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LTA and excess tax

keef987
Posts: 2
Joined: May 4th, 2020, 12:14 pm

LTA and excess tax

#393360

Postby keef987 » March 7th, 2021, 3:06 pm

I was hoping that someone could help me understand my future pension situation.

I have fixed protection on my defined contribution pension and about a year ago I opted for flexi access drawdown. I crystallised 100% of the LTA amount (taking the 25% tax free lump sum) and left the excess uncrystallised.

The crystallised (after taking lump sum) and uncrystallised amounts are sitting mingled in my SIPP. Am I right in thinking that if I take a pension for the next 15 years (taxed at my marginal rate) that reduces the pot to below 75% of the LTA then when I hit 75 there will be no excess LTA tax to pay?
In my mind this seems wrong as payments will have come from uncrystallised funds in excess of LTA so should be taxed but with the un/crystallised amounts sitting together I can’t see how else it would work.

Any help is much appreciated. Thanks

ursaminortaur
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Re: LTA and excess tax

#393394

Postby ursaminortaur » March 7th, 2021, 5:12 pm

keef987 wrote:I was hoping that someone could help me understand my future pension situation.

I have fixed protection on my defined contribution pension and about a year ago I opted for flexi access drawdown. I crystallised 100% of the LTA amount (taking the 25% tax free lump sum) and left the excess uncrystallised.

The crystallised (after taking lump sum) and uncrystallised amounts are sitting mingled in my SIPP. Am I right in thinking that if I take a pension for the next 15 years (taxed at my marginal rate) that reduces the pot to below 75% of the LTA then when I hit 75 there will be no excess LTA tax to pay?
In my mind this seems wrong as payments will have come from uncrystallised funds in excess of LTA so should be taxed but with the un/crystallised amounts sitting together I can’t see how else it would work.

Any help is much appreciated. Thanks



No. From what you have described you have already used up 100% of your LTA limit.

At age 75 there will be two further tests.

The first will look at the growth in the crystallised pot which is still left in the pot

(Amount in crystallised pot at age 75) - (amount when pot first crystallised - 25% tax free lump sum)

By drawing money out of the crystallised pot using flexi-access drawdown so that all of the growth has been removed by age 75 this can be reduced to zero meaning that you won't have any excess to pay because of this test at age 75.

The second test will look at any uncrystallised amounts still in the pot at age 75. This can't be reduced by using UFPLS to access the uncrystallised pot since each UFPLS drawdown will result in an LTA test at that point which would result in an LTA excess charge since you have already used up 100% of your LTA limit. Hence at age 75 you will have an LTA excess charge on this uncrystallised remainder (plus whatever growth has occurred in that uncrystallised part).

It is best to think of the crystallised pot and uncrystallised pot as separate pots which is how some providers will treat them and present them to you. Other providers though present it to you as though it is one single pot but just handle things behind the scenes so that your flexi-access withdrawals are coming just from the crystallised pot. In extremis I would suppose it would be possible for your withdrawals to completely exhaust the crystallised pot at which point such a provider would refuse to allow you further drawdowns unless you crystallised some of the uncrystallised part of the pot or switched to using UFPLS to access the uncrystallised funds (which would of course trigger an LTA test and you having an LTA excess charge).

keef987
Posts: 2
Joined: May 4th, 2020, 12:14 pm

Re: LTA and excess tax

#393533

Postby keef987 » March 8th, 2021, 9:43 am

Thank you ursaminortaur, a very clear explanation


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