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When does any LTA tax actually have to be paid

rhinestone
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When does any LTA tax actually have to be paid

#278419

Postby rhinestone » January 18th, 2020, 7:22 pm

A question on lifetime allowance …

Let’s say I am over the LTA at 75 when the LTA test on the value of your pensions occurs.

If the value of your pensions left plus benefits taken at that test point exceeds the LTA then the LTA tax becomes due.

If at 75 the value of benefits taken is still low (let’s say LTA percentage used 50%) – am I right in thinking that the tax will not become due until the value of benefits taken uses up the LTA in full – which in this example might be some further 15 years down the road if a similar low rate of withdrawal is taken. Also assuming that any unused 25% tax free elements could still be accessed.

So bottom line question – if LTA is breached at 75 when tested then is the tax only due on this once the value of benefits taken has exceeded LTA even though the value of the pensions in total has exceeded the LTA.

Thanks in advance for any insights here.

Chrysalis
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Re: When does any LTA tax actually have to be paid

#278438

Postby Chrysalis » January 18th, 2020, 10:41 pm

No, I think the charge is payable immediately. If you wish to take the excess as income then the rate payable is 25%, plus income tax as the withdrawals are taken. If you take the excess as an immediate lump sum then the rate is 55%.
That’s my understanding anyway...hopefully others will know more.

ursaminortaur
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Re: When does any LTA tax actually have to be paid

#278446

Postby ursaminortaur » January 19th, 2020, 1:44 am

Chrysalis wrote:No, I think the charge is payable immediately. If you wish to take the excess as income then the rate payable is 25%, plus income tax as the withdrawals are taken. If you take the excess as an immediate lump sum then the rate is 55%.
That’s my understanding anyway...hopefully others will know more.


Yes it is payable immediately. Either the Excess is left in the pension pot and a 25% excess charge is applied or it can be taken as a tax-free lump sum at that point in which case a 55% charge is applied before you take it.
(If you leave it in the pot then it is assumed that you would then take it at some point in the future at which point you would pay tax at your marginal rate on it. If the marginal tax rate is 40% then that in combination with the 25% excess charge applied is equivalent to it being taxed at 55% - thus if you can withdraw it with a lower marginal tax rate eg 20% then it is better to do so whereas if you had so much income that your marginal tax rate was 45% it would be better to take the excess as a capital sum and pay the 55% excess charge. Of course you could leave it in the pot, with the 25% excess charge having been paid, so it would go to your beneficiaries after your death but then they would pay tax on it at their marginal rate when they withdrew it since you would have been older than 75 when you died.)

rhinestone wrote:If at 75 the value of benefits taken is still low (let’s say LTA percentage used 50%) – am I right in thinking that the tax will not become due until the value of benefits taken uses up the LTA in full – which in this example might be some further 15 years down the road if a similar low rate of withdrawal is taken. Also assuming that any unused 25% tax free elements could still be accessed


The LTA test at 75 is the last LTA test. There are two possible LTA tests at that point either or both of which might be applied.

Firstly if you have crystallised your pot (or some of your pension pots) and put them into flexible drawdown then any growth which still remains in the drawdown pot at age 75 is tested against whatever percentage of your LTA limit is left. This is easy to avoid by just drawing down all the growth before you reach 75 - that drawdown will be taxed at your marginal rate.
Secondly if you have any remaining uncrystallised pension pots at age 75 they are tested against the LTA limit (or whatever percentage of the LTA limit you have left if you have already accessed some pensions).

If at age 75 you have not exceeded the LTA limit there are no further LTA tests and your pot can then continue to grow without any worries about the LTA limit. So if at age 75 you had used up 95% of the LTA limit and at age 90 you found that your pension pot then had say 200% of the then LTA limit then that would be of no concern to you.

The tax-free 25% lump sum can be taken either before or after age 75 but note the maximum tax-free lump sum is 25% of the minimum of your total pension pot value or the LTA limit ie you can't take 25% of any amount above the LTA limit tax-free (though you can take all of the excess as a tax-free lump sum subject to the 55% charge when the LTA test shows you are over the limit).
Also note the 25% tax-free lump sum is a personal benefit which dies with you - your beneficiaries can't make use of it.

Hope that is of some help.

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Re: When does any LTA tax actually have to be paid

#278453

Postby BrummieDave » January 19th, 2020, 7:31 am

With the introduction of LTA and other 'pension reforms' the Government has created a monster.

As a trustee director of a large pension scheme with several DB and DC sections, I have watched the monster grow and whilst it may suit the Government to have introduced these reforms in order to limit the tax benefits of what can be paid in, and subsequently taken out, they have inadvertently taken the understanding and optimisation of an individual's pension beyond the average (or even much better informed) person.

The creation and growth of the excellent (IMHO) 'Pensions Advisory Service' (https://www.pensionsadvisoryservice.org.uk), part of the broader Money and Pensions Service which also includes Pension Wise (https://www.pensionwise.gov.uk/en), is a clear acknowledgement by the authorities that the level of knowledge and expertise required to plan, administer, and access a pension efficiently is now beyond the average citizen.

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Re: When does any LTA tax actually have to be paid

#278480

Postby rhinestone » January 19th, 2020, 10:53 am

Thanks for the responses - and yes the LTA rules seem like a minefield. :?

My personal scenario is I'm at a point where I can take my pension and overall I am lingering just below the LTA limit (about 5% leeway). I am now retired and what I want to do is start taking benefits and I'm working on a safe withdrawal rate of 3.25%. I am looking to have some of the pension left to pass on at death to my family.

With a recent inheritance I don't need the 25% tax free cash sum right now so whilst drawdown seems the way to go from an LTA perspective I was looking to maintain more money in the pension wrapper for longer for inheritance purposes.

UFPLS then seemed like an option just drawing down the 3.25% each year which is what prompted my original question. So I was trying to figure if I could just take 3.25% in perpetuity and take the LTA hit when my LTA allowance was used up or when I die. At a withdrawal rate of 3.25% that's some 30 years from the point of retirement. But the points made about it being a personal tax free benefit and the tax being due immediately if LTA breached at 75 push me away from this.

I'm starting to think I go into drawdown on the pensions, take the 25% tax free and reinvest outside the pension wrapper and then manage the two pots to get the required income keeping a careful eye on LTA limits.

Alternatively maybe I take the UFPLS route for a few years - wait for the next market crash and then go into to drawdown at that point....

ursaminortaur
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Re: When does any LTA tax actually have to be paid

#278498

Postby ursaminortaur » January 19th, 2020, 12:31 pm

rhinestone wrote:Thanks for the responses - and yes the LTA rules seem like a minefield. :?

My personal scenario is I'm at a point where I can take my pension and overall I am lingering just below the LTA limit (about 5% leeway). I am now retired and what I want to do is start taking benefits and I'm working on a safe withdrawal rate of 3.25%. I am looking to have some of the pension left to pass on at death to my family.

With a recent inheritance I don't need the 25% tax free cash sum right now so whilst drawdown seems the way to go from an LTA perspective I was looking to maintain more money in the pension wrapper for longer for inheritance purposes.

UFPLS then seemed like an option just drawing down the 3.25% each year which is what prompted my original question. So I was trying to figure if I could just take 3.25% in perpetuity and take the LTA hit when my LTA allowance was used up or when I die. At a withdrawal rate of 3.25% that's some 30 years from the point of retirement. But the points made about it being a personal tax free benefit and the tax being due immediately if LTA breached at 75 push me away from this.

I'm starting to think I go into drawdown on the pensions, take the 25% tax free and reinvest outside the pension wrapper and then manage the two pots to get the required income keeping a careful eye on LTA limits.

Alternatively maybe I take the UFPLS route for a few years - wait for the next market crash and then go into to drawdown at that point....



If you are close to the LTA limit then the best drawdown route is to crystallise the pot and use flexible drawdown.
UFPLS leaves the untouched part of the pot uncrystallised and growing and at each UFPLS drawdown there will be another LTA test using up part of your LTA limit with a final test at age 75 capturing any uncrystallised pension.
Hence all of that growth will be captured and you are very likely to exceed the LTA limit and face an excess charge.

In contrast with flexible drawdown there is an LTA test when the pot is crystallised (and when the 25% tax free lump sum is taken which is generally at the same time*). However there are NO LTA tests when you then drawdown money from that crystallised pot. The final LTA test at 75 will just be on growth which is left in the pot and so will not include growth that you have drawndown. The test simply being

(Amount in crystallised pot at age 75) - ( Amount in pot when drawdown entered - the tax free lump sum taken)

Hence to avoid exceeeding the LTA limit all you then need to do is take out the growth before the age of 75.

see

https://www.retirement-planner.co.uk/231685/bernadette-lewis-drawdown-second-lifetime-allowance-test



* I believe that technically there is some small leeway allowed between when you are deemed to have started flexible drawdown and when you decide to take the 25% tax free lump sum. However in practise I think practically all providers will require you to take the tax free lump sum at commencement of flexible drawdown.
Note. After commencing flexible drawdown you aren't compelled to actually withdraw anything other than the tax free lump sum and as long as you do not make any withdrawals apart from that tax free lump sum you keep your full annual allowance and hence could if you wished continue to contribute to your pension upto the Annual Limit of £40,000 ( + any carry-forward from the last three years) provided you had enough relevent earnings. Given how close you are to the LTA limit that probably isn't a concern to you but others who are further from the LTA limit and still earning might wish to do so. Once you drawdown more than the tax free lump sum though any further contributions to a money-purchase/DC pension will be subject to the lower MPAA limit restricting you to just contributing £4000 per year.

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Re: When does any LTA tax actually have to be paid

#278504

Postby TedSwippet » January 19th, 2020, 12:43 pm

rhinestone wrote:I'm starting to think I go into drawdown on the pensions, take the 25% tax free and reinvest outside the pension wrapper and then manage the two pots to get the required income keeping a careful eye on LTA limits.

Right. This is the route I am taking.

In short, the tax you would pay on gains in the PCLS portion reinvested outside the pension will almost certainly be lower than the tax you would pay on gains above the LTA that accrue inside the pension. For basic rate tax, 7% on dividends and max 10% on capital gains versus 40% on a pension above the LTA; for higher rate tax, 32.5% on dividends and max 20% on capital gains versus 55% on a pension above the LTA.

rhinestone wrote:Alternatively maybe I take the UFPLS route for a few years - wait for the next market crash and then go into to drawdown at that point....

It's a possibility, but how confident are you that you won't be forced into paying higher LTA penalties later on if the crash doesn't come when you need it, or isn't as deep as you need it to be?

I've seen this strategy being suggested for several years now, during which time markets have risen more than 30%. Anyone taking the decision then and still waiting for the crash now might need a 50% drop to let them duck under the LTA. The larger the crash required, the lower the probability of it occurring.

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Re: When does any LTA tax actually have to be paid

#278509

Postby ursaminortaur » January 19th, 2020, 12:54 pm

BrummieDave wrote:With the introduction of LTA and other 'pension reforms' the Government has created a monster.

As a trustee director of a large pension scheme with several DB and DC sections, I have watched the monster grow and whilst it may suit the Government to have introduced these reforms in order to limit the tax benefits of what can be paid in, and subsequently taken out, they have inadvertently taken the understanding and optimisation of an individual's pension beyond the average (or even much better informed) person.

The creation and growth of the excellent (IMHO) 'Pensions Advisory Service' (https://www.pensionsadvisoryservice.org.uk), part of the broader Money and Pensions Service which also includes Pension Wise (https://www.pensionwise.gov.uk/en), is a clear acknowledgement by the authorities that the level of knowledge and expertise required to plan, administer, and access a pension efficiently is now beyond the average citizen.


A-Day on 6th April 2006 which introduced the LTA was known as Pension Simplification day and generally simplified the preceding system. The LTA (and annual allowance limits) were set at levels such that they didn't really affect most people - LTA: intially £1.5 million, growing to £1.8 Million in 2010/2011, Annual Allowance initially £215,000 growng to £255,000 in 2010/2011. It was only after the election of the coalition government and the lowering of the limits that major complications such as the introduction of various protections, tapering of the annual limit for high earners, MPAA etc were introduced. (Though to counter-balance this there were George Osborne's pension freedoms which got rid of the GAD complications which limited how much you could take out of a drawdown pension).

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Re: When does any LTA tax actually have to be paid

#278518

Postby BrummieDave » January 19th, 2020, 1:21 pm

ursaminortaur wrote:
BrummieDave wrote:With the introduction of LTA and other 'pension reforms' the Government has created a monster.

As a trustee director of a large pension scheme with several DB and DC sections, I have watched the monster grow and whilst it may suit the Government to have introduced these reforms in order to limit the tax benefits of what can be paid in, and subsequently taken out, they have inadvertently taken the understanding and optimisation of an individual's pension beyond the average (or even much better informed) person.

The creation and growth of the excellent (IMHO) 'Pensions Advisory Service' (https://www.pensionsadvisoryservice.org.uk), part of the broader Money and Pensions Service which also includes Pension Wise (https://www.pensionwise.gov.uk/en), is a clear acknowledgement by the authorities that the level of knowledge and expertise required to plan, administer, and access a pension efficiently is now beyond the average citizen.


A-Day on 6th April 2006 which introduced the LTA was known as Pension Simplification day and generally simplified the preceding system. The LTA (and annual allowance limits) were set at levels such that they didn't really affect most people - LTA: intially £1.5 million, growing to £1.8 Million in 2010/2011, Annual Allowance initially £215,000 growng to £255,000 in 2010/2011. It was only after the election of the coalition government and the lowering of the limits that major complications such as the introduction of various protections, tapering of the annual limit for high earners, MPAA etc were introduced. (Though to counter-balance this there were George Osborne's pension freedoms which got rid of the GAD complications which limited how much you could take out of a drawdown pension).


Yes, a good synopsis; I've lived through all of that, as a contributing member, a pensioner member, and a trustee. There are lots of seemingly quite minor items within all the changes that when taken in aggregate with another change, can result in quite complex issues to resolve, be that for the member, or the trustees.

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Re: When does any LTA tax actually have to be paid

#278519

Postby ursaminortaur » January 19th, 2020, 1:24 pm

rhinestone wrote:But the points made about it being a personal tax free benefit and the tax being due immediately if LTA breached at 75 push me away from this.

I'm starting to think I go into drawdown on the pensions, take the 25% tax free and reinvest outside the pension wrapper and then manage the two pots to get the required income keeping a careful eye on LTA limits.


You can still take the 25% tax free lump sum after 75 it is just that you can't take 25% of the excess if you exceed the LTA limit tax free as part of the PCLS.

So for instance if at age 75 the LTA limit was say 1.1M and your pot was 1.2 million then you would have an excess of £100,000. You could take that as a tax free lump sum subject to a 55% charge ie would take home £45,000. Alternatively you could leave it in the pot and suffer a charge of 25% meaning that your pot would contain 1.175m.
If at that point you then took the 25% tax free lump sum then irrespective of whether you had taken the excess as a lump sum or whether you had left it in the pot the maximum tax free lump sum you would be able to take would be 25% of the LTA limit ie 25% of £1.1m = £275.000. You could though leave it a little longer and so long as you survived would be able to take out tax free 25% of whatever the LTA limit has then grown to.

The tax free lump sum is a personal benefit though and dies with you so you don't want to leave it too long. If you do want to give it to your beneficiaries then the best way would probably be to take the 25% tax free lump sum and then gift it as a PET (Potentially exempt transfer) to your beneficiaries which will be tax free and will escape inheritance tax so long as you survive seven years after making the gift. Unfortunately the tax free lump sum is viewed as capital rather than income so can't be treated as a gift out of excess income which is the other main way
of avoiding IHT and which just requires evidence of regular gifting rather than requiring you to survive seven years (Drawdown, DB payments or annuity payments from a pension are considered to be income and can be gifted as out of excess income if you wish).

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Re: When does any LTA tax actually have to be paid

#278703

Postby rhinestone » January 20th, 2020, 10:43 am

Thank for the comments and discussion here - especially to ursaminotaur.

Much clearer now on some key points and closer to crystallising my decision....


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