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Lifetime Allowance Calculation

GeoffF100
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Lifetime Allowance Calculation

#421732

Postby GeoffF100 » June 23rd, 2021, 8:03 pm

I have got some pensions in payment and a SIPP to which I am making contributions and is not in payment. I will reach a BCE at age 75 in a few years time, and want to make sure that I have all my ducks on a row.

https://www.pruadviser.co.uk/knowledge- ... llowance/#

I purchased an annuity with the proceeds of a FSAVC policy in FY 2002-3 before the introduction of the lifetime allowance. My understanding is that this does not take up any of my current lifetime allowance.

A defined benefit pension went into payment in FY 2007-8 when the LTA was £1,600,000. My understanding is that this takes up RUA * CSLA / £1,600,000 of my current LTA, where RUA1 = 20 * payment in the first year, and CSLA is the LTA that is current when I reach 75.

Another defined benefit pension went into payment in FY 2014-5 when the LTA was £1,250,000. My understanding is that this takes up RUA2 * CSLA / £1,250,000 of my current LTA. I later received a wind up lump sum in place of this pension. My understanding is that was not a BCE and does not change the amount of the LTA used by the pension.

Is my understanding correct? I have had to refer to some old paper files. Do I need to scan the relevant documents and back them up to the cloud in case my house burns down?

scrumpyjack
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Re: Lifetime Allowance Calculation

#421733

Postby scrumpyjack » June 23rd, 2021, 8:12 pm

As I understand it, at the point a BCE occurs on any of your pension assets, you would have received a notification from the manager of those assets of what percentage of the LTA has been used by the specific BCE. I certainly have had these, even though the LTA does not apply to me as I have Enhanced Protection.

GeoffF100
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Re: Lifetime Allowance Calculation

#421739

Postby GeoffF100 » June 23rd, 2021, 8:27 pm

scrumpyjack wrote:As I understand it, at the point a BCE occurs on any of your pension assets, you would have received a notification from the manager of those assets of what percentage of the LTA has been used by the specific BCE. I certainly have had these, even though the LTA does not apply to me as I have Enhanced Protection.

I was given percentages of the LTA used when the two defined benefit pensions came into payment, but these were percentages of the LTAs that were in force at the time. As my link illustrates, you cannot validly add these percentages and should use the statutory calculation (as above). No percentage was given for the annuity, because there was no LTA at that time. The documentation with the wind up lump sum did not mention the LTA. I found this:

A winding-up lump sum can only be paid if the member has some lifetime allowance remaining, even though the payment of the lump sum doesn't actually use lifetime allowance.

https://techzone.adviserzone.com/anon/p ... small-pots

GeoffF100
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Re: Lifetime Allowance Calculation

#421811

Postby GeoffF100 » June 24th, 2021, 8:49 am

GeoffF100 wrote:I purchased an annuity with the proceeds of a FSAVC policy in FY 2002-3 before the introduction of the lifetime allowance. My understanding is that this does not take up any of my current lifetime allowance.

My understanding was wrong:

https://adviser.royallondon.com/technic ... re-tested/

The annuity counts towards the lifetime allowance when my defined benefit pension came into payment in FY 2007-8. The amount taken off the lifetime allowance is 25 x annual pension amount at the date of the first post 6 April 2006 benefit crystallisation event.

With regard to adding percentages, that would be mathematically correct if it were not for the fact that the percentages are quoted to two decimal places. The amounts paid have more significant figures. We have a potential rounding error problem here, but that should not be an issue in my case.

I have looked closely at the documentation for the wind up lump sum. It mentions a lifetime allowance check, but does not give a percentage of my lifetime allowance used. My understanding there appears to be correct.

At age 75, it would appear that I add the percentages already determined at the previous BCEs and also add in 20 x the value of my SIPP at that date. That is unless the rules have changed, of course.

ursaminortaur
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Re: Lifetime Allowance Calculation

#421818

Postby ursaminortaur » June 24th, 2021, 9:02 am

GeoffF100 wrote:
GeoffF100 wrote:I purchased an annuity with the proceeds of a FSAVC policy in FY 2002-3 before the introduction of the lifetime allowance. My understanding is that this does not take up any of my current lifetime allowance.

My understanding was wrong:

https://adviser.royallondon.com/technic ... re-tested/

The annuity counts towards the lifetime allowance when my defined benefit pension came into payment in FY 2007-8. The amount taken off the lifetime allowance is 25 x annual pension amount at the date of the first post 6 April 2006 benefit crystallisation event.

With regard to adding percentages, that would be mathematically correct if it were not for the fact that the percentages are quoted to two decimal places. The amounts paid have more significant figures. We have a potential rounding error problem here, but that should not be an issue in my case.

I have looked closely at the documentation for the wind up lump sum. It mentions a lifetime allowance check, but does not give a percentage of my lifetime allowance used. My understanding there appears to be correct.

At age 75, it would appear that I add the percentages already determined at the previous BCEs and also add in 20 x the value of my SIPP at that date. That is unless the rules have changed, of course.


If it is a SIPP which has already been crystallised then the test at age 75 is only on the growth remaining in the SIPP
ie (amount in SIPP at age 75 - (amount in SIPP when crystallised - tax free lump sum taken))

If the SIPP was not crystallised ie drawdown was using UFPLS then the only test at age 75 will be on the value of the remaining uncrystallised funds.

Note. The multiplication by 20 is only used when calculating the value to be tested with DB pensions ie 20 x initial annual pension + any tax free lump sum taken.

GeoffF100
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Re: Lifetime Allowance Calculation

#421833

Postby GeoffF100 » June 24th, 2021, 9:58 am

ursaminortaur wrote:If it is a SIPP which has already been crystallised then the test at age 75 is only on the growth remaining in the SIPP
ie (amount in SIPP at age 75 - (amount in SIPP when crystallised - tax free lump sum taken))

If the SIPP was not crystallised ie drawdown was using UFPLS then the only test at age 75 will be on the value of the remaining uncrystallised funds.

Note. The multiplication by 20 is only used when calculating the value to be tested with DB pensions ie 20 x initial annual pension + any tax free lump sum taken.

I am still paying into the SIPP, and I am not planning to take a tax free lump sum or go into drawdown. The proceeds will most likely go to charity, tax free under current legislation.

As I have said, the factor is 25 for my the annuity that I bought in FY 2002-3, applied to the pension that I was paid in FY 2007-8, which was my first BCE. Fortunately, I have a record of my past pension payments.

You are right that the only test is on my uncrystallised SIPP. Hopefully, I will be able to just fill boxes on Vanguard's online system, but I will need to know what I am doing and have the numbers to hand. I should be way within the limit, so I doubt whether anyone will come chasing me for some small inaccuracy, but it is good to get it right.


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