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LTA abolition from 2024

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  • Pat38493
    Pat38493 Posts: 3,318 Forumite
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    zagfles said:
    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!
    What you are saying about using the tax free allowance from a DB pension to take from DC - even now that is only valid if the two are part of the same scheme linked together right?  You cannot do that even today, if they are 2 completely separate schemes.
  • zagfles
    zagfles Posts: 21,403 Forumite
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    Pat38493 said:
    zagfles said:
    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!
    What you are saying about using the tax free allowance from a DB pension to take from DC - even now that is only valid if the two are part of the same scheme linked together right?  You cannot do that even today, if they are 2 completely separate schemes.
    Yes, that why I said "still".
    There was speculation that the max PCLS could be related to amount previously crystallised eg that you could build up an entitlement to future PCLS by crystallising and not taking the max PCLS at the time. But looks like they're not going that way and ignoring non-lump sum BCEs.

  • Albermarle
    Albermarle Posts: 27,754 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    zagfles said:
    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...


    I have not had the time to read it all, so this is interesting.
    Couple of points.
    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)
    Is this limit really £1.07M , or do they really mean £268K ?

    Although this change would reduce the attractiveness of beneficiary pensions from people who died under age 75 (  I would agree probably a sensible move) I am not sure how it affects the more general use of pensions as a IHT avoidance vehicle ?
  • zagfles
    zagfles Posts: 21,403 Forumite
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    edited 20 July 2023 at 2:47PM
    zagfles said:
    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...


    I have not had the time to read it all, so this is interesting.
    Couple of points.
    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)
    Is this limit really £1.07M , or do they really mean £268K ?

    Why would it be £268k? That's the PCLS limit which still stands, as it says.
    £1.07m for death benefit lump sum (after taking off any previous lump sums taken) makes it sort of consistent with previous rules. Except from next year it seems you need to take it all up front otherwise taxable.

    Although this change would reduce the attractiveness of beneficiary pensions from people who died under age 75 (  I would agree probably a sensible move) I am not sure how it affects the more general use of pensions as a IHT avoidance vehicle ?
    Because the inherited pension is more likely to be taken as a lump sum, rather than remaining in a beneficiary/successor pension.
  • Pat38493
    Pat38493 Posts: 3,318 Forumite
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    zagfles said:
    ...which presumably means that the beneficiary would have a hard time keeping any investments of it tax free if it was the full £1.07m
  • zagfles
    zagfles Posts: 21,403 Forumite
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    Pat38493 said:
    zagfles said:
    ...which presumably means that the beneficiary would have a hard time keeping any investments of it tax free if it was the full £1.07m
    Indeed.
    It doesn't mention what happens on death over 75, presumably the situation is the same as now that any drawdown is taxable, but what about the lump sum allowance, is that lost?

  • coyrls
    coyrls Posts: 2,508 Forumite
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    Does "the remainder of the deceased full 'lump sum tax free limit'" mean that if the deceased has crystallised their pension, the PCLS taken at crystallisation is subtracted from the tax free limit to determine what is available tax free to the beneficiary?  If so that's quite a major tax change for people with large crystallised pensions.
  • Linton
    Linton Posts: 18,149 Forumite
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    edited 20 July 2023 at 4:54PM
    zagfles said:
    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...


    I think you misunderstand.  A pension inherited from someone who dies before 75 is generally  with some exceptions completely tax free including all drawdowns.  I think what may be causing confusion is that if the pension was over the the LTA the excess was, and presumably will continue to be, taxable.  This aspect needs to be redefined after the abolition of the LTA

    See https://www.gov.uk/tax-on-pension-death-benefits

    I doubt very much that a change to the general rule would be sneaked through in a measure that clears any loose ends left over by abolishing LTA.
  • zagfles
    zagfles Posts: 21,403 Forumite
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    coyrls said:
    Does "the remainder of the deceased full 'lump sum tax free limit'" mean that if the deceased has crystallised their pension, the PCLS taken at crystallisation is subtracted from the tax free limit to determine what is available tax free to the beneficiary?  If so that's quite a major tax change for people with large crystallised pensions.
    Only for those who were previously heading towards paying an LTA charge at 75 ie where they'd crystallised up to LTA and not drawn growth.
    It does look like if you were to die under 75 with a large crystallised pot, this tax year might be the ideal year for it to happen! Last year you might have had an LTA charge, next year your beneficiaries might be liable to income tax on the excess.
    It does seem death benefits are being changed quite a lot with the LTA abolision!

  • DairyQueen
    DairyQueen Posts: 1,855 Forumite
    Eighth Anniversary 1,000 Posts Name Dropper
    An article published in Investor Chronicle today states (bold italics mine):

    'Those who inherit a pension pot may have to pay income tax as early as next year, if a policy proposal published earlier this week by HMRC goes through.

    At the moment, when somebody dies before turning 75, beneficiaries of a pension pot are exempt from inheritance tax and can draw income without incurring income tax.

    However, an HMRC policy paper has proposed that an uncrystallised pension inherited from someone younger than 75 would "no longer be excluded from marginal rate income tax” of the inheritor from 6 April 2024.

    Pensions have been considered a very efficient vehicle for inheritance planning. This is both because they are generally free of inheritance tax and can be free of income tax if the person dies before the age of 75.

    The HMRC paper is part of a series of documents released covering changes to the lifetime allowance (LTA), which is due to be formally abolished from 2024. That measure was announced by chancellor Jeremy Hunt in his Spring Budget earlier this year, but for the current tax year only the LTA tax charge was scrapped.

    • If you die before 75, your beneficiaries can currently draw income from your pension tax free
    • Tax office proposes changing the rules as part of aboloishing (sic) the lifetime allowance

    Those who inherit a pension pot may have to pay income tax as early as next year, if a policy proposal published earlier this week by HMRC goes through.

    At the moment, when somebody dies before turning 75, beneficiaries of a pension pot are exempt from inheritance tax and can draw income without incurring income tax.

    However, an HMRC policy paper has proposed that an uncrystallised pension inherited from someone younger than 75 would "no longer be excluded from marginal rate income tax” of the inheritor from 6 April 2024.

    Pensions have been considered a very efficient vehicle for inheritance planning. This is both because they are generally free of inheritance tax and can be free of income tax if the person dies before the age of 75.

    The HMRC paper is part of a series of documents released covering changes to the lifetime allowance (LTA), which is due to be formally abolished from 2024. That measure was announced by chancellor Jeremy Hunt in his Spring Budget earlier this year, but for the current tax year only the LTA tax charge was scrapped.

    The change to the treatment of pension pots at death was included in the paper unexpectedly. Steve Webb, former pensions minister and now partner at pensions consultancy LCP, said this was a big change that should have been properly discussed.

    He added: “For the last eight years, people have known that if a loved one died under the age of 75, they could inherit an untouched pension pot free of all tax. The money could sit in a drawdown account, being invested and growing, and would be a source of tax-free income whenever needed.

    “It would be totally unacceptable to make such a big change ‘through the back door’. If ministers plan to remove this pension tax break, they should announce their plans publicly and have them properly debated."

    A HM Treasury spokesperson said: “We look forward to working with stakeholders over the coming weeks to help us craft the legislation which will ensure that our historical pensions tax cut delivers the right results for savers and the economy.” '

    So, it appears that this is indeed a major change that is sneaking through the back door of unrelated legislation. 
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