Taigo wrote:Hi There,
Just to confirm...
By fully crystallised do you mean that 100% of her SIPP is now in a flexi-drawdown less the 25% PCLS which has been taken and now sits in her estate (or has been spent)? The total pre-PCLS pension value was c.£475,000?
Yes, she had about 480k pre-crystallisation, taking 120k PCLS, leaving 360k in drawdown. I think she is safe to contribute to a pension this year, but I am concerned I may have missed something such as a special rule that says if FP 2016 is lost in the same year benefits are taken the benefits calculation is redone. She would not want her 38% to suddenly become 48% just because she put £2880 into a SIPP this year.
Her current age is a consideration as this would affect whether or not the FP2016 was likely to be needed in the future. FP2016 would be lost if she starts to pay in to a scheme now reducing her LTA to £1 million.
On face value, with the figures you have mentioned this doesn't seem to be too much of a loss as assuming she is now expecting to take an income from the pension at some point in the future and her drawdown funds are in a relatively low-risk portfolio so no massive gains expected, then arguably FP2016 is unlikely to have been of benefit anyway.
However, if she is a young retiree and/or has other sources of income and/or plans to leave this pension invested and not take an income there may be an argument for FP2016.
Using 3% compound growth the fund would exceed the new LTA in 2041 - 25 years from now
Using 4% compound growth the fund would exceed the new LTA in 2034 - 18 years from now
Using 5% compound growth the fund would exceed the new LTA in 2031 - 15 years from now
Using 6% compound growth the fund would exceed the new LTA in 2028 - 12 years from now
Any pension savings above the lifetime allowance are subject to the lifetime allowance charge. This charge will continue to be:
- 55% if the excess is taken as a lump sum
- 25% if the excess is taken as income, for example as a scheme pension, an annuity or drawdown. Income tax at your marginal rate will also be payable.
Thanks for that, I worked out she would hit the LTA (index linked from 2018) with a 3.7% growth rate over inflation, assuming she took nothing out. Seems to be in line with your calculations.
You are also correct that the LTA is %-age based.
The correct method for calculating LTA usage requires the past crystallised amount be indexed at the same rate the standard LTA has been indexed. This is done with the formula:
RUA x (CSLA/PSLA)
Where:
RUA - Relevant Untaxed Amount - the amount of the previous BCE
CSLA - Current Standard Lifetime Allowance - Standard LTA today
PSLA - Previous Standard Lifetime Allowance - LTA at the time of the previous BCE
Thanks for pointing that out. I had forgotten that this was how subsequent BCE calculations were done. I thought that you just adjusted the percentage figure already crystallised, which is wrong. i.e. as she has taken 38.4% of the LTA, then the 2036 BCE 5 calculation would be done assuming she had taken 38.4% of whatever the LTA was in 2036. Just an extra bit of complexity to have to manage!
Either way I think she is in the clear putting £2880 into a pension this financial year. I will warn her of all the complexity though and I guess she really should review this every time the rules change and every year or so to make sure she is not likely to end up breaching the LTA.