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LTA - death and post crystallisation

RockRabbit
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LTA - death and post crystallisation

#438723

Postby RockRabbit » August 31st, 2021, 6:09 pm

Apologies if this has been answered before and for any incorrect or vague terminology I may have used below.

I should be grateful if someone could help me with the potential LTA calculations below - I have not retired yet, but am rather trying to plan for the future.

Scenario - background
At age 60, crystallise SIPP by going into drawdown. Take TFLS, leave remainder in SIPP. 95% of LTA used by crystallisation therefore little LTA available for any future LTA tests. No other pensions held or previously crystallised.

Scenario 1
Live to 75, without having taken any income from the SIPP (other than TFLS). My understanding is that at age 75, a further and final LTA test will take place on the growth in the remaining SIPP. ie value of SIPP at age 75 - (value at crystallisation date - TFLS). Anything over the remaining 5% of the LTA will be subject to a taxation charge at this point.

Question - scenario 1
I understand that you can avoid any LTA tax charge at 75 by taking any SIPP growth in excess of remaining LTA as income prior to age 75. However is there any allowance for inflation in these calculations? If not, and we were to enter a high inflation environment, then there could be a lot of nominal growth within the SIPP to take out as income prior to age 75 as opposed to real growth.

Scenario 2
Die after crystallisation but prior to 75, again without having taken any income from SIPP (other than TFLS).

Question - scenario 2
In scenario 2, would there be a LTA test at the date of death in a similar way to the age 75 test prior to the beneficiaries having access to the SIPP assets?

Thanks in advance.

ursaminortaur
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Re: LTA - death and post crystallisation

#438777

Postby ursaminortaur » August 31st, 2021, 11:46 pm

RockRabbit wrote:Apologies if this has been answered before and for any incorrect or vague terminology I may have used below.

I should be grateful if someone could help me with the potential LTA calculations below - I have not retired yet, but am rather trying to plan for the future.

Scenario - background
At age 60, crystallise SIPP by going into drawdown. Take TFLS, leave remainder in SIPP. 95% of LTA used by crystallisation therefore little LTA available for any future LTA tests. No other pensions held or previously crystallised.

Scenario 1
Live to 75, without having taken any income from the SIPP (other than TFLS). My understanding is that at age 75, a further and final LTA test will take place on the growth in the remaining SIPP. ie value of SIPP at age 75 - (value at crystallisation date - TFLS). Anything over the remaining 5% of the LTA will be subject to a taxation charge at this point.

Question - scenario 1
I understand that you can avoid any LTA tax charge at 75 by taking any SIPP growth in excess of remaining LTA as income prior to age 75. However is there any allowance for inflation in these calculations? If not, and we were to enter a high inflation environment, then there could be a lot of nominal growth within the SIPP to take out as income prior to age 75 as opposed to real growth.


There is no additional protection for inflation as such. To make sure that you that you aren't caught out and have to pay an LTA excess charge. In your scenario you would have to remove enough of the growth so that the age 75 test does not eat up more than that remaining 5% of the then current LTA limit. If the government remove the current freeze on the LTA limit and again allow it to rise with inflation each year then that would help but there is no guarantee that they will do that especially if we were to enter a high inflation environment. There has even been talk of the government looking at cutting the LTA limit - possibly to £900,000 or even £800,000 (probably if that happened they would provide some form of protection for those already above the new limit or willing not to contribute anymore to their pensions as they have in past but that would in effect just preserve the limit for those so protected rather than providing any help for inflation).

High inflation and thus likely higher pot sizes at age 75 would just have to be countered by higher withdrawals which might push you into a higher marginal tax rate. Generally that should still be better than suffering the excess charge of 55% on lump sum withdrawal of the excess (only available to those under 75) or 25% charge on the excess amount + marginal tax rate on withdrawals if it is taken as income (which come to the same 55% value if your marginal tax rate is 40%).

RockRabbit wrote:Scenario 2
Die after crystallisation but prior to 75, again without having taken any income from SIPP (other than TFLS).

Question - scenario 2
In scenario 2, would there be a LTA test at the date of death in a similar way to the age 75 test prior to the beneficiaries having access to the SIPP assets?

Thanks in advance.


The age 75 test only takes place at age 75. The only LTA tests on death are on uncrystallised pots. Of course this is a bit of an anomaly so it is possible that the government might change it in the future.

https://techzone.adviserzone.com/anon/public/pensions/death-benefits-LTA-decision-tree

Pension benefits that have already been crystallised won't be subject to further lifetime allowance (LTA) testing on death

RockRabbit
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Re: LTA - death and post crystallisation

#438809

Postby RockRabbit » September 1st, 2021, 9:02 am

Ursaminortaur, thank you very much for your comprehensive and very helpful reply.

Probably best then if I take up a number of dangerous sports (post crystallisation) in order to ensure a tax efficient outcome prior to reaching 75 :)

Kantwebefriends
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Re: LTA - death and post crystallisation

#439096

Postby Kantwebefriends » September 1st, 2021, 10:09 pm

Every now and again someone roguishly suggests a tactical divorce that puts half the pot in your wife' hands.

It would be a great shame to let such a tradition fail.

RockRabbit
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Re: LTA - death and post crystallisation

#439191

Postby RockRabbit » September 2nd, 2021, 11:19 am

Kantwebefriends wrote:Every now and again someone roguishly suggests a tactical divorce that puts half the pot in your wife' hands.


I think that falls into the 'dangerous sports' category :)


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