BCE5a calculation for second breach of LTA
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cjking
Posts: 99 Forumite
Say at age 55 you have a lifetime allowance of £1 million, and uncrystallised funds of £1.2 million. You crystallize everything. So you get 250K tax-free lump sum, and (1200K-250K-25%*200K) = 900K in your drawdown fund. (The 25% * 200K = 50K is the charge for breaching the LTA.)
You have a balance of £1 million at age 75. How much have you exceeded your LTA?
Is it:-
1. 1000K-900K = 100K or
2. 1000K-950K = 50K
You have a balance of £1 million at age 75. How much have you exceeded your LTA?
Is it:-
1. 1000K-900K = 100K or
2. 1000K-950K = 50K
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Comments
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You would have used up all your LTA when you crystalize
So all subsequent growth is in excess of the LTA and it's 100k .. you need to withdraw it before you are 75
Btw LTA is now £1030k so th let calculations are slightly different0 -
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My understanding is that it would be 100k.
ie the value at 75 minus the original balance put into drawdown.0 -
How do we know that according to strict legal definition, the drawdown starting balance was 900K? Maybe it was 950K from which 50K tax was deducted immediately, resulting in 900K appearing as the closing balance at the end of the first day.
OK, I don't believe that's true, but I really need links to legal definitions to be certain how the calculation to avoid double-charging works. Or even just to an example that takes this scenario into account.0 -
Say at age 55 you have a lifetime allowance of £1 million, and uncrystallised funds of £1.2 million. You crystallize everything. So you get 250K tax-free lump sum, and (1200K-250K-25%*200K) = 900K in your drawdown fund. (The 25% * 200K = 50K is the charge for breaching the LTA.)
You have a balance of £1 million at age 75. How much have you exceeded your LTA?
Is it:-
1. 1000K-900K = 100K or
2. 1000K-950K = 50K
It is option 1.
In this situation, lets assume the LTA is £1m.
The first £1m crystallised produces £250,000 tax-free cash, and the remainder £750,000 is placed in drawdown.
The next £200,000 is crystallised, and as the funds are being allocated to drawdown, there is a charge of £50,000. This means only an additional £150,000 is actually allocated to drawdown.
So, in total, £900,000 has been allocated to drawdown.
If this pot has grown to £1m at age 75(and that's a pretty dreadful rate of return over 20 years!) then that is a gain of £100,000, and this is liable for the LTA charge. It is irrelevant at this point what the LTA is, as 100% of it has already been used.I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.0 -
What I really wanted is legal definitions, because the words in most web explanations are not carefully defined.
This page says the calculation at 75 will be the same as if an annuity was brought with funds in drawdown.
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088650
The following page says that when buying an annuity, it is the amount initially crystallised that is deducted.
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088640#IDA2KNKB
The following legal web page makes clear that for BCE1 "the amount crystallised is the value of the drawdown pension". (This was what I needed, prior to seeing this, for me "the amount crystallised" could have been the amount the uncystallised balance declined by.)
https://uk.practicallaw.thomsonreuters.com/0-380-7453?originationContext=knowHow&transitionType=KnowHowItem&contextData=%28sc.Default%29&comp=pluk0 -
OMW are good at this kind of thing.
See example 3 in the below link.
https://www.oldmutualwealth.co.uk/globalassets/knowledge-direct/financial-planning-solutions/lta-excess-options.pdfI am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.0 -
Indeed, if not drawn on in the interim!HappyHarry wrote: »If this pot has grown to £1m at age 75(and that's a pretty dreadful rate of return over 20 years!) ...
The 25% LTA penalty at age 75 is extremely punitive in that it captures nominal gain, not just real gain. This produces tax rates of 40% to 55% on both the real and the inflationary (illusory) gain, with the potential -- depending on returns and inflation rates -- of entirely wiping out any real gains.
Unless IHT is a huge factor, far better to draw down the excess at normal marginal tax rates before (and perhaps well before) age 75, and then let growth build up in general taxable accounts, where ordinary dividend and capital gains tax rates are both lower than the LTA punitive rates.0 -
And here we have a definition of BCE1 crystallised amount from HMRC manuals:-
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088610The amount crystallising through BCE 1 will be the actual amount designated to provide a drawdown pension, net of any deduction made by the scheme administrator to cover any lifetime allowance charge due.
I think that's fairly clear!0 -
On this subject, how would the value against LTA at 75 be calculated if the scheme was hybrid and at 55 the DB had an HMRC valuation of £600k and the DC pot was valued at the same. How would the value of DB be calculated after 20 years of taking it?0
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