Lifetime allowance and PCLS

Avro1995

Hi all, 

I am reading about the LTA. I am seeing stuff for the current tax year that talks about taking excess pcls over your entitlement. How is this even possible? Isnt the PCLS just 25% of your value even if you have protection? How is it literally possible to take excess pcls over your entitlement? I would love an explanation if possible as I am missing something

Any general info regarding PCLS and LTA would also be appreciated

MallyGirl

There seems to be a limit to PCLS which is 25% of the LTA figure of £1,073,000 ie £268,250.

If your pension is £2m then 25% would be £500,000 but you can't take more than the £268,250 tax free.

xylophone

https://www.gov.uk/government/publications/abolition-of-the-lifetime-allowance-from-6-april-2024/abolition-of-the-lifetime-allowance-lta

Marcon

Avro1995 said:

Hi all, 

I am reading about the LTA. I am seeing stuff for the current tax year that talks about taking excess pcls over your entitlement. How is this even possible? Isnt the PCLS just 25% of your value even if you have protection? How is it literally possible to take excess pcls over your entitlement? I would love an explanation if possible as I am missing something

Any general info regarding PCLS and LTA would also be appreciated

Be very helpful if you could link to what you're reading.

jamesd

You may be confusing the tax free Pension commencement Lump Sum (PCLS) and the lifetime allowance (LTA).

There are various protection schemes that allow a higher LTA and PCLS than the current rules. You had to apply for those so should know if you're in one that gets you more PCLS, up to 25% of your protected higher LTA.

The big news is the LTA. The LTA Charge for taking benefits above the LTA has been set to 0% for this tax year and is to be abolished next, along with the LTA. This replaces the previous 55% charge for a lump sum or 25% plus income tax for income.

Labour have said that they will reintroduce the LTA at an unspecified level.

This means that in the 2023 tax year and probably some of 2024, maybe all of it depending on election timing, there is an opportunity to avoid the potential LTA Charge bill.

Prudent planning suggests using this now, while you still can. To do that you can tell your pension firm that you want to take benefits from the whole pot, with maximum PCLS, and place the non-PCLS 75%+ into flexi-access drawdown. You can withdraw the taxable money from the flexi-access drawdown pot at whatever rate makes income tax sense, it's taxable income when taken.

The PCLS portion can be gradually reinvested in ISAs as desired. Any non-ISA gains will be trivial compared to the avoided possible LTA Charge bill.

If the amounts are relevant to you start learning and acting now.

Albermarle

Labour have said that they will reintroduce the LTA at an unspecified level

I think Labours response to the LTA abolition announcement was more of a knee jerk reaction. AFAIK not a lot has been said by them about it since?

It would be complicated to unwind, and the fact that the tax free part remains restricted, could mean it will be low on their priority list. I would think that the very generous tax treatment of pension pots on death would be a more viable target.

Also by crystallising a pot now to avoid a possible LTA introduction, you could be exposing the tax free part to inheritance tax at a later stage.

jamesd

Labour seem to be trying to avoid tying their hands in a likely messy task.

Yes, the tax free bit is exposed to inheritance tax, as are withdrawn but not spent taxable parts. The usual inheritance tax avoidance strategies like regular giving out of income or living long enough after gifting are available. For some who still work pension contributions into their own pension can be useful. Subject to whatever Labour do.

gm0

The system is changing (again) in april once the current finance bill hits the statute book

The principles remain the same though for the new "LSA"

A scheme allows a % of PCLS for pension getting accessed (all or slice).  Usually (but not always) this is up to 25%.  A few old trusts had a different value baked in so it can be higher in rare situations.

The maximum tax free lump sum for a given transaction is that scheme specific of default 25% of the amount of pension touched.  And the total amount you take across all pensions and slices thereof is tracked until you reach the maximum allowed in total figure.  Which is set at 25% of the 1.0m and change LTA (soon to be called LSA figure). 

Again not everyone has 1m as the 25% of number.  There are people with old pensions from before earlier pension reforms with protection certificates from prior changes - various sorts - which lock in a different maximum tax free cash figure such as 25% of 1.5m or 25% of 1.8m

Unless you know you are in one of the special cases - your schemes and history on contribution and protection.  Then the 25% of 1m is a good rule of thumb to use - provided you have the 1m pot size to get all of it. 
Lesser of both rules.

leosayer

jamesd said:

You may be confusing the tax free Pension commencement Lump Sum (PCLS) and the lifetime allowance (LTA).

There are various protection schemes that allow a higher LTA and PCLS than the current rules. You had to apply for those so should know if you're in one that gets you more PCLS, up to 25% of your protected higher LTA.

The big news is the LTA. The LTA Charge for taking benefits above the LTA has been set to 0% for this tax year and is to be abolished next, along with the LTA. This replaces the previous 55% charge for a lump sum or 25% plus income tax for income.

Labour have said that they will reintroduce the LTA at an unspecified level.

This means that in the 2023 tax year and probably some of 2024, maybe all of it depending on election timing, there is an opportunity to avoid the potential LTA Charge bill.

Prudent planning suggests using this now, while you still can. To do that you can tell your pension firm that you want to take benefits from the whole pot, with maximum PCLS, and place the non-PCLS 75%+ into flexi-access drawdown. You can withdraw the taxable money from the flexi-access drawdown pot at whatever rate makes income tax sense, it's taxable income when taken.

The PCLS portion can be gradually reinvested in ISAs as desired. Any non-ISA gains will be trivial compared to the avoided possible LTA Charge bill.

If the amounts are relevant to you start learning and acting now.

Shifting assets into a taxable environment from a non-taxable environment on the expectation of a specific general election result followed by a specific budget result doesn't seem like prudent planning to me.

jamesd

Given the high probability of that particular event it does seem prudent to me. It would be possible to wait until the election result instead but then pension firms are likely to be very busy. Labour have been clear about their intent with details and timing the uncertainties.

The money doesn't necessarily stay in a taxable environment. ISA is obvious but for some people VCTs are suitable.

If you take a look around online you'll find extensive discussion of the choices.

tiring33

jamesd said:

Given the high probability of that particular event it does seem prudent to me. It would be possible to wait until the election result instead but then pension firms are likely to be very busy. Labour have been clear about their intent with details and timing the uncertainties.

The money doesn't necessarily stay in a taxable environment. ISA is obvious but for some people VCTs are suitable.

If you take a look around online you'll find extensive discussion of the choices.

I share your concern regarding the return of the LTA. I am currently trying to decide whether to fully crystallise my DC pension before the next election and pay a 0% LTA charge, in the hope that this will protect me from having to pay it 'again' at a higher rate if/when it is reintroduced (under the old rules I was facing a fairly hefty LTA charge). I understand all the downsides about withdrawing my full PCLS but I'm happy that I can feed it back into ISAs over a few years. There is also, of course, no guarantee that having a pension fully crystallised and in drawdown will protect it from a re-introduced LTA charge, but it feels like it might.

Under the new proposed rules crystallising before 6th April would actually mean I get slightly less PCLS than under the new legislation, but I'm inclined to think it might be worth the certainty of crystallising now and avoiding the rush to crystalise between 6th April and an election followed by potential anti forestalling legislation which Labour may introduce to stop people taking advantage of LTA removal before they can re-introduce it.

I'm still mulling over what to do so am interested in any other views.

@jamesd if you have any links to discussion on these options I would love to read them.