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Crystallisation

Alan1701
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Crystallisation

#422942

Postby Alan1701 » June 27th, 2021, 6:57 pm

Quick question on crystallising a SIPP.

I've crystallised my SIPP so have taken a tax free lump sum and the remainder has gone into drawdown with an intention of taking income later.

To keep the maths simple, suppose a Lifetime Allowance of £1m, £100k tax free lump sum and £300k remaining in the drawdown pot.

That presumably gives a used LTA of 40% at the point of crystallising.

So suppose theoretically over the course of a number of years the £300k remaining in drawdown grows to £3m. Is the used used LTA still 40% or does it get recalculated at some point to reflect the growth of the drawdown fund? In that instance there would presumably be a hefty tax bill to pay at some point.

I originally thought it did however looking at my SIPP statement i'm not sure that's the way it works...

Thanks.

mearnsfool
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Re: Crystallisation

#422963

Postby mearnsfool » June 27th, 2021, 8:35 pm

Yes it is rechecked at 75 and possibly at other times between the crystaisation and your 75th birthday.

Alan1701
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Re: Crystallisation

#423030

Postby Alan1701 » June 28th, 2021, 8:37 am

mearnsfool wrote:Yes it is rechecked at 75 and possibly at other times between the crystaisation and your 75th birthday.


Thanks - that does raise as many questions as it answers though...

e.g
- how is any income taken from the drawdown fund handled.
- how is any growth of the drawdown fund handled.

As example (i usually find only examples make this sort of thing clear) at 75 if i'd taken £100k income out of the withdrawal fund in the intervening period would be LTV by recalculated as 50% or would it still be 40%? If the drawdown fund had doubled in value to £600k then would the LTV taken be recalculated as 70% or would it still be 40%. From what you are saying i am presuming the former however no idea how the income is treated.

Thanks.

TedSwippet
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Re: Crystallisation

#423044

Postby TedSwippet » June 28th, 2021, 9:29 am

Alan1701 wrote:- how is any income taken from the drawdown fund handled.

It's ordinary taxable income. No interaction with the LTA. The percentage of the LTA used by crystallisation and the move into drawdown remains fixed.

Alan1701 wrote:- how is any growth of the drawdown fund handled.

At age 75, it's tested against the current (or protected, if applicable) LTA. Google "BCE 5A".

Example 7 in this document might help make things a bit clearer: ACCA Lifetime Allowance Charge -- worked examples

TedSwippet
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Re: Crystallisation

#423081

Postby TedSwippet » June 28th, 2021, 10:33 am

TedSwippet wrote:Example 7 in this document might help make things a bit clearer: ACCA Lifetime Allowance Charge -- worked examples

... and there appears to be an error in this example. The final sentence states:
If he reduced the value of the drawdown pension pot to less than £257,500 there would be no lifetime allowance charge on his 75th birthday, ...

Technically correct, but looks like vast overkill. This should probably have read:
If he reduced the increase in the value of the drawdown pension pot to less than £257,500 there would be no lifetime allowance charge on his 75th birthday, ...

Or alternatively:
If he reduced the value of the drawdown pension pot to less than £1,270,000 there would be no lifetime allowance charge on his 75th birthday, ...

Sigh. If you can't trust the Association of Chartered Certified Accountants to get accounting details right, who can you trust?

Alan1701
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Re: Crystallisation

#423098

Postby Alan1701 » June 28th, 2021, 11:28 am

Thanks Ted, those examples are really useful and (apart from the error you pointed out) very clear.
Appreciated.


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