LTA questions

derek1957 · 21 June 2018 at 3:53PM

I might be fortunate when I retire in 4 years to have a sum likely to be very close to the Life Time Allowance (LTA) on reaching the age of 66 in a defined contributions scheme only, I have no defined benefits pension scheme apart from a survivors spouse pension should my wife die before me.

However I am still a little confused on exactly how this LTA works and would be grateful for opinions on what I have asked.

I was told that the LTA in not just the maximum you can hold in a fund without incurring the excess charge on any withdrawals, but is also the maximum you can draw down from your pension fund as a percentage of that annual LTA over the life time of any withdrawals.
Irrespective for this question any tax implication, if I was to withdraw in an uncrystallised form 4% annually of the LTA for each year, it would mean in 25 years I would have used all my lifetime allowances. i.e. 25 years of withdrawals x 4% = 100% of the LTA. Would this be correct?

If the above is correct would this then mean after 25 years that any further withdrawals would be subject to the excess charge of 25% on any withdrawals as income or 55% of the cash sum, which would a bit harsh if I manged to live beyond the 25 years from the start of taking withdrawals at age 66. Can anyone comment on whether this is in fact correct?

For the purposes of Inheritance Tax (IHT) is it correct that the remaining fund in my pension should if I die after the age of 75 after my wife, that the remaining fund can be passed to my children equally free of IHT, providing the funds are placed in the children’s own private pension funds? Or will only the remaining funds of my unused LTA only be free of IHT if placed in the children’s own private pension funds and the remaining funds subject to tax at the children’s nominal tax rates.

Whilst I applaud the pension’s freedoms in the new rules, they have equally posed more question than answers which don’t appear to be as straight forward as I first thought.

Derek

Aegis · 21 June 2018 at 4:32PM

derek1957 wrote: »

I might be fortunate when I retire in 4 years to have a sum likely to be very close to the Life Time Allowance (LTA) on reaching the age of 66 in a defined contributions scheme only, I have no defined benefits pension scheme apart from a survivors spouse pension should my wife die before me.

However I am still a little confused on exactly how this LTA works and would be grateful for opinions on what I have asked.

I was told that the LTA in not just the maximum you can hold in a fund without incurring the excess charge on any withdrawals, but is also the maximum you can draw down from your pension fund as a percentage of that annual LTA over the life time of any withdrawals.
Irrespective for this question any tax implication, if I was to withdraw in an uncrystallised form 4% annually of the LTA for each year, it would mean in 25 years I would have used all my lifetime allowances. i.e. 25 years of withdrawals x 4% = 100% of the LTA. Would this be correct?

It would be correct if not for the age 75 test. When you reach age 75, any uncrystallised funds you have left are tested immediately against the remaining LTA, as is any growth on the crystallised funds you have accrued (if you are withdrawing 4% of the LTA each time and taking that as a mixture of 25% tax free lump sum and 75% taxable lump sum, there will be no crystallsied funds at age 75, but it is worth remembering anyway).

Any LTA excess tax payable is deducted from the pension at that point.

If the above is correct would this then mean after 25 years that any further withdrawals would be subject to the excess charge of 25% on any withdrawals as income or 55% of the cash sum, which would a bit harsh if I manged to live beyond the 25 years from the start of taking withdrawals at age 66. Can anyone comment on whether this is in fact correct?

For the purposes of Inheritance Tax (IHT) is it correct that the remaining fund in my pension should if I die after the age of 75 after my wife, that the remaining fund can be passed to my children equally free of IHT, providing the funds are placed in the children’s own private pension funds? Or will only the remaining funds of my unused LTA only be free of IHT if placed in the children’s own private pension funds and the remaining funds subject to tax at the children’s nominal tax rates.

There is an LTA test on uncrystallised pension funds on death before age 75, but after that test has been completed funds pass free of further tax to named beneficiaries either as a lump sum or as a tax-free drawdown pension. Post age 75, the LTA test will have happened, so no further charges there, but income tax will apply on the inherited sums.

The complexities of pensions post pension simplification!

Alibert · 21 June 2018 at 5:04PM

just to add - the LTA grows each year, and that helps.
So if you crystalise some funds now, and use up 10% of your LTA, then what you have left is 90% of your LTA.
But the good news is : that's 90% of the current LTA (growing with inflation) not 90% of what you started with.

One your fund reaches the LTA then the tax incentive is to crystalise it all, and to take any growth after that as income before your are 75, to avoid LTA completely

TcpnT · 21 June 2018 at 5:55PM

I was in a similar situation to you. I retired last year and the total value of my pensions was already above the LTA. For this reason (broadly speaking) I elected to crystallise my whole fund up to the value of the LTA in order to avoid any future growth taking the fund significantly above the LTA and becoming taxable.

My plan is to take 3-4% per year from the crystallised funds. If, despite this drawdown, investment growth takes the value above it's starting value I also plan to withdraw as much of the excess as I can, whilst staying in the basic rate tax band, and placing it in an ISA. By doing this I hope to avoid the age 75 LTA test resulting in a further tax bill. This way I get some of the excess out at 20% income tax rather than 25% LTA penalty followed by 20% income tax.

If investment returns are strong I won't be able to take out all the excess at the lower rate of tax but that would be a good problem to have.

Alibert · 21 June 2018 at 9:18PM

Tcpm . Why did you leave anything uncrystalised ..all of tuat, and all the future growth of that amount is now inescapably subject to the LTA

TcpnT · 21 June 2018 at 10:49PM

Tcpm . Why did you leave anything uncrystalised ..all of tuat, and all the future growth of that amount is now inescapably subject to the LTA

Ok - The story wasn't quite that simple. That's why I said "broadly speaking".

If I was in the OP's situation that's what I would have done. In my case part of my pension provision was a DB pension worth about 30% of LTA. The rest was in a DC scheme. The total value of the two at the time was about 115% of LTA. The DB pension is not due for another three years and I do not want it to be reduced by an LTA excess charge. So I have so far crystallised about 70% of LTA from my Dc scheme and the plan is that this will leave enough LTA available to draw the DB pension without any reduction. As soon as I start drawing the DB pension I will then crystallise the remaining approx 15% of LTA value in the DC scheme and pay the LTA charge due at the time.

The rationale behind my plan was to crystallise the maximum possible amount last year without risking any reduction to the DB pension as I wish to maximise guaranteed, index linked income in future.

Sterlingtimes · 22 June 2018 at 10:30AM

A question, please. When the pension is revalued for LTA at the age of 75, is the Direct Benefit portion of the pension calculated at the then current income multiplied by 20. My Direct Benefit pensions are RPI linked so they may grow at a faster rate than the indexation of the LTA.

It seems to me that this rule achieves very little other than encouraging the pensioner to withdraw more income than is necessary or to carry out a transfer of monies from SIPP to ISA.

greatkingrat · 22 June 2018 at 11:06AM

I'm not sure what you mean by "Direct Benefit". If you mean Defined Benefit, then this rule doesn't apply, there is only one LTA test when you start drawing the pension.

Sterlingtimes · 22 June 2018 at 12:08PM

greatkingrat wrote: »

I'm not sure what you mean by "Direct Benefit". If you mean Defined Benefit, then this rule doesn't apply, there is only one LTA test when you start drawing the pension.

Thank you. Perhaps, I need to elaborate. For simplicity, assume that I am 62 years old and assume I triggered a Direct Benefit pension of £25,000 today. The LTA calculation is 20 times £25,000 which equals £500,000. My LTA allowance today would be £1,030,000. Suppose today I crystallise the whole of my Direct Contribution pension which is valued at £530,000. I have now used the whole my LTA allowance.

Now my Direct Benefit pension will grow contractually at the Retail Price Index, and the Direct Contribution pension will be revalued in time at the market rate at any point in time.

As I understand this discussion (and I may have misunderstood), when I reach the age of 75 my pension be revalued albeit that I have triggered Direct Benefit pension and fully crystallised my Direct Contribution pension.

I am asking how the pension will be valued at age 75 given that I have a mix of Direct Contribution and Direct Benefit pensions. The valuation of the Direct Contribution portion would be straightforward, but how is my Direct Benefit pension valued at age 75?

EdSwippet · 22 June 2018 at 1:59PM

Sterlingtimes wrote: »

I am asking how the pension will be valued at age 75 given that I have a mix of Direct Contribution and Direct Benefit pensions. The valuation of the Direct Contribution portion would be straightforward, but how is my Direct Benefit pension valued at age 75?

The short answer is... it isn't. The BCE tests at age 75 encompass DC funds, either crystallised or otherwise, and any (part of a) DB pension entitlement that has not already been taken into payment. See BCEs 5, 5a and 5b in this paper.

And yes, this is yet another way in which DC pensions get worse tax treatment than DB ones.

goRt · 22 June 2018 at 5:40PM

The general rule is that if you're near LTA you should fully crystalise and then manage your withdrawals to keep fund value/growth below the age 75 LTA test.

(near being 50% or more)

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