrawals? 

Doctor_Who

In that cases, the PCLS is taxed unless it exceeds the permitted maximum.  If it does exceed the permitted maximum then the excess is taxed.

Is that correct? I would have thought that a PCLS was not taxed unless it exceeded the permitted maximum.

Notepad_Phil

[Deleted User] said:

...
3. The permitted maximum is the lump sum allowance of £268,275.  Where some of that has already been used, it is reduced by that amount.  This is the called the previously-used amount and is the aggregate of the non-taxable amounts in relation to previous relevant lump sums (e.g. PCLS, uncrystallised funds pension lump sum, trivial commutation lump sum). 
...

I take it that people will need to calculate their own values for what they've taken tax-free up to the introduction of this new method.

Luckily I know exactly how much I've taken as I keep records of everything, but I can see that it might be more difficult for people who don't keep such records,  e.g. people with multiple DB pensions that have taken tax-free amounts or people who for one reason or another are lucky enough to have DC pensions which allowed greater than 25% tax-free lump sums or perhaps have taken less than 25% when they crystallised their pot, especially if they've subsequently transferred/closed that DC pot down.

Albermarle

Notepad_Phil said:

[Deleted User] said:

...
3. The permitted maximum is the lump sum allowance of £268,275.  Where some of that has already been used, it is reduced by that amount.  This is the called the previously-used amount and is the aggregate of the non-taxable amounts in relation to previous relevant lump sums (e.g. PCLS, uncrystallised funds pension lump sum, trivial commutation lump sum). 
...

I take it that people will need to calculate their own values for what they've taken tax-free up to the introduction of this new method.

Luckily I know exactly how much I've taken as I keep records of everything, but I can see that it might be more difficult for people who don't keep such records,  e.g. people with multiple DB pensions that have taken tax-free amounts or people who for one reason or another are lucky enough to have DC pensions which allowed greater than 25% tax-free lump sums or perhaps have taken less than 25% when they crystallised their pot, especially if they've subsequently transferred/closed that DC pot down.

Nothing is ever simple with pensions....

zagfles

I think there's a significant change here wrt death benefits.

Currently, someone can inherit a pension of someone who died under 75 and designate it to drawdown, and the drawdown is tax free. The money remains in the pension and so no tax on investment growth, outside scope for IHT etc.

Under the new rules, it seems that can still be done BUT the drawdown will be taxable. But there's the ability to take the remainder of the deceased's full "lump sum tax free limit" as a tax free lump sum.

So for instance someone dies under 75 with an untouched £400k pension. Beneficiary has the choice of taking a £400k tax free lump sum (as it's within the 1.07m allowance), or designating £400k into drawdown but that drawdown would then be subject to income tax. Or possibly split it eg take £200k tax free and £200k into taxable drawdown.

So I think they've sneaked in a change to make pensions less of a IHT avoidance vehicle. Some would say this is perfectly reasonable (inc me).

I may of course have misunderstood...

Pat38493

It seems pretty clear as proposed above that DB pension income will no longer have any bearing on the threshold or the amount of tax free cash you can get based on 

...... "It will not take into consideration the payment of regular pension income."

and....

"The requirement to have available LTA to take any lump sum payment will be removed."

zagfles

Pat38493 said:

It seems pretty clear as proposed above that DB pension income will no longer have any bearing on the threshold or the amount of tax free cash you can get based on 

...... "It will not take into consideration the payment of regular pension income."

and....

"The requirement to have available LTA to take any lump sum payment will be removed."

Would seem so, looks like they've removed all the income BCEs but retained the lump sum BCEs so BCEs are now used to measure lump sum usage rather than LTA usage. But looks like the other PCLS limit ie on 25% of the value crystallising/designated remains, as there's nothing saying that's changed.

So it would seem that eg taking a DB pension with no PCLS means: on one hand you don't use any of your "lump sum allowance", but on the other it doesn't generate any additional lump sum allowance of 25% of the DB value for use elsewhere.  

So for instance if you have a DB pension paying £15k pa and have a separate SIPP with £100k in it, you can still only take £25k of the SIPP as PCLS.

OTOH if the DB pension had a linked AVC with £100k in it, as now, you'd be able to take the whole £100k tax free as it's 25% of the combined value (20x15k + 100k).

However with a 15k DB and a £1m SIPP, you'd now be able to take £250k PCLS from the SIPP as the DB pension hasn't used any lump sum allowance.

Again, this is my understanding from a not too clear document so could be wrong.

It's not clear on transition for people who've already used LTA, possibly BCEs 1-5D are ignored from next tax year and only BCEs6+ are counted? So eg someone who's already crystallised a £15k DB pension with no PCLS - this year they'd only have a max PCLS of 25% of their remaining LTA ie about £155k, but from April 2024 they'd have the full £268k as they haven't used any lump sum BCEs. 

Think we need more detail, I'm not sure at all the above is correct!