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Lifetime Allowance Testing and Potential Breach
Simon Child
Posted: 21 June 2017 19:13:17(UTC)
#1

Joined: 21/06/2017(UTC)
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I think I may have posed this query in the wrong place in the forum; so apologies but I am asking it under a new title :
I understand that if I crystallise my entire pension funds and move the monies into drawdown (25% cash taken tax free and the remainder remaining invested) then the Lifetime Allowance test will be applied at that point and not again until I am 75 or die.
Crucially I am correct in thinking that the Lifetime Allowance test won't be applied again until either my 75th birthday or upon my death if earlier?
If correct, then the 75% remaining drawdown fund (after withdrawing 25% cash tax free) can be "managed" as it (hopefully) grows to even exceed the Lifetime Allowance in any given year before I die or reach 75 and, if my understanding is correct, the 55% tax charge for exceeding the Lifetime Allowance won't be applied provided that I ensure I withdraw enough each year from my drawdown fund to reduce the remaining fund to less than the 100% of the Lifetime Allowance before or upon my 75th birthday or my death if earlier?
So I might pay 20%, 40% or possibly even 45% tax on income drawn down from the Drawdown Fund but, if correct, I would avoid ever having to suffer a 55% tax charge provided the second time the Lifetime Allowance test was applied (at 75 years of age or upon death) my total funds did not exceed £1,000,000 plus whatever indexation has occurred at the time?
This could be despite my Drawdown Fund perhaps having exceeded the Lifetime Allowance in any of the intervening years between first crystallising the pension fund in its entirety at age 55+ and either death or reaching 75 years of age.
I am unable to benefit from any of the existing Lifetime Protection arrangements.
A response would be much appreciated.
Many thanks.
Money Spider
Posted: 23 June 2017 09:57:59(UTC)
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Simon,
I have spent quite a bit of time trying to gain a definitive understanding of how the Lifetime Allowance(LTA) works. Like much pension and taxation law there is nowhere (that I have found) where it is in one place and clearly explained. However, I'll share my understanding (as a layman and not an adviser). The best single document I have seen was on the HL website and is called "Lifetime Allowance Factsheet". I has been updated over the years as the LTA has decreased.

1. If you crystallise your SIPP when it is >LTA, then you will be taxed on the excess amount. Tax = 55% if you take the excess as cash; 25% if you leave in your Drawdown SIPP (but you'll then pay marginal income tax when you take it as income).
2. Your LTA will again be taxed at age 75, or if you die before 75 with uncrystallised SIPP funds. I haven't read anything that says the LTA will be tested on a death before 75 if it is 100% in Drawdown. However, it would seem logical that it would be tested thus.
3. My understanding is that the Drawdown SIPP can rise above the LTA between tests without penalty (because it is not tested). So, you could drawdown more in some years to reduce it before the next test - you might want to do this to manage your income tax over several years. Remember that the Personal Allowance is 'clawed back' when income exceeds £100k. So, between £100k and ~£123k your marginal rate would be considerably higher than 40%!
4. I understand that the last test is at age 75, so if you have exceeded the LTA at that point then you could choose to pay the 25% tax and leave the excess funds in your SIPP as part of an inheritance tax plan.

Given how the LTA has been reduced considerably over recent years, I think that many more people are going to be wrestling with this issue and many of them don't even realise it yet.
2 users thanked Money Spider for this post.
Tyrion Lannister on 05/02/2018(UTC), john brace on 09/03/2018(UTC)
Simon Child
Posted: 24 June 2017 18:00:49(UTC)
#3

Joined: 21/06/2017(UTC)
Posts: 3

Money Spider

Many thanks for your encouraging response. I am much obliged.

I had obtained that Life Time Allowance Fact sheet from Hargreaves Lansdown which I agree is most helpful and covers many of the points I had wanted clarification about but it did not seem to me to wholly provide all my requisite answers perhaps inevitably (as all our personal circumstances of course vary to greater or lesser degrees).

Indeed I always have found Hargreaves Lansdown staff to be "clued up" and helpful which is more than I can say for H M R & C to whom I had put my queries and were literally next to useless!

I do not have the Hargreaves Lansdown fact sheet to hand presently but I don't recall that it covered and clarified that the Lifetime Allowance can be effectively breached between crystallising 100% of funds (after age 55) and the next test at 75 years of age (or death) without penalty provided that the sums in the drawdown account (in my example) had been successfully managed back down (withdrawn) so as to equal 100% or less of the Life Time Allowance at age 75 (or death).

That is significant to me as none the of the fixed or individual protection arrangements are available to me as I have made regular contributions to my personal pension plans since April 2016.

You rightly point out the consequences of suffering extra income taxation in the £100,000 to £123,000 band but personally, without a crystal ball of course and therefore no knowledge of how my investments may grow over time, assuming that most of us intend investing for growth, I guess I am weighing that risk of possible added taxation in certain years (unknown as yet) in that precise income band against the prospect of a 55% tax charge on an unknown sum that might potentially be created by leaving pension funds growing in a drawdown account which would then be vulnerable to that 55% charge on the all the surplus above the Life Time Allowance when tested at age 75. Potentially that surplus could be a considerably larger sum than that tax band under current tax law, but that quantum can't be accurately predicted today.

Additionally of course none of us knows what legislative changes in taxation applying to pensions and income might be enacted over the ensuing years.

So I suppose a balanced approach for most people is best not least moving available funds into Stocks and Shares ISAs whilst the current annual allowances exist and given that pension planning is becoming more of a lottery. But of course current Inheritance Tax rules need to be considered in that regard too!

Thanks again for your most helpful comments and clarification.

Simon
Lortag
Posted: 25 June 2017 02:28:39(UTC)
#4

Joined: 10/04/2016(UTC)
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You wouldn't pay a 55% LTA charge on money you move to drawdown. The 55% LTA charge only applies to lumpsums, not drawdown funds.

When you move money into drawdown you pay a 25% LTA charge on any excess over your remaining LTA. Then at Age 75, or death if earlier, any drawdown funds above the amount previously moved into drawdown are tested again against your remaining LTA and any excess charged at 25%. You also pay tax at your marginal rate on any income you draw - but it's optional to draw an income, even in drawdown. But if you did take an income then the 25% charge plus marginal income tax gives effective tax rates of 25% for a non-taxpayer, 40% at basic rate, 55% at higher rate and 58.75% at additional rate. So effective rates could be higher or lower than 55%.

Your plan to draw income to prevent the fund exceeding LTA is generally good, but not in every case. For example, if you planned to pass your fund to your nominees free of IHT rather than use it for your own income then:
* if you are a non-tax payer or basic rate tax payer then it is better to pay income tax rather than the 25% LTA charge.
* if you are a high rate tax payer and your nominees are basic rate tax payers then the effective tax rates are equivalent, so there's no benefit either way.
* if you are a higher rate or additional rate tax payer then it is only better for you to take income if your nominees are higher rate or additional rate tax payers.
Ski Man
Posted: 03 February 2018 13:40:26(UTC)
#5

Joined: 03/02/2018(UTC)
Posts: 2

I am also trying to work out how the further Lifetime Allowance test will be applied at age 75.

My benefits were crystallised last year. At that time I had 2014 LTA protection, so a £1,500,000 LTA. I had a fund greater than that, and a small additional pension from a previous employer, which was included in the calculation as a value of 20 x the pension, giving a total value of approximately £1,600,000.

I paid the 25% tax charge for the amount over my LTA, and took the maximum tax free cash, £375,000. I have taken Income Drawdown from the fund and intend to continue doing this on an annual basis.

I understand that a further LTA test will be applied at age 75, but I would like to know how this is calculated.

According to the HMRC pension tax manual, it is only the net growth (investment growth less income payments) that is tested, so presumably that means any additional (25%) tax will only apply if the fund at 75 is greater than the amount originally crystallised. In my case, I assume this will be £1,225,000 (£1,600,000 less £375,000 tax free cash).

How is the additional pension valued for this calculation? Is it valued as 20 x pension again, or is a small factor used?
Money Spider
Posted: 05 February 2018 22:51:06(UTC)
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@Ski Man
Provided that you have crystallised 100% of your pension funds then you should not be tested against the LTA again until your 75th birthday.

I think you are correct in what you say in para 5 (immediately above). However, I cannot help you with regard to valuing the DB pension component (I don't have one, so I don't spend any brain cycles on it - sorry).
John46
Posted: 08 March 2018 22:05:42(UTC)
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Ski Man;56429 wrote:
According to the HMRC pension tax manual, it is only the net growth (investment growth less income payments) that is tested, so presumably that means any additional (25%) tax will only apply if the fund at 75 is greater than the amount originally crystallised. In my case, I assume this will be £1,225,000 (£1,600,000 less £375,000 tax free cash).

How is the additional pension valued for this calculation? Is it valued as 20 x pension again, or is a small factor used?


Only just found this thread but I had exactly the same questions regarding the DB scheme. I assume this is ignored for the LTA calculation at 75 as it was measured against LTA when first taken, and unless it is subject to an unusual increase (which has its own category and definition) then I think it is safe to assume it isnt 'retested' at 75 as it hasnt been subject to growth beyond inflationary increases. However, I cannot find that actually written down anywhere.

However for other purposes I have found the document on this link useful:-

http://www.scottishwidow...t/Literature/Doc/FP0647
P L
Posted: 09 March 2018 11:51:35(UTC)
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With regard to the issue of how DB schemes are valued the deeded value of pensions in payment is taken as 25:1 ie 25 times the current income. It's 25 rather than 20, which is the valuation method prior to crystalisation as it accounts for the 25% taxfree lumpsum that they except you to have taken.

My father in law was caught out by this. He has a DB pension which he took prior to the lifetime allowance ever being brought in. When the initial lifetime allowance came in as 1.8M the valuation was below this level so on advice he started a SIPP. When he reached 75 recently and the calculation was done again he got hit with a 25% tax charge on the SIPP value as the DB income had increased due to indexation and this coupled with the reduction in LTA mean he now breached the current LTA. In hindsight he should have been keeping an eye on the valuations and stopped paying into the SIPP.





markus
Posted: 09 March 2018 12:21:30(UTC)
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P L;58453 wrote:
With regard to the issue of how DB schemes are valued the deeded value of pensions in payment is taken as 25:1 ie 25 times the current income. It's 25 rather than 20, which is the valuation method prior to crystalisation as it accounts for the 25% taxfree lumpsum that they except you to have taken.

My father in law was caught out by this. He has a DB pension which he took prior to the lifetime allowance ever being brought in. When the initial lifetime allowance came in as 1.8M the valuation was below this level so on advice he started a SIPP. When he reached 75 recently and the calculation was done again he got hit with a 25% tax charge on the SIPP value as the DB income had increased due to indexation and this coupled with the reduction in LTA mean he now breached the current LTA. In hindsight he should have been keeping an eye on the valuations and stopped paying into the SIPP.








fairly certain its x20 as per

https://www.moneyadvices...ance-for-pension-savings
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John46 on 09/03/2018(UTC)
P L
Posted: 09 March 2018 12:32:16(UTC)
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I stand corrected. It is for pensions in payment pre A day. ie those in payment prior to the LTA.
1 user thanked P L for this post.
John46 on 09/03/2018(UTC)
John46
Posted: 09 March 2018 16:09:09(UTC)
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PL, markus, thank you.

So just to replay my understanding:-

- a DB final salary scheme that assessed against LTA at the time it is first taken, has been allocated a % against LTA already so is NOT then reassessed at age 75. (Unless there has been an abnormal increase of course). It is just a SIPP/DC that has been subject to growth were this could need a reassessment.

- If the DB scheme was not assessed against LTA at the time it was taken (ie it has been long standing) then it WOULD be assessed at age 75yrs.

Is that the correct understanding?

I still cant find the answer in the HMRC manuals but I am probably just looking in the wrong place. I may email them a question, but from past experience it is often difficult to get a simple answer to a very specific question like this.

Thanks
markus
Posted: 09 March 2018 17:04:10(UTC)
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John46;58462 wrote:
PL, markus, thank you.

So just to replay my understanding:-

- a DB final salary scheme that assessed against LTA at the time it is first taken, has been allocated a % against LTA already so is NOT then reassessed at age 75. (Unless there has been an abnormal increase of course). It is just a SIPP/DC that has been subject to growth were this could need a reassessment.

- If the DB scheme was not assessed against LTA at the time it was taken (ie it has been long standing) then it WOULD be assessed at age 75yrs.

Is that the correct understanding?

I still cant find the answer in the HMRC manuals but I am probably just looking in the wrong place. I may email them a question, but from past experience it is often difficult to get a simple answer to a very specific question like this.

Thanks



not an expert but...

your first point - if taking of the DB falls under a Benefit crystallisation event - BCE2 - then that is calculated at x20 & eats up x% of your LTA

your second point - looks like it falls under pre-commencement...and eats up your LTA at x25 annual pension *at the time* of the first BCE (ouch...as per P L point)..I guess first BCE could be 75.


HMRC BCE manual:
https://www.gov.uk/hmrc-...ns-tax-manual/ptm088100

HMRCS Pre-commencement manual:
https://www.gov.uk/hmrc-...ns-tax-manual/ptm088300

1 user thanked markus for this post.
John46 on 09/03/2018(UTC)
John46
Posted: 09 March 2018 19:49:03(UTC)
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Thanks Markus,

Its that first one that applies to me, BCE2 that will be taken this year.

In my case I am planning on taking my DB pension 3 years early (at 57yrs) to trigger the BCE at a slightly lower % rate of LTA than waiting until my normal retirement date, and hence leave lots of head room for my SIPP to grow. I think by taking the DB pension early it uses 30% of LTA rather 36% of LTA and that will make a difference when I am 75yrs, if the rules haven't changed by then of course !!

Reason for planning so far ahead is I have FP2014, and as I understand it the FP2014 level LTA although it is £1.5m wont increase with CPI. Hence if the DB scheme was assessed again at 75yrs it would have made a big impact as I would have 18 years of further growth to allow for.

Hopefully my fears are somewhat misplaced though, and the DB scheme will only ever be assessed once and that will be at the time it is first drawn, so drawing early still sounds like the right decision.

Many thanks for your help.
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