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LTA calculation

UncleEbenezer
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LTA calculation

#436182

Postby UncleEbenezer » August 20th, 2021, 10:36 am

I'm about to take a lump sum from a second pension pot, having taken the lump sum from my main pot two years ago.

In the forms I have to fill there is a calculation for LTA purposes, in which I have to state the value of other pensions. But what's not clear to me is the basis for calculation of that value. Should I state the value at the time I took the lump sum and moved it to drawdown? Or should I take a snapshot of the current value? The former is well-defined, whereas the latter varies by the second with stockmarket fluctuations.

The wording also talks about state pension, which I thought was excluded from LTA calculation. It's still some years before I qualify for that, if both it and I survive that long.

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Re: LTA calculation

#436185

Postby pje16 » August 20th, 2021, 10:41 am

State pension is excluded from LTA
I look forward to others helping with the other points

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Re: LTA calculation

#436217

Postby goRt » August 20th, 2021, 12:44 pm

They wish to know the %age of LTA already crystallised - so if the old pension was 200k and you took the full 50k where the LTA *at the time* for you was 1m, then you've used 20% of the LTA.

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Re: LTA calculation

#436223

Postby pje16 » August 20th, 2021, 12:52 pm


ursaminortaur
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Re: LTA calculation

#436224

Postby ursaminortaur » August 20th, 2021, 12:52 pm

UncleEbenezer wrote:I'm about to take a lump sum from a second pension pot, having taken the lump sum from my main pot two years ago.

In the forms I have to fill there is a calculation for LTA purposes, in which I have to state the value of other pensions. But what's not clear to me is the basis for calculation of that value. Should I state the value at the time I took the lump sum and moved it to drawdown? Or should I take a snapshot of the current value? The former is well-defined, whereas the latter varies by the second with stockmarket fluctuations.

The wording also talks about state pension, which I thought was excluded from LTA calculation. It's still some years before I qualify for that, if both it and I survive that long.


They need to know how much of your LTA limit is left after you took the earlier pension(s). Hence they are looking for the value when the pension was taken rather than the value now. They would also need to know when it was taken since the LTA limit has changed over time. (Alternatively some might ask for the percentage of the LTA limit which you have already used up which is something you should have been told at the time you took the earlier pension). The value needed will be the total value of the crystallised pot including the tax free lump sum at the time the pot was crystallised.
The only time that they will be interested in the current value of an already crystallised pot will be for the LTA test at age 75 where they will look at any growth which has occurred since it was first crystallised and which still remains in the pot and since it will be the pension provider which holds the pot doing the LTA calculation at age 75 they will have the information on its current value anyway and won't need to ask you for it unless you have multiple flexible drawdown pots with different providers.

UncleEbenezer
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Re: LTA calculation

#436227

Postby UncleEbenezer » August 20th, 2021, 1:02 pm

Thanks. I think that kind-of confirms what I thought.

Though the most obvious interpretation of the form I have to fill would be a little different - hence the uncertainty.

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Re: LTA calculation

#436245

Postby TedSwippet » August 20th, 2021, 2:06 pm

ursaminortaur wrote:The only time that they will be interested in the current value of an already crystallised pot will be for the LTA test at age 75 where they will look at any growth which has occurred since it was first crystallised and which still remains in the pot and since it will be the pension provider which holds the pot doing the LTA calculation at age 75 they will have the information on its current value anyway and won't need to ask you for it unless you have multiple flexible drawdown pots with different providers.

Not relevant at all to the OP's current situation, but just on this point, from a rival forum ...

Testing growth in multiple drawdown accounts at second LTA test at 75 — MoneySavingExpert Forum

Apparently, for BCE 5 at age 75, each provider has to consider their scheme in isolation. The upshot of this is that if you have a loss in one pension and a gain in another, you will face an LTA penalty on the gain without being able to offset it with the other's losses. Unjust, even by the low and one-sided standards of the LTA penalty rules. Best not to get into this position, then.

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Re: LTA calculation

#436249

Postby ursaminortaur » August 20th, 2021, 2:18 pm

TedSwippet wrote:
ursaminortaur wrote:The only time that they will be interested in the current value of an already crystallised pot will be for the LTA test at age 75 where they will look at any growth which has occurred since it was first crystallised and which still remains in the pot and since it will be the pension provider which holds the pot doing the LTA calculation at age 75 they will have the information on its current value anyway and won't need to ask you for it unless you have multiple flexible drawdown pots with different providers.

Not relevant at all to the OP's current situation, but just on this point, from a rival forum ...

Testing growth in multiple drawdown accounts at second LTA test at 75 — MoneySavingExpert Forum

Apparently, for BCE 5 at age 75, each provider has to consider their scheme in isolation. The upshot of this is that if you have a loss in one pension and a gain in another, you will face an LTA penalty on the gain without being able to offset it with the other's losses. Unjust, even by the low and one-sided standards of the LTA penalty rules. Best not to get into this position, then.


Thanks for that. I find it somewhat surprising though as I'd have thought the more likely situation would be where someone has two crystallised pots with some growth in them such that the combined growth would take them over their remaining LTA limit but the separate growth in each taken in isolation would not. Unless the information from each provider is combined in some way then HMRC would lose out.

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Re: LTA calculation

#436445

Postby TedSwippet » August 21st, 2021, 12:43 pm

ursaminortaur wrote:I find it somewhat surprising though as I'd have thought the more likely situation would be where someone has two crystallised pots with some growth in them such that the combined growth would take them over their remaining LTA limit but the separate growth in each taken in isolation would not. Unless the information from each provider is combined in some way then HMRC would lose out.

I'm a comfortable number of years from this, but the only way I can see it working in practice is for the BCE 5s to be treated as if sequential. That is, provider A is handed LTA% to date, does their BCE 5, and comes up with a new LTA%; then provider B does the same but starting with the LTA% output of the first. And so on to providers C through Z or whatever, if more. Anything else seems infeasible (not that this is exactly straightforward!).

The important point is that a loss in a pension doesn't reduce the LTA% passing through this pipeline process. The LTA% only ever ratchets up, not down. So a loss in one of these pensions cannot offset a gain in the other.

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Re: LTA calculation

#436452

Postby ursaminortaur » August 21st, 2021, 1:20 pm

TedSwippet wrote:
ursaminortaur wrote:I find it somewhat surprising though as I'd have thought the more likely situation would be where someone has two crystallised pots with some growth in them such that the combined growth would take them over their remaining LTA limit but the separate growth in each taken in isolation would not. Unless the information from each provider is combined in some way then HMRC would lose out.

I'm a comfortable number of years from this, but the only way I can see it working in practice is for the BCE 5s to be treated as if sequential. That is, provider A is handed LTA% to date, does their BCE 5, and comes up with a new LTA%; then provider B does the same but starting with the LTA% output of the first. And so on to providers C through Z or whatever, if more. Anything else seems infeasible (not that this is exactly straightforward!).

The important point is that a loss in a pension doesn't reduce the LTA% passing through this pipeline process. The LTA% only ever ratchets up, not down. So a loss in one of these pensions cannot offset a gain in the other.


But that would still need the result of provider A's age 75 LTA calculation to be passed onto provider B in some way and the only person knowing that he has drawdown pensions with A and B is the owner of those pension funds so the information would have to be passed through that person to provider B. On top of that how would provider B know that they had to wait for provider A to do their age 75 calculation first ?

My guess is that to do this properly at age 75 all the providers will ask you
1) how much LTA you have already used up with other pensions
and
2) The name and contact details of any other provider that you have an already crystallised pension with.

The latter information will then allow them all to contact one another and sort things out.

The way that the LTA test at age 75 is structured per crystallised pot meant that it was never going to allow a reduction. If you had just a single pot in drawdown at age 75 plus some uncrystallised remainder all with one provider a fall in the value of the crystallised pot since it was first crystallised wouldn't reduce the LTA already used and thus allow you to squeak through the LTA test on the uncrystallised remainder. If your crystallised pot at age 75 has lost value since it was first crystallised the amount of LTA you have used isn't reduced it is just left the same ie the test has a floor value of zero.

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Re: LTA calculation

#436466

Postby TedSwippet » August 21st, 2021, 2:14 pm

ursaminortaur wrote:But that would still need the result of provider A's age 75 LTA calculation to be passed onto provider B in some way and the only person knowing that he has drawdown pensions with A and B is the owner of those pension funds so the information would have to be passed through that person to provider B.

It would, but then the LTA% passes between providers via the owner anyway. Each time I crystallise a chunk of my pension, the provider (in this case, Interactive Investor) simply asks for copies of all of the LTA usage certificates I have from any other crystallised pensions, and must trust that I've provided them:

https://www.gov.uk/hmrc-internal-manual ... /ptm088400
Establish whether or not there is a chargeable amount at a BCE
The scheme administrator is jointly liable for any lifetime allowance charge arising in the member’s lifetime, and is expected to account for any charge due direct to HMRC. So the scheme administrator is expected to take steps before a BCE occurs under their scheme (and, usually, before benefits are paid out) to establish whether or not such a charge will arise.

To do this an administrator will need to liaise with the member concerned, asking for sufficient information so that they can establish if a chargeable amount arises at the BCE.

The legislation does not prescribe how a scheme administrator does this.

Because the scheme administrator is reliant on the information or declaration the member provides to them, the legislation provides for a discharge from their liability to any lifetime allowance charge due where they can show they have acted in ‘good faith’, based on information or statements provided by the member. ...

There's no automated or third-party system for this, and pension providers don't coordinate among themselves.

ursaminortaur wrote:On top of that how would provider B know that they had to wait for provider A to do their age 75 calculation first ?

I suppose you would just have to tell them. Perhaps they will ask. Or, if not, note the "jointly liable" above. If coordination between these providers fails somehow, in a way that you end up with both allowing you the same chunk of LTA, it would come out in the wash with self-assessment, so that you'd pay the LTA penalty that way.

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Re: LTA calculation

#441025

Postby hiriskpaul » September 9th, 2021, 5:22 pm

TedSwippet wrote:
ursaminortaur wrote:But that would still need the result of provider A's age 75 LTA calculation to be passed onto provider B in some way and the only person knowing that he has drawdown pensions with A and B is the owner of those pension funds so the information would have to be passed through that person to provider B.

It would, but then the LTA% passes between providers via the owner anyway. Each time I crystallise a chunk of my pension, the provider (in this case, Interactive Investor) simply asks for copies of all of the LTA usage certificates I have from any other crystallised pensions, and must trust that I've provided them:

https://www.gov.uk/hmrc-internal-manual ... /ptm088400
Establish whether or not there is a chargeable amount at a BCE
The scheme administrator is jointly liable for any lifetime allowance charge arising in the member’s lifetime, and is expected to account for any charge due direct to HMRC. So the scheme administrator is expected to take steps before a BCE occurs under their scheme (and, usually, before benefits are paid out) to establish whether or not such a charge will arise.

To do this an administrator will need to liaise with the member concerned, asking for sufficient information so that they can establish if a chargeable amount arises at the BCE.

The legislation does not prescribe how a scheme administrator does this.

Because the scheme administrator is reliant on the information or declaration the member provides to them, the legislation provides for a discharge from their liability to any lifetime allowance charge due where they can show they have acted in ‘good faith’, based on information or statements provided by the member. ...

There's no automated or third-party system for this, and pension providers don't coordinate among themselves.

ursaminortaur wrote:On top of that how would provider B know that they had to wait for provider A to do their age 75 calculation first ?

I suppose you would just have to tell them. Perhaps they will ask. Or, if not, note the "jointly liable" above. If coordination between these providers fails somehow, in a way that you end up with both allowing you the same chunk of LTA, it would come out in the wash with self-assessment, so that you'd pay the LTA penalty that way.

There must be some coordination via the member, otherwise you could get a situation where a member uses 25% of LTA up crystallising with provider A, 25% with B, then 50% growth (BCE5A) with A, 50% with B and does not pay a charge!

With interactive investor, is a new drawdown pot created with each crystallisation? It would clearly be better for the member if they were all merged so that the growth from all the crystallisations gets combined.

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Re: LTA calculation

#443203

Postby taken2often » September 17th, 2021, 11:44 pm

I had the LTA test August 20. A few months before H-Lasked about other pensions. The other to Sipps had never been in drawdown and both showed no great value. I have no idea if H-L contacted Yousave, but I did have to provide the information. Had I drawn any funds no doubt I would have to provide the information or commit fraud.

Some people think by taking funds earlier this avoids LTA but this is not so as they are all added together. Where you do help to avoid LTA is that you have removed funds, so you have restricted the growth. Covis saved me a lot of tax. The market adjustment drpopped me below my LTA but has since motored ahead, full recovery plus.

Bob

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Re: LTA calculation

#443215

Postby ursaminortaur » September 18th, 2021, 1:39 am

taken2often wrote:I had the LTA test August 20. A few months before H-Lasked about other pensions. The other to Sipps had never been in drawdown and both showed no great value. I have no idea if H-L contacted Yousave, but I did have to provide the information. Had I drawn any funds no doubt I would have to provide the information or commit fraud.

Some people think by taking funds earlier this avoids LTA but this is not so as they are all added together. Where you do help to avoid LTA is that you have removed funds, so you have restricted the growth. Covis saved me a lot of tax. The market adjustment drpopped me below my LTA but has since motored ahead, full recovery plus.

Bob


If you crystallise the funds early then remove any growth before age 75 then the age 75 test on crystallised pots will not use up any of your remaining LTA limit. The drawdowns from a crystallised pot do not themselves trigger any LTA tests and hence don't use up any of your LTA limit though they will, of course, be taxed at your marginal rate.

Using UFPLS though means that any growth is tested against the LTA limit and uses up some LTA each time cash is drawn down and if it hasn't been drawn down by age 75 then the growth will be caught by the final age 75 LTA test on the remaining uncrystallised funds.

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Re: LTA calculation

#443230

Postby TedSwippet » September 18th, 2021, 8:32 am

hiriskpaul wrote:There must be some coordination via the member, otherwise you could get a situation where a member uses 25% of LTA up crystallising with provider A, 25% with B, then 50% growth (BCE5A) with A, 50% with B and does not pay a charge!

There is. It's described upthread. Pension providers ask the member for details that other pension schemes have given the member, typically on crystallisation of those schemes' pensions. It's up to the member to provide them. Any holes that might occur in this process are covered by questions on tax self-assessment.

hiriskpaul wrote:With interactive investor, is a new drawdown pot created with each crystallisation? It would clearly be better for the member if they were all merged so that the growth from all the crystallisations gets combined.

It's merging multiple pension schemes that creates this noxious gain/loss and isolated age 75 LTA testing nightmare. That is, moving a crystallised SIPP from provider A into a crystallised SIPP from provider B. Multiple individual and partial crystallisations within a single SIPP scheme with (say) Interactive Investor do not. These are "merged" so that gains/losses across its component parts work as you'd hope.

FWIW, Interactive Investor does not even segregate the crystallised and uncrystallised elements, but rather maintains everything inside a single 'pot', and instead keeps a note of the percentage of this that is crystallised/uncrystallised. This scheme is confusing for members and a touch fiddly to work with -- for example, you cannot hold different investments in the crystallised and uncrystallised parts -- but can be made mostly workable with a good spreadsheet.


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