75 LTA Dilemma

[taken2often]

I have been away for a while. I had a big fight with the Pension Schemes Office and got what I wanted UFPLS. It is ironic that I will never have to use it now as I will never draw on my SIPP. I am 74 now and at present have passed my LTA allowance so do I pay the Tax or do my self in at 74.75. Now some of the old MF members would no doubt say go for it. I had few friends there. If I was terminal or had dementia I could be tempted as it is I intend to
have a full body Scan including the head to help my evaluations. This LTA situation does raise question such as.

Only Idiots such as MPS and Treasury employees would tax success. Control of input tax is fine. They lie about the need to recover tax relief but they are already getting this as the Fund has probably grown miles above the input tax and they take the PAYE on pension drawn.

On one hand they acknowledge Life Span has extended and intend to delay your pension but they have not moved the 75 to 80 years

If I pay the tax in August this year and The Donald loses on Nov 6 with a Guaranteed market crash and my fund drops below the LTA can I ask for my tax back ?

An aside. On MF I had heated debate on my Logic regarding the Tax Free Lump Sum. In that as there has been very little tax free growth within a pension fund for many years it would only be fair that the Government take the 25% or say 30% for high rate tax payers as a return of tax with interest.

Now I wrote a lot of letters about this to the PSO and others and this logic may have sunk in so that they had to create tax relief They did with a win win for them. Dividend Tax. Perhaps Boris will help out with these problems.

Good New Year to All

[Chrysalis]

The answer to your question is no. I think you already knew that though

[ursaminortaur]

I have been away for a while. I had a big fight with the Pension Schemes Office and got what I wanted UFPLS. It is ironic that I will never have to use it now as I will never draw on my SIPP. I am 74 now and at present have passed my LTA allowance so do I pay the Tax or do my self in at 74.75. Now some of the old MF members would no doubt say go for it. I had few friends there. If I was terminal or had dementia I could be tempted as it is I intend to
have a full body Scan including the head to help my evaluations.

UFPLS didn't really change anything much. You could achieve the same effect though slightly more flexibly using partial drawdown which a number of pension providers supported ie crystallising your pension pot in small chunks and taking the 25% tax-free lump sum from that crystallised chunk and then drawing down the rest from the chunk taxed at your marginal rate before moving onto the next chunk.

For someone who had a large pension pot and was therefore getting close to the LTA limit UFPLS (or for that matter partial drawdown) was always going to be a bad idea as each UFPLS withdrawal (or partial crystallisation) caused a LTA test to be performed catching the growth which had occurred in the newly crystallised part.

This LTA situation does raise question such as.

Only Idiots such as MPS and Treasury employees would tax success. Control of input tax is fine. They lie about the need to recover tax relief but they are already getting this as the Fund has probably grown miles above the input tax and they take the PAYE on pension drawn.

I agree that the LTA limit shouldn't have been reduced from £1.8m. There was no logical need to do so when they reduced the Annual Allowance apart from the fact that it allowed the government to make money by charging people who exceeded the new lower limits. The reduction in the LTA limit also unnecessarily complicated things by introducing all these levels of protection.

On one hand they acknowledge Life Span has extended and intend to delay your pension but they have not moved the 75 to 80 years

If I pay the tax in August this year and The Donald loses on Nov 6 with a Guaranteed market crash and my fund drops below the LTA can I ask for my tax back ?

Of course not - the LTA test is applied at age 75 on any uncrystallised pensions (and on any growth in already crystallised drawdown pensions which remain in the crystallised pot). Once an LTA test is carried out you are deemed to have used up either all or a percentage of your LTA limit according to the result of the test and that figure won't be reduced even if you lost the lot the next day.

It is too late for you now but as I'm sure I said to you in previous posts the best strategy for someone over 55 who is close to the LTA limit but wants to avoid it* is to crystallise the pot using flexible drawdown short of the LTA limit and then before age 75 to drawdown any growth. The drawdowns will be taxed at your marginal rate but you would avoid the 55% excess charge. If you are using the pension as a vehicle to avoid IHT you can achieve the same effect by using the drawdown to make gifts out of excess income to your potential beneficiaries during your lifetime which will similarly avoid IHT since the drawdown from a pension is regarded as income.

* Obviously this doesn't apply if for instance you are still getting an employer contribution when it is usually better to just keep building up the pot and suffer the inevitable LTA excess charge.

An aside. On MF I had heated debate on my Logic regarding the Tax Free Lump Sum. In that as there has been very little tax free growth within a pension fund for many years it would only be fair that the Government take the 25% or say 30% for high rate tax payers as a return of tax with interest.

Now I wrote a lot of letters about this to the PSO and others and this logic may have sunk in so that they had to create tax relief They did with a win win for them. Dividend Tax. Perhaps Boris will help out with these problems.

Good New Year to All

I'm not quite sure I follow the above paragraph. The 25% tax free lump sum hasn't changed - though there have been rumours about it being abolished for decades. The recent changes to the taxation of dividends also hasn't changed as far as pension pots are concerned as they are a tax wrapper.

[taken2often]

Thanks for your prompt response. I have written a reply but it disappeared, cant go through it all again. Perhaps they limit replies but do not tell just wipe you out. Hargreaves do that

[Steveam]

I am 69 and (having taken the PCLS a few years ago and used my full - protected to £1.5m - LTA) I’m now beginning to think about drawing down the excess so as to reach 75 with little or no excess. Sure, I’ll be taxed at my marginal rate of 40%, but this is better than 55% ...

As for topping oneself to avoid tax: absurd unless terminally ill. I’m sure your loved ones would rather you hung around than lost you to save a bit of tax and increase their inheritance. Tax is the glue that holds together our society - like the late Enoch Powell I’m proud to pay it (but have no desire to pay more than I need).

Best wishes,

Steve

[taken2often]

To ursaminortaur. You spent time on your reply as I did but got lost. It is only fair that I try again.

8 Years ago when I was 65 I wrote to Sippdeal as is was then and told them I wanted to draw from the natural income an annual sum a modest amount
25% tax Free tax on the balance job done. Not allowed they said, that's what started me off. We were still ruled by GAD which made no sense in a SIPP.

Regarding LTA I still have my full allowance available and it will remain so after 75 there appears to be great confusion regarding the tax on the excess over LTA. In my case 25%. If I had used all my LTA and wanted to take this excess lump sum the tax is 55%. Some people think the tax on the amount greater than LTA at 75 is 55%. As usual PSO documentation can be confusing. Found a document no ref other than Tax On Your Private Pension Contributions it is clear. Another document contradicted its self in the same paragraph regarding this.

With regard to the final part. When I first got involved with pensions it was regarding a SSAS and the rules were grossly unfair. They did it to me again
wiped out the balance of this part of my reply

[ursaminortaur]

To ursaminortaur. You spent time on your reply as I did but got lost. It is only fair that I try again.

8 Years ago when I was 65 I wrote to Sippdeal as is was then and told them I wanted to draw from the natural income an annual sum a modest amount
25% tax Free tax on the balance job done. Not allowed they said, that's what started me off. We were still ruled by GAD which made no sense in a SIPP.

UFPLS wasn't a solution to GAD which as you know was abolished for new drawdowns by George Osborne's 2015 pension freedoms. I don't know whether Sippdeal offered the option of partial drawdowns but if they did the amount you could drawdown would still have been subject to the GAD limit applied when the partial pot was crystallised. Since the GAD limits were designed to ensure that you didn't empty the pot prematurely and would have only been applied to the part of the pot which had been crystallised the amount you would have been able to drawdown annually from the crystallised part would have been less than the natural yield of the whole pension. Thus even if they offered partial drawdown it wouldn't have provided what you were asking for. The problem though was the GAD limits not the lack of UFPLS.

Regarding LTA I still have my full allowance available and it will remain so after 75 there appears to be great confusion regarding the tax on the excess over LTA. In my case 25%. If I had used all my LTA and wanted to take this excess lump sum the tax is 55%. Some people think the tax on the amount greater than LTA at 75 is 55%. As usual PSO documentation can be confusing. Found a document no ref other than Tax On Your Private Pension Contributions it is clear. Another document contradicted its self in the same paragraph regarding this.

At 75 there will be a final LTA test. Any excess can then either be taken as a lump sum in which case it is subject to a 55% excess charge or can be left in the pot (to supposedly be taken as drawdown income after 75) in which case only a 25% charge will be made on the excess (as the assumption is made that the drawdown of the excess will attract a marginal tax rate of 40% - resulting in it being fully taxed at the equivalent of 55%). Of course you can just leave it there after the 25% charge has been made and on your death it will pass to your beneficiaries. Since you will have died after age 75 your beneficiaries will need to pay tax on what they receive at their marginal tax rate.

Note. The tax free lump sum of 25% of the minimum of your pension and the LTA is a personal benefit for your own use and does not pass to your beneficiaries ie you have to use it within your lifetime otherwise it is lost.
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-death-benefits-q-and-a/#

Q. My client died aged 77 leaving an uncrystallised pension fund of £720,000. Is the widow entitled to 25% of this tax-free, as the client did not take their pension commencement lump sum (PCLS) before death?

A. No. PCLS is a retirement benefit. The full £720,000 represents a death benefit and, as death occurred after age 75, the widow must pay tax at their marginal rate on any payments they receive from this.

Hence it would make sense to crystallise the pot before your death so that you could if you wished pass on the 25% tax free lump sum as a PET gift to your beneficiaries which would escape IHT so long as you lived another seven years (unfortunately the tax free lump sum is regarded as capital and so can't be passed on as gifts out of excess income).

[taken2often]

Ursaminortaur. You are correct UFPLS is not for everyone, we have to remember in old days the cheap platforms had considerable charges and everyone was being pushed towards annuities. There was and still is a reluctance to give advice. All I wanted was a simple drawdown system at low cost. At no time then did I appreciate that I would never need to use it.

As you know pensions are still a very complicated. To me taking the PCLS would be a IHT liability, which I already have with other assets. Your point about gifting is not really for me as I am still single. An alternative of course would be to nominate 10 people to receive my pension, all would have a good fund and if they only drew enough to add to their DWP pension up to the Personal allowance they would pay no tax and still have the capital when they die and it could be passed on again.

This is my third attempt to explain my comment about the 25% PCLS. I have always considered it unfair. I think HMRC should get the 25% at age 65 this should be a generous return of tax based on a grown fund over many years. The balance could then be treated as a pension ISA. The lump sum is a very popular con as no one works out the tax take on their pensions for the next 15/25years.

Regards

[ursaminortaur]

To me taking the PCLS would be a IHT liability, which I already have with other assets. Your point about gifting is not really for me as I am still single. An alternative of course would be to nominate 10 people to receive my pension, all would have a good fund and if they only drew enough to add to their DWP pension up to the Personal allowance they would pay no tax and still have the capital when they die and it could be passed on again.

taken2often,

Sorry for prying but I'm really struggling to understand why you have built up your large pension just to avoid IHT when, from what you are saying, it looks like you are not close enough to your beneficiaries to want to use other means such as PETs to gift them the PCLS free of IHT during your lifetime ?

[taken2often]

Ursaminortaur. You misunderstand my position. Over the past 16 years I have been investing for income in all three portfolios SIPP, ISA and Taxable Fund and Share. All have done very well. I thought I would be drawing pension, but now find that I do not need it and it is Nominated to someone very close to me. The example I gave you was just that, but in more practical way than taking PCLS at my age. Anyway watching others waste my savings would not be good for moral.

My ISA is producing what to me is a substantial income that I do not need and is reinvested each year.

The Taxable Fund and Share fund produces the same amount of income for my needs plus I transfer the annual ISA allowance from it. In the coming year it will provide my Capital Gains allowance It will take about 10 years to drain this account. Then I would just switch on the ISA

Finally I have little confidence that I will live another 7 years. Work on a year to year basis

Regards