25% Tax Free Cash - DB and DC Combination - LTA Breach

JamesP8

Most grateful for thoughts and any clarification on the following scenario, following the April 2023 reduction of the tax penalty to 0% in excess of LTA please.

I had previously crystallised some of my DC pot, whilst maintaining a sufficient remaining percentage of the LTA to cater for my projected DB pension. This was in order to avoid the tax penalty against the DB. I intend to effect the DB payments sometime during the next twelve months, without taking any offered upfront tax free cash.

The remaining balance of my DC pot, once the DB pension has been initiated will be in excess of the LTA (£1,073,100). 

Having recently crystallised a very small additional amount of my DC pot I was provided with a revised LTA usage percentage (still leaving a sufficient balance for the DB).

I anticipate that the LTA percentage is still calculated/advised in order to monitor the available 25% tax free cash, but it has got me thinking about the sequence of DC/DB drawings.

Question- If the full LTA (£1,073,100) has been exhausted by way of a DC/DB crystallisation, whilst only receiving 10% of available tax free cash (i.e. of total 25%), would the 15% balance of tax free cash still be available from the remaining uncrystallised DC pot, which is effectively in excess of the 100% LTA (limited to an overall tax free of £268,275)? 

Thanks for any thoughts, clarity.





 

zagfles

It's an interesting question - my understanding is as follows:

This tax year 2023/24, all the LTA legislation remains in place but the LTA charge is zero. So all BCEs use up LTA and so affect future tax free cash availability. So every time you crystallise a pension, whether or not you take tax free cash, you use up LTA which reduces the available tax free cash for future crystallisations. So if you use up all your LTA, regardless of how much tax free cash you've taken, you can't take any more tax free cash in the future.

So if you want tax free cash from the DC but not the DB, it would seem to make sense to take the DC first, then when taking the DB you don't care if you've exceeded the LTA as there is no charge, it just restricts the tax free cash which you don't want anyway.

This could all change next tax year as the draft legislation to remove the LTA seems to just account for lump sum BCEs, so it could be that next tax year it wouldn't matter what order you did it in as the DB BCE with no tax free cash would be ignored anyway. But not sure how they'd deal with past BCEs, possibly ignore previous non lump sum BCEs? 

See discussion here https://forums.moneysavingexpert.com/discussion/6460817/lta-abolition-from-2024/p1

JamesP8

Thank you zagfles, it is awkward to know what's the best option and when. My concern would be to crystallise the remaining DC then find some kind of re-introduction of the LTA before effecting the DB. I've been advised that the DB could take several months to come into payment, once requested.

Bimbly

The obvious solution would seem to be crystallise the DC now, then enact the DB - maybe in April? Even if it is a bit early? It might be unnecessary, but could be worth it for peace of mind, if nothing else.

Pat38493

The draft guidance that was issued before the summer recess seemed to imply, at least to my non lawyer trained eye, that under the new situation they will only care about how much tax free cash you have used, regardless where it came from.  This might mean that it’s better to wait until at least next April as you might find that you can put your DB into payment, but then still have your remaining tax feee cash from DC pots unrestricted by the DB transaction.  

This is far from certain and in the current tax year as Zagfles said, it seems like you are better off to pull out all of your tax free cash from all DC pots before putting a DB into payment that will take you over the old LTA.  The laws for next year are not finalised yet, and maybe I’m a pessimist but I’m not too confident they will be finalised before next tax year - we could end up stuck in this weird situation for another year.

in fact as a side point, it’s also not even clear to me in this tax year 2023/24, that if you took your DB with. PCLS that exceeded the old LTA, if there actually any mechanism to restrict you from receiving the full PCLS tax free - I think this would in the past have been taxed under LTA tax which is now 0%.   Not sure if anyone has actually tried this!

zagfles

Pat38493 said:

The draft guidance that was issued before the summer recess seemed to imply, at least to my non lawyer trained eye, that under the new situation they will only care about how much tax free cash you have used, regardless where it came from.  This might mean that it’s better to wait until at least next April as you might find that you can put your DB into payment, but then still have your remaining tax feee cash from DC pots unrestricted by the DB transaction.  

This is far from certain and in the current tax year as Zagfles said, it seems like you are better off to pull out all of your tax free cash from all DC pots before putting a DB into payment that will take you over the old LTA.  The laws for next year are not finalised yet, and maybe I’m a pessimist but I’m not too confident they will be finalised before next tax year - we could end up stuck in this weird situation for another year.

in fact as a side point, it’s also not even clear to me in this tax year 2023/24, that if you took your DB with. PCLS that exceeded the old LTA, if there actually any mechanism to restrict you from receiving the full PCLS tax free - I think this would in the past have been taxed under LTA tax which is now 0%.   Not sure if anyone has actually tried this!

The "mechanism" is exactly what the mechanism has always been, PCLS is restricted to 25% of the amount crystallising or 25% of the remaining LTA, whichever is less. As has been the case since 2006. The only difference this year is that there is no LTA charge. But the LTA still restricts PCLS.

JamesP8

Thanks to all for responses. I'll additionally see what I can gather from my SIPP/DB providers and update.

Albermarle

JamesP8 said:

Thanks to all for responses. I'll additionally see what I can gather from my SIPP/DB providers and update.

If your DB administrator is one of the large well known ones, like XPS, Mercer or WTW, the chance of an answer to a relatively complicated question like this one is probably remote. They can take weeks/months just to respond to simple queries.

JamesP8

Just as an update - I haven't yet received clarity in reply to my requests to the administrator(s), despite reiterating the specific scenario.

Despite it being a little earlier than was hoped, it seems to me, as mentioned within the responses above, that the best option would be to fully crystallise the DC pot now (utilising almost all of the remaining LTA) and initiate the DB process, which I understand can take around three months before payments can begin (April/May). This would hopefully see benefit of the 0% excess LTA tax charge on the full DB pension ahead of any potential LTA amendment following the looming General Election. 

If there are any updated thoughts regarding this I would be most grateful for them.

jamesd

That seems good, though you might ask the DB pension people to ensure that it doesn't commence this tax year. Absent that, a likely Autumn election plus time for a future government to act seems to suggest that making the DB request in April would ensure that the correct year is used before the law can be changed again.

JamesP8

Many thanks for your comments jamesd. Think an April request regarding the DB pension sounds a good idea. Will check the turnaround time with them again.