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LTA tax liability

MickC
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LTA tax liability

#292399

Postby MickC » March 19th, 2020, 3:19 pm

Long time lurker - looking for advice please.
Apologies for going into numbers (appreciated it is a bit vulgar but it is needed to get a correct understanding).
I am due to commence DB pension drawdown in June when I am 60. In round terms it will be £50k p.a. This is a reduction from a max of £56k as I intend to take c£150k by way of Pension Commencement Tax Free Lump Sum
I have used a separate SIPP for UFPLS and have cleared out the full value of c£250k to date.
I have 2016 Fixed Protection to £1.25m so once this all works through I will have had benefits of c£1.4m so there is a tax liability for the excess.
My reading of the various Inland Rev tax pages is that when commencing pension drawdown (BCE 2) and taking a TFLS (BCE 6) BCE 6 is regarded as occurring immediately before BCE 2 and so attracts a tax charge of 25% rather than 55%.
Has anyone direct experience of this scenario please as my pension provider won't tell me; the I Rev won't tell me and when I have asked IFAs they will not advise as I have made it clear that the DB scheme needs to stay where it is.
Thanks

parallellines
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Re: LTA tax liability

#292629

Postby parallellines » March 20th, 2020, 10:56 am

I'm confused by some aspects of the question, but I will have a go. The key point is that the PCLS (or TFLS) is limited by the LTA, normally to a quarter of the LTA, so the question of the PCLS attracting a tax charge should not arise.

YOu say that you have cleared out the full value £250K of your separate SIPP. Three quarters of this should have been taxed when withdrawn with only the remaining £62.5K treated as PCLS. So how much PCLS have you taken so far, is it £250K or £62.5K ?

Depending on the answer to that question, the plan to take £150K PCLS from the DB scheme is either well inside your fixed protection limit of £312.5K or would be capped (coincidentally at £62.5K) . LTA issues aside most DB schemes will pay the remainder of the benefit as a regular pension so I don't understand the reference to DB pension drawdown. For benefits in excess of the LTA *only*, some schemes offer the facility to pay the excess as a lump sum . You may see this as semantics but this other lump sum is not a PCLS or drawdown . The choice there is between paying 55% tax on the lump sum, or 25% if the excess is paid as a regular pension. IF you pay 40% tax on the regular pension instalments then the financials broadly balance out. I think the question of whether BCE6 comes ahead of BCE2 is an irrelevance.

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Re: LTA tax liability

#292633

Postby DrBunsenHoneydew » March 20th, 2020, 11:05 am

MickC wrote: ...

There can be a mixture of the 55% and "25% + income tax" charges.
It depends on whether the DB lump sum exceeds 25% of your remaining LTA, and whether it exceeds 25% of the DB package benefits, whichever is the lower figure in £.
It doesn't here, being only 15% of the remaining £1M unused LTA and 150000/(20x50k+150k) = 13% of the DB package.

[If the lump sum to be taken did exceed either limit, the excess lump sum over the 25% permitted would get 55% tax. Then they would take your original LTA and deduct the DC usage and the allowable tax-free part of the lump sum, and compare 20 x DB pension against that remaining LTA and apply a 25% charge to the excess pension.]

In your case it will all be taxed by the "25% on the pension" route. The scheme would then divide the "25% of the excess LTA over the allowable LTA" charge by an age factor and recover the tax charge in monthly instalments over your expected lifetime. If you live longer than they predict, you would pay more tax overall than the 25%.

MickC
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Re: LTA tax liability

#293642

Postby MickC » March 24th, 2020, 10:33 am

Thank you for the considered responses. I appreciate your input. Apologies for the delay in responding.
Wow - this is quite complex

Parallellines - I have taken a number of UFPLS drawings from my SIPP and these have been made up of 25% PCLS with the remainder taxed as income. So I have had £62.5k as PCLS so far in which case even with the PCLS on my DB pension commencement £150k in am well within the £312.5. Therefore, I assume, a tax liability of c£37.5k will accrue (being 25% of the amount of benefits above £1.25k - calculated as £1m from the value of the annual DB payments of £50k; £250k from the SIPP and £150k from the PCLS on the DB scheme)

DrB - The PCLS (DB lump sum) is within 25% of the unused LTA (and 25% overall) so I think I will be on the hook for no more than 25% of the overall excess number of £150k. I assume I will be given the choice to pay in there and then (out of the PCLS) and so have a clean break.

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Re: LTA tax liability

#293655

Postby DrBunsenHoneydew » March 24th, 2020, 11:12 am

MickC wrote:Thank you for the considered responses. I appreciate your input. Apologies for the delay in responding.
Wow - this is quite complex

Parallellines - I have taken a number of UFPLS drawings from my SIPP and these have been made up of 25% PCLS with the remainder taxed as income. So I have had £62.5k as PCLS so far in which case even with the PCLS on my DB pension commencement £150k in am well within the £312.5. Therefore, I assume, a tax liability of c£37.5k will accrue (being 25% of the amount of benefits above £1.25k - calculated as £1m from the value of the annual DB payments of £50k; £250k from the SIPP and £150k from the PCLS on the DB scheme)

DrB - The PCLS (DB lump sum) is within 25% of the unused LTA (and 25% overall) so I think I will be on the hook for no more than 25% of the overall excess number of £150k. I assume I will be given the choice to pay in there and then (out of the PCLS) and so have a clean break.


I suspect you'll only get a choice if your DB scheme is funded with real assets, rather than one of the 'unfunded' public sector schemes.
As you're not exceeding the 25% of LTA for all your PCLS and DB Lump Sums, you'll be put into the "25% of excess pension" criterion as the likely default.
It's for your scheme to say how it will recover that charge in instalment reductions of your monthly DB pension. This will likely continue for ever until any spouse's/children's pensions stop - there is not really a clean break.

taken2often
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Re: LTA tax liability

#293764

Postby taken2often » March 24th, 2020, 4:50 pm

I thought I had a big bill coming in August but the current market has sorted that out big time. So I have been doing a bit of research on LTA a right dogs breakfast of lies and misinformation.

So my take on your situation is Annual 50k by 20 years equals 1m add on both PCLS 150k and 62.5k No tax due. Had you not taken Sipp there would be tax. as the gross sum would have been included. But you have paid tax so I hope you had good reason to take all this cash.

You could of course ask for the 150k to be transferred into a new sipp as unsecured pension and keep this PCLS for another day and compounding as you still have a good bit of LTA/PCLS allowance left. You also can use it for UFPLS

Bob

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Re: LTA tax liability

#293773

Postby MickC » March 24th, 2020, 5:54 pm

I agree with you (Taken) it seems to be very hard to get a straight answer (any answer) from HMRC or my pension provider and there are so many issues in play.

We have used the SIPP to live on since I left work 6 years ago. This has bridged the gap between me being 54 and now at 59. I have over the years pulled in as much net from the SIPP to keep within the 20% income tax limit (which is gross around £60k) p.a. I have paid the income tax as I have gone along.

So my BCE's to date = c£250k (well £236,818 to be exact) which is 18.9% of my LTA.

My reading of the various papers is that when I start drawing my DB scheme in June this will be classed as BCE 2. At the same time I will draw my PCLS (£150k) which is BCE 6 which combined will take me over the £1.25m protection.

I think I will just put my head in the Lion's mouth and see what happens. I think it will net down to a tax bill of £34.2k in the end and will update this thread when I know the final numbers.

My reading of the protection and PCLS is that I am unable to re-cycle so will use the net cash and put some into ISAs over the next couple of years.

taken2often
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Re: LTA tax liability

#302209

Postby taken2often » April 21st, 2020, 1:11 pm

[Sorry about the delay in answering your point. If you could transfer out the PCLS amount it would not be recycling. This applies if you take the money out and then put it back in to obtain tax relief. This would just be a transfer of an notional amount that the provider would be comfortable with as they were going to pay it out anyway. The problem may be the company rules as you no they not always favourable to the client. If you have time they could be challenged on the basis of Pension Freedom and unfair contract rules.

Regards Bob

MickC
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Re: LTA tax liability

#322001

Postby MickC » June 27th, 2020, 11:05 am

After months of dealing with Willis Towers Watson who administer my DB Pension Scheme have now completed the process and I started to receive my pension.

I promised to revert with details of how it was worked out so others may review this if appropriate. You will of course need to consider all aspects of your own case.

In essence WTW calculated the level of BCE's already taken and then calculated how much of my pension would be used to take the total to my LTA (£1.25m). They also took into account my request for a Tax Free Lump Sum of £150k and came up with a pension number that took this into account.

This left a value within the DB scheme which was above the £1.25m Fixed Protection which they offered me as an additional cash lump sum (taxed at 55%) or an additional pension amount (taxed at 25%). I opted for the latter.

So the final numbers are
BCE - £236,818
TFLS - £150,000
Annual pension - £43,159
All of which uses the £1.25m LTA
I took the additional DB pension value of £5647 (net of 25% tax charge) which equates to a tax charge of £35,190

Hope this helps anyone who may find themselves in a position similar to mine.

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Re: LTA tax liability

#322442

Postby Chrysalis » June 29th, 2020, 8:10 am

Thanks for this response. Can you clarify, how many years does the pension need to be in payment for before you have paid the total tax liability? I assume if you live longer, you will overpay?
I’m curious as to why you decided to take the income related tax and not the lump sum tax.

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Re: LTA tax liability

#322463

Postby MickC » June 29th, 2020, 9:12 am

The tax payment is taken in perpetuity. I had anticipated being offered a choice between ongoing pension deductions and a once only cash payment but this was not an option offered to me. So I may well overpay; I guess if I do it means I am still around which is a reasonable trade off!
Also my pension administrator (Will Towers Watson) was doing such an abysmal job in moving this forward that I decided just to jump. I could not get past their front line administrators and they had already taken three months to issue me offers (I have requested an Internal Dispute Resolution Form and will complain to the Pension Fund Trustee) so I was cheesed off with the whole thing.
Other areas of consideration;
- the structure I have now means that I am a touch under £50k with its current 40% tax threshold (with annual increases it will soon reach this But I can live with that)
- I get a useful lump of cash that I can ISA over the next few years (this is now part of my estate)
It’s a balance as always (I could have had more cash as this was working out on a 26x multiplier as far as I can make out) but drew the line at around the £50k enduring income level.

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Re: LTA tax liability

#322561

Postby Chrysalis » June 29th, 2020, 3:05 pm

MickC wrote:The tax payment is taken in perpetuity. I had anticipated being offered a choice between ongoing pension deductions and a once only cash payment but this was not an option offered to me. So I may well overpay; I guess if I do it means I am still around which is a reasonable trade off!
.


Thanks for the explanation. You said you had been offered the excess as a lump sum, so you were offered the choice? (Taking the excess as a lump sum incurs 55% tax; taking it as income incurs 25% tax plus your marginal rate of income tax - paying the 25% tax as a lump sum upfront is not an option under the rules for anybody). That’s why I wondered why you’d chosen the ongoing tax, it seems to be the less tax efficient option.

I am not just being nosy - I expect to be in a similar position, with a large-ish DB pension (smaller than yours, but I have no LTA protection) and a SIPP of similar size. My plan is not to take from my SIPP (I have other savings) until after I begin the DB pension. The DB pension should then avoid LTA charge and be paid in full, giving me a bit more flexibility as to when and how I pay any LTA excess charge from the SIPP.

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Re: LTA tax liability

#322723

Postby MickC » June 30th, 2020, 10:35 am

Hi Chrysalis
I don't regard you as being nosy - I found it hard to get real examples of how this works in actuality so happy to share if it helps.
I see now that in order to pay LTA Tax Liability in a lump sum one needs to take cash; taking an annuity means paying tax liability over time.
I don't think I am necessarily being tax inefficient as by moving my annual pension to <£50k I will be paying a marginal income tax rate of 20% (at present) and this with the LTA tax charge at 25% is less than the 55% I would have to pay under a cash payment.
It may help if I track back over the options that I was offered. Sorry again for being vulgar and using real numbers but this is the only way to convey accurately.

Before the administrators (WTW) were aware of LTA issues they offered me (at my request)

Option 1 (all benefits taken as a pension)
£56126 p.a.

Option 2 (tax free lump sum and pension)
£150k lump sum +
£50,197 p.a.

*****

Once LTA liability was taken into account (bear in mind I already had some BCE's) they offered - Excess over LTA taken as LTA Allowance Excess Lump Sum or annual pension
Option 1 (Excess over LTA taken as LTA Excess Lump Sum or additional pension)
£50,659
+
Option 1A (LTA excess lump sum - after 55% tax deduction) £62,241
OR
Option 1B (LTA excess pension - after 25% deduction) £4386 p.a.

Option 2 - (Excess over LTA taken as LTA excess lump sum or additional pension). This option allows for what appears to be the max allowable Tax Free Cash Lump Sum (after taking into account my protection and the amount of TFLS I had taken out of my SIPP)
TFLS £253,295 +
Pension £37,994 p.a.
+
Option 2A (LTA excess lump sum - after 55% tax deduction) £92,446
OR
Option 2A (LTA excess pension - after 25% deduction) £6515 p.a.

Option 3 (Excess over LTA taken as LTA specified lump sum or additional pension)
TFLS £150k +
Pension £43,195 p.a.
+
Option 3A (LTA excess lump sum - after 55% tax deduction) £80.128
OR
Option 3B (LTA excess pension - after 25% tax deduction) £5647 p.a.

I opted for 3B

There will be a State Pension Deduction when I start to draw that - but we can leave that for now.

One final thought - make sure you give your pension administrators lots of time as you may want to go back for more illustrations as you ponder your choices.

Chrysalis
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Re: LTA tax liability

#323051

Postby Chrysalis » July 1st, 2020, 6:29 pm

Thanks for the detailed reply. It certainly is complex, but I guess the flip side is all options are pretty good, all things considered..
In my case, I am almost certain that the DB by itself will not fill the whole LTA, nor put me in a higher rate tax band. Plus, I won’t really have any options, it being a public sector DB scheme which doesn’t offer choices about the PCLS. Sometimes less is more when it comes to pension options...
So I’m happy just to take that in full and worry about the SIPP and LTA later. Or in fact not to worry much about the LTA at all, since I anticipate the SIPP not really being essential.

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Re: LTA tax liability

#325323

Postby taken2often » July 10th, 2020, 11:56 pm

Sorry but I do not understand what you have quoted. Did you receive a statement laying out all your transactions.
Each transaction should show a percentage of LTA used. If the total comes to more than 1.25m then tax would be due on the excess.If so what is this sum.

If you have no stock to sell to pay the tax. I feel you should be able to pay this tax from your other funds. I am having discussions about this with my provider as I will be 75 in August and I do not wish to sell any stock.

If you do not have stock to sell it is not clear how you are supposed to pay this tax. Buying an annuity would not be a great idea. Has your provider proposed how you would pay the tax.

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Re: LTA tax liability

#325342

Postby Steveam » July 11th, 2020, 8:45 am

@taken2often: I’d be very interested to hear of the outcome of yr discussion with yr SIPP provider. Please keep us informed. Thanks, Steve

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Re: LTA tax liability

#325343

Postby scrumpyjack » July 11th, 2020, 8:51 am

If you were to discharge from other sources the tax liability due from your pension assets, that would probably count as you making a further contribution to your pension and so taking you further over the limit and incurring a further LTA tax charge!

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Re: LTA tax liability

#325364

Postby TedSwippet » July 11th, 2020, 11:13 am

scrumpyjack wrote:If you were to discharge from other sources the tax liability due from your pension assets, that would probably count as you making a further contribution to your pension and so taking you further over the limit and incurring a further LTA tax charge!

Perhaps not a contribution, but this from HMRC strongly implies it would add to the LTA charge.

https://www.gov.uk/hmrc-internal-manual ... 0#IDAWNBLD
The scheme may deduct the tax due from the member’s pension and lump sum entitlements under the scheme. Or, the scheme can choose to fund the tax due themselves from the scheme’s own resources. However, where the scheme funds the charge (or part of it) without correspondingly reducing the rights of the member the level of charge due will be higher - see PTM085000.

Related discussion: viewtopic.php?f=49&t=24011


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