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    • derek1957
    • By derek1957 21st Jun 18, 3:53 PM
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    derek1957
    LTA questions
    • #1
    • 21st Jun 18, 3:53 PM
    LTA questions 21st Jun 18 at 3:53 PM
    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
Page 1
    • Aegis
    • By Aegis 21st Jun 18, 4:32 PM
    • 4,964 Posts
    • 3,222 Thanks
    Aegis
    • #2
    • 21st Jun 18, 4:32 PM
    • #2
    • 21st Jun 18, 4:32 PM
    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?
    Originally posted by derek1957

    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!
    I am an Independent Financial Adviser
    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.
    • Alibert
    • By Alibert 21st Jun 18, 5:04 PM
    • 103 Posts
    • 55 Thanks
    Alibert
    • #3
    • 21st Jun 18, 5:04 PM
    • #3
    • 21st Jun 18, 5:04 PM
    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
    • By TcpnT 21st Jun 18, 5:55 PM
    • 145 Posts
    • 86 Thanks
    TcpnT
    • #4
    • 21st Jun 18, 5:55 PM
    • #4
    • 21st Jun 18, 5:55 PM
    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
    • By Alibert 21st Jun 18, 9:18 PM
    • 103 Posts
    • 55 Thanks
    Alibert
    • #5
    • 21st Jun 18, 9:18 PM
    • #5
    • 21st Jun 18, 9:18 PM
    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
    Last edited by Alibert; 21-06-2018 at 9:27 PM.
    • TcpnT
    • By TcpnT 21st Jun 18, 10:49 PM
    • 145 Posts
    • 86 Thanks
    TcpnT
    • #6
    • 21st Jun 18, 10:49 PM
    • #6
    • 21st Jun 18, 10:49 PM
    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
    • By Sterlingtimes 22nd Jun 18, 10:30 AM
    • 1,545 Posts
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    Sterlingtimes
    • #7
    • 22nd Jun 18, 10:30 AM
    • #7
    • 22nd Jun 18, 10:30 AM
    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.
    Solar installed 21 November 2014 > Centre of England > 3,780 Wp > 14 *270 Watt Trina panels > 14 * Enphase micro-inverters > managed by Enlighten Envoy Hub > 19° west of south > 35° pitch > tree shading to east > iBoost > Wattson Anywhere monitoring > Ovo Smart Gateway > Schneider Electric (Drayton) MiGenie smart thermostat.
    • greatkingrat
    • By greatkingrat 22nd Jun 18, 11:06 AM
    • 127 Posts
    • 108 Thanks
    greatkingrat
    • #8
    • 22nd Jun 18, 11:06 AM
    • #8
    • 22nd Jun 18, 11:06 AM
    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
    • By Sterlingtimes 22nd Jun 18, 12:08 PM
    • 1,545 Posts
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    Sterlingtimes
    • #9
    • 22nd Jun 18, 12:08 PM
    • #9
    • 22nd Jun 18, 12:08 PM
    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.
    Originally posted by greatkingrat
    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?
    Solar installed 21 November 2014 > Centre of England > 3,780 Wp > 14 *270 Watt Trina panels > 14 * Enphase micro-inverters > managed by Enlighten Envoy Hub > 19° west of south > 35° pitch > tree shading to east > iBoost > Wattson Anywhere monitoring > Ovo Smart Gateway > Schneider Electric (Drayton) MiGenie smart thermostat.
    • EdSwippet
    • By EdSwippet 22nd Jun 18, 1:59 PM
    • 779 Posts
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    EdSwippet
    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?
    Originally posted by Sterlingtimes
    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
    • By goRt 22nd Jun 18, 5:40 PM
    • 263 Posts
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    goRt
    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)
    • Sterlingtimes
    • By Sterlingtimes 22nd Jun 18, 6:20 PM
    • 1,545 Posts
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    Sterlingtimes
    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.
    Originally posted by EdSwippet
    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?
    Solar installed 21 November 2014 > Centre of England > 3,780 Wp > 14 *270 Watt Trina panels > 14 * Enphase micro-inverters > managed by Enlighten Envoy Hub > 19° west of south > 35° pitch > tree shading to east > iBoost > Wattson Anywhere monitoring > Ovo Smart Gateway > Schneider Electric (Drayton) MiGenie smart thermostat.
    • Aegis
    • By Aegis 22nd Jun 18, 6:38 PM
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    Aegis
    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?
    Originally posted by Sterlingtimes
    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.
    I am an Independent Financial Adviser
    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.
    • anselld
    • By anselld 22nd Jun 18, 7:12 PM
    • 5,875 Posts
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    anselld
    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)
    Originally posted by goRt
    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.
    • EdSwippet
    • By EdSwippet 22nd Jun 18, 8:21 PM
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    EdSwippet
    Say, for example there was a period of higher inflation. Full crystallisation loses any protection form indexation of the LTA.
    Originally posted by anselld
    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.

    Crystal ball and Tarot deck, then.
    • Alibert
    • By Alibert 22nd Jun 18, 8:49 PM
    • 103 Posts
    • 55 Thanks
    Alibert
    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?
    Originally posted by Sterlingtimes
    once you have used 100% of your LTA you have used 100% of your LTA -- and there is no more LTA left.
    • TcpnT
    • By TcpnT 22nd Jun 18, 9:25 PM
    • 145 Posts
    • 86 Thanks
    TcpnT
    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.
    • Sterlingtimes
    • By Sterlingtimes 23rd Jun 18, 10:00 AM
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    Sterlingtimes
    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.
    Originally posted by TcpnT
    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.
    Solar installed 21 November 2014 > Centre of England > 3,780 Wp > 14 *270 Watt Trina panels > 14 * Enphase micro-inverters > managed by Enlighten Envoy Hub > 19° west of south > 35° pitch > tree shading to east > iBoost > Wattson Anywhere monitoring > Ovo Smart Gateway > Schneider Electric (Drayton) MiGenie smart thermostat.
    • derek1957
    • By derek1957 4th Jul 18, 2:30 PM
    • 2 Posts
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    derek1957
    Thanks to all for the responses. Helped clear up the muddy waters of what is supposed to be a simpler system.
    • Triumph13
    • By Triumph13 4th Jul 18, 4:57 PM
    • 1,324 Posts
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    Triumph13
    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.
    Originally posted by anselld


    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...
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