LTA Excess Charge Abolition

Paintitred

It is my understanding that under the "old rules", if the value of an individual's pensions exceeded the lifetime allowance it would normally trigger a tax charge when transferring into drawdown where the total amount exceeded the Lifetime Allowance. 

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Therefore, if deciding to move a SIPP into drawdown, there would be no liability for a lifetime allowance excess tax charge at this time.

Is there any reason why you would not now transfer 100% of a SIPP, even where its value far exceeds the LTA, if the intention is to have the option to draw down the full amount over time?

What are thoughts about the impact of such a decision should a Labour government decide to reverse the policy and reinstate the LTA rules?

Marcon

Paintitred said:

It is my understanding that under the "old rules", if the value of an individual's pensions exceeded the lifetime allowance it would normally trigger a tax charge when transferring into drawdown where the total amount exceeded the Lifetime Allowance. 

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Therefore, if deciding to move a SIPP into drawdown, there would be no liability for a lifetime allowance excess tax charge at this time.

Is there any reason why you would not now transfer 100% of a SIPP, even where its value far exceeds the LTA, if the intention is to have the option to draw down the full amount over time?

Transferring to a drawdown account has never been what triggered the LTA; it is actually withdrawing (rather than transferring) the funds that mattered.

Paintitred said:

What are thoughts about the impact of such a decision should a Labour government decide to reverse the policy and reinstate the LTA rules?

Any thoughts would be pure guesswork, but as the trigger would be the actual withdrawal, rather than the decision to move the funds, you could always choose not to withdraw them - or pay the tax.

ukdw

Paintitred said:

It is my understanding that under the "old rules", if the value of an individual's pensions exceeded the lifetime allowance it would normally trigger a tax charge when transferring into drawdown where the total amount exceeded the Lifetime Allowance. 

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Therefore, if deciding to move a SIPP into drawdown, there would be no liability for a lifetime allowance excess tax charge at this time.

Is there any reason why you would not now transfer 100% of a SIPP, even where its value far exceeds the LTA, if the intention is to have the option to draw down the full amount over time?

What are thoughts about the impact of such a decision should a Labour government decide to reverse the policy and reinstate the LTA rules?

If you have already crystallised / transferred into  drawdown up to the current LTA then I don't think there is too much downside risk of crystallising the rest now and triggering the 0% LTA charge.     

I guess the worst possible case is that a future government reinstates LTA around the current level, plus introduces some additional BCEs like the age 75 one that target crystallised drawdown pots.

I guess doing something like an annuity purchase of some of the 0% LTA rate crystallised funds might make it even more difficult for a future government to attack.

On the other hand - if you are currently only crystallised a little bit, so have plenty of LTA percentage left - if a future government reinstates LTA at a much higher level then that might give access to a bigger tax free lump sum than is currently available if you crystallise the whole lot now.

tiring33

Marcon said:

Transferring to a drawdown account has never been what triggered the LTA; it is actually withdrawing (rather than transferring) the funds that mattered.

Is this true? I thought BCE 1 was - 'Where funds are designated to provide a member with a drawdown pension' (www.Gov.uk). The examples I have seen on-line indicate:

1) Up to the value of the individual's LTA - that transfer is achieved by assigning the funds to drawdown and simultaneously taking your 25% PCLS. The 75% left in drawdown can then be withdrawn at any time subject to income tax at your marginal rate.

2) Funds in excess of an individual's LTA - can be assigned to drawdown at any time, but are subject to an immediate LTA test/charge at the point they are assigned. That charge used to be 25% but is now 0%. The sum left in drawdown can then be withdrawn at any time subject to income tax at your marginal rate.

In answer to the OP's question "Is there any reason why you would not now transfer 100% of a SIPP" there seem to me to be potential upsides and downsides: The primary upside may be that 'paying the LTA' now at 0% and having all your fund crystallised in a drawdown account may shelter it from any reintroduction of the LTA at a later date (or it may not depending on any rules accompanying any re-introduction).. On the downside you are withdrawing the full PCLS from your pension so it's inside your estate and subject to IHT.

In answer to the question of what might happen if a future Government re-instates the LTA, that is very difficult to predict, it will depend on how they re-instate it.

I found the article below in FT Adviser to be helpful, in summary the advice is to hang on until after the Autumn statement and the next set of draft legislation on LTA removal (imminent) before making a decision.

https://www.ftadviser.com/opinion/2023/07/06/to-crystallise-or-not-to-crystallise/

Albermarle

On the downside you are withdrawing the full PCLS from your pension so it's inside your estate and subject to IHT
Plus you have to find a home for the tax free £260 + K .
If it stays in the pension it is protected from taxes like dividend tax etc

zagfles

Marcon said:

Paintitred said:

It is my understanding that under the "old rules", if the value of an individual's pensions exceeded the lifetime allowance it would normally trigger a tax charge when transferring into drawdown where the total amount exceeded the Lifetime Allowance. 

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Therefore, if deciding to move a SIPP into drawdown, there would be no liability for a lifetime allowance excess tax charge at this time.

Is there any reason why you would not now transfer 100% of a SIPP, even where its value far exceeds the LTA, if the intention is to have the option to draw down the full amount over time?

Transferring to a drawdown account has never been what triggered the LTA; it is actually withdrawing (rather than transferring) the funds that mattered.

This is completely wrong. Transferring into drawdown has always triggered the LTA, it's a BCE. BCEs are when the LTA is tested for and (previously) an LTA charge applied if LTA exceeded.

Actually withdrawing from a drawdown account is not a BCE. (taking a UFPLS is, but that, as the name implies, is taken from an uncrystallised account not a drawdown account)

zagfles

Albermarle said:

On the downside you are withdrawing the full PCLS from your pension so it's inside your estate and subject to IHT
Plus you have to find a home for the tax free £260 + K .
If it stays in the pension it is protected from taxes like dividend tax etc

However - I think it's likely that the max PCLS will stay frozen for the forseeable future. Organisations like the IFS etc have already said it's too generous as it is.

If that's the case, then it could be more tax efficient outside the pension. Inside, any growth would eventually be subject to income tax rates, outside the tax on growth would probably be less due to lower dividend tax, dividend and CGT allowances, use of ISAs etc.

Obviously there's other issues like IHT, benefits etc to consider.

leosayer

Paintitred said:

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Had this been confirmed?

I'd imagine it would be easy for a future government to revert the LTA tax charge to 25% if the LTA legislation remains in force.

zagfles

leosayer said:

Paintitred said:

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Had this been confirmed?

I'd imagine it would be easy for a future government to revert the LTA tax charge to 25% if the LTA legislation remains in force.

Yes, it was in the Autumn statement.

5.47 LTA Abolition – The government will legislate in the Autumn Finance Bill 2023
to remove the Lifetime Allowance. The measure will clarify the taxation of lump
sums and lump sum death benefits, and the application of protections, as well as
the tax treatment for overseas pensions, transitional arrangements, and reporting
requirements. This will take effect from 6 April 2024.

Obviously the legislation still needs to be passed, but same applies to most other things announced today.

Pat38493

zagfles said:

leosayer said:

Paintitred said:

But since 6 April 2023, the lifetime allowance charge has been removed. And from April 2024, the lifetime allowance is set to be completely abolished. 

Had this been confirmed?

I'd imagine it would be easy for a future government to revert the LTA tax charge to 25% if the LTA legislation remains in force.

Yes, it was in the Autumn statement.

5.47 LTA Abolition – The government will legislate in the Autumn Finance Bill 2023
to remove the Lifetime Allowance. The measure will clarify the taxation of lump
sums and lump sum death benefits, and the application of protections, as well as
the tax treatment for overseas pensions, transitional arrangements, and reporting
requirements. This will take effect from 6 April 2024.

Obviously the legislation still needs to be passed, but same applies to most other things announced today.

Is any further detail behind this available yet?

NoMore

Autumn Statement 2023 — Overview of tax legislation and rates (OOTLAR) - GOV.UK (www.gov.uk)

Abolition of the Lifetime Allowance (LTA) - GOV.UK (www.gov.uk)

Just published yesterday, haven't read it yet, so no comment on its details