LTA questions
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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.
Thank you for this. And thank you to everyone else has been patient so far.
So in my example again, at the age of 62 I take my DB pension worth £25,000 per annum which counts for £500,000 against my LTA. I crystallise my DC fund valued at £530,000. I have now used my LTA and have nothing left.
Now I reach the age of 75 and I disregard my DB completely. That is apparently sunk. Now, my somewhat unlikely assumption is that I draw nothing from my DC fund over the intervening years and it is now worth £1,200,000 but indexation takes the LTA threshold to £1,300,000. So I owe nothing, is this correct?I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".0 -
No, because at each crystallisation event you use a percentage of your LTA, which is then gone for good and unavailable for retesting. As such, if you use all of your LTA on a DB and a DC crystallisation, the growth on the DC pot at age 75 will all be subject to the LTA excess charge.Sterlingtimes wrote: »Thank you for this. And thank you to everyone else has been patient so far.
So in my example again, at the age of 62 I take my DB pension worth £25,000 per annum which counts for £500,000 against my LTA. I crystallise my DC fund valued at £530,000. I have now used my LTA and have nothing left.
Now I reach the age of 75 and I disregard my DB completely. That is apparently sunk. Now, my somewhat unlikely assumption is that I draw nothing from my DC fund over the intervening years and it is now worth £1,200,000 but indexation takes the LTA threshold to £1,300,000. So I owe nothing, is this correct?I am a Chartered Financial Planner
Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.0 -
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)
I wouldn't say its a rule. There are reasons and circumstances that would make it the wrong strategy.
Say, for example there was a period of higher inflation. Full crystallisation loses any protection form indexation of the LTA.
Likewise if the objective is to maximise the pot for IHT reasons it would be better to remain uncrystallised.
Finally, there is the slim possibility that the LTA might be removed or increased by a future Chancellor.
Hence crystal ball required for optimal strategy.0 -
You would generally expect your pension investments to rise at a rate above inflation, though. So strictly speaking, I think there would have to be a period of stagflation for a delay in crystallising to work to your advantage.Say, for example there was a period of higher inflation. Full crystallisation loses any protection form indexation of the LTA.
Crystal ball and Tarot deck, then.0 -
Sterlingtimes wrote: »Thank you for this. And thank you to everyone else has been patient so far.
So in my example again, at the age of 62 I take my DB pension worth £25,000 per annum which counts for £500,000 against my LTA. I crystallise my DC fund valued at £530,000. I have now used my LTA and have nothing left.
Now I reach the age of 75 and I disregard my DB completely. That is apparently sunk. Now, my somewhat unlikely assumption is that I draw nothing from my DC fund over the intervening years and it is now worth £1,200,000 but indexation takes the LTA threshold to £1,300,000. So I owe nothing, is this correct?
once you have used 100% of your LTA you have used 100% of your LTA -- and there is no more LTA left.0 -
So in my example again, at the age of 62 I take my DB pension worth £25,000 per annum which counts for £500,000 against my LTA. I crystallise my DC fund valued at £530,000. I have now used my LTA and have nothing left.
Now I reach the age of 75 and I disregard my DB completely. That is apparently sunk. Now, my somewhat unlikely assumption is that I draw nothing from my DC fund over the intervening years and it is now worth £1,200,000 but indexation takes the LTA threshold to £1,300,000. So I owe nothing, is this correct?
Completely incorrect I'm afraid. LTA calculations work in percentages. In your example you rightly state that at age 62 you have used 100% of your lifetime allowance. From that moment on you have 0% of whatever any future LTA allowance might be. It doesn't matter what the LTA is at 75 because you have 0% of it available to use.
In your example your crystallised DC fund started at £500k. If there is £1.2M still in the fund at 75 you will pay the LTA excess charge on the difference of £700k. So 55% = £412.5k tax if you withdraw the excess as a lump sum or 25% = £187.5K if you leave the excess in the fund to continue to draw income from.
The point is that the fund is supposed to provide you with an income in retirement. If you choose not to draw this income you will be penalised.0 -
Completely incorrect I'm afraid. LTA calculations work in percentages. In your example you rightly state that at age 62 you have used 100% of your lifetime allowance. From that moment on you have 0% of whatever any future LTA allowance might be. It doesn't matter what the LTA is at 75 because you have 0% of it available to use.
In your example your crystallised DC fund started at £500k. If there is £1.2M still in the fund at 75 you will pay the LTA excess charge on the difference of £700k. So 55% = £412.5k tax if you withdraw the excess as a lump sum or 25% = £187.5K if you leave the excess in the fund to continue to draw income from.
The point is that the fund is supposed to provide you with an income in retirement. If you choose not to draw this income you will be penalised.
Thank you, TcpnT.
I appreciate your careful response. I think that I now understand.
So in my example I have used my LTA at 62. That is the end of the matter until I reach 75. Because my crystallised fund started at £500,000, then I must have less than £500,000 at the age of 75 if I am not to suffer taxation detriment. I presume that indexation is not applied in respect of the valuation.
In my case, my wife is 12 years younger than me so I have to be careful not to plunder the fund. It would seem (presuming that legislation doesn't change) that I may have to play the game of periodically transferring funds to an ISA. This of course takes some money outside of the IHT protection bubble.I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".0 -
Thanks to all for the responses. Helped clear up the muddy waters of what is supposed to be a simpler system.0
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I wouldn't say its a rule. There are reasons and circumstances that would make it the wrong strategy.
Say, for example there was a period of higher inflation. Full crystallisation loses any protection form indexation of the LTA.
Likewise if the objective is to maximise the pot for IHT reasons it would be better to remain uncrystallised.
Finally, there is the slim possibility that the LTA might be removed or increased by a future Chancellor.
Hence crystal ball required for optimal strategy.
One further 'reason' to delay is if you are brave enough to indulge in some market timing and hope that you will get to crsytallise after a dip if you hang on. This is not for the faint-hearted though - you could say it requires balls of something stronger than just crystal...0 -
Unfortunately not for me it hasn't so was wondering if anyone could clear this slight twist on the situation up for me.Thanks to all for the responses. Helped clear up the muddy waters of what is supposed to be a simpler system.
Say, for simplification, LTA still at £1M and at 55 crystallise all from £400k DC pot & HMRC valuation of £600k for DB scheme. At 60 another DB kicks in with HMRC valuation of £50k. How would this DB actually look in payment as far as tax on it was concerned? Would HMRC take 25% from each payment of the second DB and then tax again at my nominal rate?0
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