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LTA now and beneficiaries' tax when I die over 75

Ma1co1m
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LTA now and beneficiaries' tax when I die over 75

#425794

Postby Ma1co1m » July 8th, 2021, 9:50 am

I am 67 and have been vaguely aware of the Lifetime Allowance so I figured it was time I looked into it properly. Wow ! What an incredibly weird but ultimately potentially-unfair tax it is !!

I have a DB pension that I took early ( before 2006 ) and a SIPP. I have just done the sums and realise that I will hit the LTA within weeks, if not days if the stock market continues to climb as it is. So I am planning to crystallise asap and then take what I can up to the 40% income tax limit each year until I am 75. Reality check please -that is the sensible thing to do, isn’t it ?

But even if I do that, when I reach 75 ( and I certainly hope to…. ) I will have exceeded the LTA because I can’t take enough out without paying 40% income tax. Fine, I’ll pay the 25% when I am 75.

However ( and this is where the unfair bit really seems to kick in ) when I do die after 75 it appears that my beneficiaries have to pay 25% if they take it as income and 55% if they take a lump sum. But what I cannot find out is
(a) whether that is instead of income tax or in addition to income tax. If it’s instead of, that’s OK but I have a suspicion that it’s in addition to – can anyone clarify please.
(b) Is the 25% or 55% just on the excess in the pot above the LTA or on the whole pot. Again, I can’t find anything that makes it clear

Thanks
ma1co1m

ursaminortaur
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Re: LTA now and beneficiaries' tax when I die over 75

#425999

Postby ursaminortaur » July 8th, 2021, 11:14 pm

Ma1co1m wrote:I am 67 and have been vaguely aware of the Lifetime Allowance so I figured it was time I looked into it properly. Wow ! What an incredibly weird but ultimately potentially-unfair tax it is !!

I have a DB pension that I took early ( before 2006 ) and a SIPP. I have just done the sums and realise that I will hit the LTA within weeks, if not days if the stock market continues to climb as it is. So I am planning to crystallise asap and then take what I can up to the 40% income tax limit each year until I am 75. Reality check please -that is the sensible thing to do, isn’t it ?

But even if I do that, when I reach 75 ( and I certainly hope to…. ) I will have exceeded the LTA because I can’t take enough out without paying 40% income tax. Fine, I’ll pay the 25% when I am 75.

However ( and this is where the unfair bit really seems to kick in ) when I do die after 75 it appears that my beneficiaries have to pay 25% if they take it as income and 55% if they take a lump sum. But what I cannot find out is
(a) whether that is instead of income tax or in addition to income tax. If it’s instead of, that’s OK but I have a suspicion that it’s in addition to – can anyone clarify please.
(b) Is the 25% or 55% just on the excess in the pot above the LTA or on the whole pot. Again, I can’t find anything that makes it clear

Thanks
ma1co1m



At age 75 there will be two potential LTA tests

1) Against any uncrystallised funds
2) Against funds which have already been crystallised - this latter will only look at any growth which has occurred since crystallisation which is still in the pension.

( crystallised pot value at age 75 - ( pot value when crystallised - tax free lump sum taken) )

This second test can be rendered toothless by withdrawing the growth from the crystallised pot before age 75.

Once you reach 75 any excess can not be taken as a lump sum but instead will be subject to a 25% excess charge which would be taken from the excess. Subsequently you would be able to drawdown the remaining excess along with the rest of your pot with it being taxed at your marginal rate - if that rate was 40% then that 40% + the 25% which had already been removed would amount to a 55% charge (which is what would have been charged if you had crystallised everything before age 75 and taken the excess as a lump sum).

If you don't drawdown these funds but then die after this age 75 LTA test then the funds will pass to your beneficiaries as indicated in your expression of wishes and since you died after age 75 they will have to pay tax at their marginal rate on the pension that they inherit. However they will not have to pay any more in respect of the LTA excess since that has already been paid (the 25 % excess charge at age 75).

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/lifetime-allowance/

If the member has uncrystallised funds on their 75th birthday any excess over the LTA will be charged at 25%. The funds will technically become crystallised at that point, but subject to remaining unused LTA (as per the paragraph above), PCLS and UFPLS may still be available.

If the member wishes to take an LTA excess as a lump sum they must choose to take the excess to provide this (if the scheme allows this) before they reach 75 (they must have used or will use up 100% of the LTA to do this).

taken2often
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Re: LTA now and beneficiaries' tax when I die over 75

#426155

Postby taken2often » July 9th, 2021, 12:15 pm

I have to say I am still confused, and I have researched this a lot. Statements are made how to avoid LTA Tax by withdrawing funds but as far as I know each withdrawel comes with a percentage of LTA used and it all rolls up. Now it is true that if you take the money out you do restrict the growth and this will reduce the LTA at 75. Then it is up to the individuals circumstanes as the money out of the sipp may have grown and the estate has to pay 40%.

In January 2020 I estimated that I would be paying 35k plus in August. I asked two major companies if I could pay the tax from funds earning nothing, both said no but HMRC said yes . More information in one of my other Posts. Anyway the virus comes along the market drops. No LTA to pay.
July 2021 if my birthday was this year 76k of tax due based on my Protection. Without Protection 199k.

Anyway paying off the LTA out of other funds would save 40% IHT. Selling stock in a Sipp to pay tax at the wrong time, as you have no choice may not be a great idea. Will they give you the tax back if the market drops a month after your birthday, so that you may be a good bit under the LTA . No Way, crazy or what.

So no PCLS taken. Income growing and reinvested. No LTA. Might live another 10 years. Will never need to draw the pension so some people will have very healthy pensions when the time comes.

swill453
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Re: LTA now and beneficiaries' tax when I die over 75

#426185

Postby swill453 » July 9th, 2021, 1:57 pm

taken2often wrote:I have to say I am still confused, and I have researched this a lot. Statements are made how to avoid LTA Tax by withdrawing funds but as far as I know each withdrawel comes with a percentage of LTA used and it all rolls up.

Only if you withdraw by UFPLS or similar.

If you take a PCLS then that fixes a percentage of the LTA, so further withdrawals from crystallised funds are not BCEs (Benefit Crystallisation Events).

(Didn't understand much of the rest of your post).

Scott.

taken2often
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Re: LTA now and beneficiaries' tax when I die over 75

#427208

Postby taken2often » July 12th, 2021, 10:25 pm

Hi Scott
Thanks for yopur response. You are right if you do not have a lot of pensions and take the PCLS and draw the balance you will not have any problem at 75 One problem was that if you say crystaliosed 100k when the LTA was 1.8m then a modest percentage was used, now it is quite a large percentage. Certain professions on DB pensions are now in the frame for a tax hit and not happy.

If you point out what you do not understand . I will be happy to go over it. I suppose it may only be of interest to those likely to pay LTA Tax.

Regards Bob

Ma1co1m
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Re: LTA now and beneficiaries' tax when I die over 75

#433344

Postby Ma1co1m » August 8th, 2021, 8:38 pm

Many thanks ursaminortaur, and apologies for the tardy response

It would appear that before I made the original post here I had been led up the garden path by reading too many badly-written financial web pages. Having talked to an IFA it turns out that, although the rules are bizarre, they are not nearly as onerous as I had thought. In fact for me they are very simple.
So, for anyone in my position - which is that I have now crystallised my whole SIPP, taken the 25% TFLS and am not going to be making any more contributions, and will therefore have no uncrystallised funds - DYOR but the rules are:

From my point of view:
• until I am 75 I can take as much as I want from the SIPP and just pay the relevant income tax. No tests are done - because the SIPP has been crystallised I can take what I like and just pay income tax
• When/if I reach 75 I will pay a penalty of 25% of the amount my SIPP has grown since crystallisation after subtraction of the percentage of the LTA that I hadn’t used at crystallisation ( I have got a generous DB pension which has used up a significant percentage of my LTA so I will end up paying a penalty )
• Incredibly this process is all done on trust - I have to work out my own penalty and tell my SIPP provider what penalty is due, there is no “official” reporting mechanism by HMRC or anyone !
• After 75, whatever money I take from the SIPP is only subject to income tax, no further penalties

From my beneficiaries point of view
• If I die before 75 they get the whole pot entirely tax-free, not even income tax to pay
• If I die after 75 I will have paid the LTA tax penalty and they can take the whole remaining pot and just pay income tax on withdrawals
• They can access their pot at any age – they don’t have to wait for retirement age or anything.

ma1co1m

DrBunsenHoneydew
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Re: LTA now and beneficiaries' tax when I die over 75

#435629

Postby DrBunsenHoneydew » August 18th, 2021, 11:33 am

Ma1co1m wrote:Many thanks ursaminortaur, and apologies for the tardy response
From my beneficiaries point of view
• If I die before 75 they get the whole pot entirely tax-free, not even income tax to pay
• If I die after 75 I will have paid the LTA tax penalty and they can take the whole remaining pot and just pay income tax on withdrawals
• They can access their pot at any age – they don’t have to wait for retirement age or anything.

ma1co1m

Not sure about that line in red.
If your pot exceeds the LTA at death the LTA test applies then (rather than waiting until the age 75 that you have failed to reach).
Only after any 25% LTA death tax has been paid is the reminder tax-free to your beneficiaries.

ursaminortaur
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Re: LTA now and beneficiaries' tax when I die over 75

#435702

Postby ursaminortaur » August 18th, 2021, 3:45 pm

DrBunsenHoneydew wrote:
Ma1co1m wrote:Many thanks ursaminortaur, and apologies for the tardy response
From my beneficiaries point of view
• If I die before 75 they get the whole pot entirely tax-free, not even income tax to pay
• If I die after 75 I will have paid the LTA tax penalty and they can take the whole remaining pot and just pay income tax on withdrawals
• They can access their pot at any age – they don’t have to wait for retirement age or anything.

ma1co1m

Not sure about that line in red.
If your pot exceeds the LTA at death the LTA test applies then (rather than waiting until the age 75 that you have failed to reach).
Only after any 25% LTA death tax has been paid is the reminder tax-free to your beneficiaries.


The only LTA tests carried out on death before age 75 are those associated with Benefit Crystallisation Events (BCEs) 5C, 5D and 7. These all involve tests against the remaining uncrystallised funds. Which ones apply is determined by how the beneficiaries decide to take their inherited pension :-
BCE 5C applies if beneficiaries take it as an inherited drawdown fund
BCE 5D applies if beneficiaries take it as an annuity
BCE 7* applies if beneficiaries take it as a lump sum.

Somewhat surprisingly BCE 5A which deals with the growth in a previously crystallised drawdown pot specifically only applies at age 75 it doesn't apply on death.

https://www.aegon.co.uk/support/faq/pension-technical/benefit-crystallisation-event.html


(My highlighting by underlining)


Hence LTA tests will only be carried out on a death before age 75 against the deceased's LTA limit if they still had uncrystallised funds. Thus if the OP crystallises everything before age 75 and then were to die before age 75 their beneficiaries would not have to pay any LTA excess charge since there would be no further LTA tests on death or pay income tax on the benefits that they inherited.

* BCE 7 also applies to any lump sum death benefit paid by a DB pension.

Ma1co1m
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Re: LTA now and beneficiaries' tax when I die over 75

#435805

Postby Ma1co1m » August 18th, 2021, 9:05 pm

Yes, and as I said, I have crystallised everything so my beneficiaries get the whole lot tax free of I drop off my perch before 75 ( please don't tell them that.... )

ma1co1m


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