LTA and death before 75

[Guineagrill]

Morning All

I think I know the answer to this, but as I find the terminology all rather confusing would be grateful if someone could confirm or, alternatively, put me straight.

I crystallised my SIPP in 2019. In doing so I used up 101% of my Lifetime Allowance and paid a little tax.

My plan was to draw the investment growth so that when the SIPP was retested at 75 I would have little or no LTA excess tax to pay.

Unfortunately, cancer has derailed my carefully laid plans and, absent a miracle, I'll expire long before my 75th birthday.

It's my belief that there is no further LTA test on crystallised pots on death before 75 and as such 100% of my SIPP will pass to my nominees without any sort of deduction (under the current law).

Is this correct?

Thanks

[swill453]

The LTA is effectively abolished now, as announced in the last budget.

Scott.

[Guineagrill]

Yes, but the tax has just been renamed in some circumstances I think.

Uncrystallised pots at death under 65 still seem get caught by the LTA, albeit that the excess is taxed at the recipient's marginal rate rather than 55%.

[yorkshirelad1]

Morning All

I think I know the answer to this, but as I find the terminology all rather confusing would be grateful if someone could confirm or, alternatively, put me straight.

I crystallised my SIPP in 2019. In doing so I used up 101% of my Lifetime Allowance and paid a little tax.

My plan was to draw the investment growth so that when the SIPP was retested at 75 I would have little or no LTA excess tax to pay.

Unfortunately, cancer has derailed my carefully laid plans and, absent a miracle, I'll expire long before my 75th birthday.

It's my belief that there is no further LTA test on crystallised pots on death before 75 and as such 100% of my SIPP will pass to my nominees without any sort of deduction (under the current law).

Is this correct?

Thanks

I believe so, but assuming Labour don't win the next election and re-introduce the LTA.

[ursaminortaur]

Yes, but the tax has just been renamed in some circumstances I think.

Uncrystallised pots at death under 65 still seem get caught by the LTA, albeit that the excess is taxed at the recipient's marginal rate rather than 55%.

https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

Death benefit lump sums
On the member’s death, there could be two types of lump sum that may have been subject to the 55% LTA charge, the uncrystallised funds lump sum death benefit and the defined benefits lump sum death benefit.

The uncrystallised funds lump sum death benefit is where the member dies with uncrystallised DC funds and the beneficiary takes them as a lump sum rather than using them for drawdown or to buy an annuity. This might be the recipient’s decision or they might be limited by the options the scheme offers under its rules.

The defined benefits lump sum death benefit is paid by a DB scheme and typically derives from death-in-service style arrangements where a lump sum (usually based on multiple of the member’s pensionable salary) is paid on death.

On death under age 75, when paid within two years of the date of death, both of these lump sums were tax free up to the available LTA, with the 55% LTA charge applying to the excess when paid before 6 April 2023. The charge was paid by the recipients of the death benefits. Where there were multiple BCEs on the death of the member, the legal personal representatives (LPRs) would receive all the details of each BCE from the various schemes and then submit this to HMRC, who would apportion the available LTA to all the BCEs. HMRC would then let the beneficiaries know how much LTA tax charge they had to pay.

From 6 April 2023, these lump sums remain tax free up to the available LTA, but now the excess will be taxed at the recipient’s marginal tax rates. HMRC have confirmed that the process will remain the same for 2023/24 - the scheme will pay out the death benefits in full, the LPRs will inform HMRC of the BCEs, and HMRC will inform the beneficiaries of their marginal rate liability

[Guineagrill]

@ ursaminotaur.

Thank you for your reply and link.

Do you know of any circumstances whereby crystallised pots get re tested against LTA at death before 75?

I had been rather imagining that the LTA test at 75 gets brought forward if someone croaks before 75 and that somehow the investment growth since the pot was crystallised and death would get caught by the LTA also. Mercifully that doesn't seem to be the case but would be grateful for a post if you know any different!

Thanks

[scrumpyjack]

As I understand it the beneficiary of the pension will only pay income tax on the fund to the extent it is drawn. It is likely not to be a good idea to take the whole lot in one tax year as it will probably be subject to a high rate of tax (no top slicing is available). Better to plan to draw it down over a number of years to minimise the tax charge or, indeed, don't drawn it down but pass it intact to one's children/grandchildren so they have a pension fund!

[ursaminortaur]

@ ursaminotaur.

Thank you for your reply and link.

Do you know of any circumstances whereby crystallised pots get re tested against LTA at death before 75?

I had been rather imagining that the LTA test at 75 gets brought forward if someone croaks before 75 and that somehow the investment growth since the pot was crystallised and death would get caught by the LTA also. Mercifully that doesn't seem to be the case but would be grateful for a post if you know any different!

Thanks

As far as I am aware only uncrystallised funds are subjected to LTA tests on death before 75. The only times crystallised funds are subject to further LTA tests before age 75 are if you take certain actions ie decide to purchase an annuity with the crystallised funds or transfer the funds overseas.

https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

BCE 4. - when purchasing an annuity

If the lifetime annuity is bought from uncrystallised funds, the crystallised value is the market value of the fund used to buy the lifetime annuity.

But if the lifetime annuity is bought from income drawdown funds, the crystallised value is:

the market value of the member's income drawdown fund, at the time the lifetime annuity is being bought, less the amount originally moved into income drawdown at the outset
The reason for this deduction is to reflect that these funds have effectively already been tested against the LTA through BCE 1 when the funds were designated to provide drawdown.

BCE 8 - QROPS transfer overseas

BCE 8: transfer overseas - where benefits in a UK registered pension scheme are transferred to a qualifying recognised overseas pension scheme (QROPS).

The crystallised value is the total of the funds and the market value of any assets transferred from the scheme.

If any of the benefits have already been crystallised under BCE 1 (drawdown) or BCE 2 (scheme pension) an overlap provision applies - the amount crystallised under BCE 8 is reduced by the amount previously crystallised under BCE 1 or BCE 2.

It is also worth noting that the position with lump sums for 2023/24 whereby the excess is taxed at the beneficiary's marginal rate will have to change in 2024/25 since from April 2025 there will no longer be an LTA limit (rather than just no LTA excess charge) and hence HMRC will not be able to calculate a value for the LTA excess.

[ursaminortaur]

@ ursaminotaur.

Thank you for your reply and link.

Do you know of any circumstances whereby crystallised pots get re tested against LTA at death before 75?

I had been rather imagining that the LTA test at 75 gets brought forward if someone croaks before 75 and that somehow the investment growth since the pot was crystallised and death would get caught by the LTA also. Mercifully that doesn't seem to be the case but would be grateful for a post if you know any different!

Thanks

As far as I am aware only uncrystallised funds are subjected to LTA tests on death before 75. The only times crystallised funds are subject to further LTA tests before age 75 are if you take certain actions ie decide to purchase an annuity with the crystallised funds or transfer the funds overseas.

https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

BCE 4. - when purchasing an annuity

If the lifetime annuity is bought from uncrystallised funds, the crystallised value is the market value of the fund used to buy the lifetime annuity.

But if the lifetime annuity is bought from income drawdown funds, the crystallised value is:

the market value of the member's income drawdown fund, at the time the lifetime annuity is being bought, less the amount originally moved into income drawdown at the outset
The reason for this deduction is to reflect that these funds have effectively already been tested against the LTA through BCE 1 when the funds were designated to provide drawdown.

BCE 8 - QROPS transfer overseas

BCE 8: transfer overseas - where benefits in a UK registered pension scheme are transferred to a qualifying recognised overseas pension scheme (QROPS).

The crystallised value is the total of the funds and the market value of any assets transferred from the scheme.

If any of the benefits have already been crystallised under BCE 1 (drawdown) or BCE 2 (scheme pension) an overlap provision applies - the amount crystallised under BCE 8 is reduced by the amount previously crystallised under BCE 1 or BCE 2.

It is also worth noting that the position with lump sums for 2023/24 whereby the excess is taxed at the beneficiary's marginal rate will have to change in 2024/25 since from April 2025 there will no longer be an LTA limit (rather than just no LTA excess charge) and hence HMRC will not be able to calculate a value for the LTA excess.

Sorry that should of course be

It is also worth noting that the position with lump sums for 2023/24 whereby the excess is taxed at the beneficiary's marginal rate will have to change in 2024/25 since from April 2024 there will no longer be an LTA limit (rather than just no LTA excess charge) and hence HMRC will not be able to calculate a value for the LTA excess.

[Guineagrill]

@ ursaminotaur

That's really useful, thank you.

I spoke to someone on one the pension helpdesk at one of the big online brokers a few days ago, and his answer was exactly the same, so I think we've got to the bottom of this. That is until the rules change....