Pensions - Lifetime allowance and Tax Free Lump Sum

[omniflow]

All,

Apologies if this has already been asked and answered, but I couldn't find any reference to this specific question.

Assuming the following scenario:

Pension pot of £1,055,000 in March 2020.
Take out 25% tax free lump sum of £263,750, leaving £791,250 still invested
No contributions and no drawdowns for the next 5 years.
Assuming 2% annual increase in the lifetime allowance - the lifetime allowance will then be - £1,165,000 (approx.)
Assuming 5% net growth on remaining £791,250 - that would then be worth - £1,010,000 (approx.)

Do I then get to take an additional £27,450 as a tax free lump sum - this being the difference between the £263,750 I have already had and 25% of the future lifetime allowance - which will be £291,000

Obviously by then I'm going to be paying %55 on some of the money.
Then there's the question of whether or not I'm better leaving the 25% in there the entire time - but that's a completely different question and not one I'd be looking to an answer to on the internet.

Thanks.

[JulianPH]

omniflow said:

All,

Apologies if this has already been asked and answered, but I couldn't find any reference to this specific question.

Assuming the following scenario:

Pension pot of £1,055,000 in March 2020.
Take out 25% tax free lump sum of £263,750, leaving £791,250 still invested
No contributions and no drawdowns for the next 5 years.
Assuming 2% annual increase in the lifetime allowance - the lifetime allowance will then be - £1,165,000 (approx.)
Assuming 5% net growth on remaining £791,250 - that would then be worth - £1,010,000 (approx.)

Do I then get to take an additional £27,450 as a tax free lump sum - this being the difference between the £263,750 I have already had and 25% of the future lifetime allowance - which will be £291,000

Obviously by then I'm going to be paying %55 on some of the money.
Then there's the question of whether or not I'm better leaving the 25% in there the entire time - but that's a completely different question and not one I'd be looking to an answer to on the internet.

Thanks.

No.

Once you have crystallised funds to take the tax free cash you cannot come back for another tax free grab on the crystallised growth.

You can, however, elect to crystallise only part of your pot and take the tax free cash on that bit whilst leaving the balance un-crystallised, then come back and crystallise the balance, taking the tax free cash on the capital and any growth from this part of you pension.

Each time you crystallise your pension is tested against the lifetime allowance though, so if you have exceed this with your whole pot there will be an additional tax bill to pay.

[omniflow]

Thanks - the key question I have is not about the 25% of the growth, it's about the 25% of the increase in the lifetime allowance.

[JulianPH]

omniflow said:

Thanks - the key question I have is not about the 25% of the growth, it's about the 25% of the increase in the lifetime allowance.

I'm not quite sure what you are saying, but am making the assumption that you are connecting the 25% tax free cash with the lifetime allowance.

This is not the case as they aren't connected in this way.

If I have got hold of the wrong end of the stick please let me know and I'll give you a better answer!

[chip*]

If you crystallise your pension up to the current £1.055 mio LTA, you would have used up your lifetime allowance e.g. 100%. As far as I know, there are no further 25% TFC freebie irrespective of any future LTA increase.

omniflow said:

Obviously by then I'm going to be paying %55 on some of the money.
Thanks.

I assume you are referring to the excess pension over the LTA. If so, you have 2 options, take the whole amount as a LUMP SUM and pay the 55% tax charge, or take it as DRAWDOWN income and pay 25% tax charge first, then pay the marginal tax rate when you use the income.

If you have a DC pot balance exceeding the LTA, it's worth checking out this Mutual link (just tick the box as financal advisor to enter page).

https://www.oldmutualwealth.co.uk/Adviser/platform...

Go to bottom right section under "Case Studies" and review the document Advising clients with funds greater than the prevailing or protected LTA showing the 3 options + impact summary. Overall, additional tax will be unavoidable, but the amount will depend on your decision/route you choose. Best to take regulated advice if you are in this (fortunate) situation as mistake/wrong decision can be an expensive one.

[omniflow]

Thanks both.

Yes, I was connecting the 25% tax free lump with the lifetime allowance - and it looks like I have that wrong.

Probably a simpler illustration is:

2020 - LTA = £1,000,000 and 25% = £250,000
2025 - LTA = £1,200,000 and 25% = £300,000

I was assuming (hoping) that if I had £1,000,000 in 2020 and took the £250K, then provided the remainder grew sufficiently then I would be able to take another £50K tax free in 2025.

However, it seems that the government is not that generous, and because the seed for the growth had already been crystalised there is no more tax free lump to be had from that.

Oh well...….

[JulianPH]

omniflow said:

Thanks both.

Yes, I was connecting the 25% tax free lump with the lifetime allowance - and it looks like I have that wrong.

Probably a simpler illustration is:

2020 - LTA = £1,000,000 and 25% = £250,000
2025 - LTA = £1,200,000 and 25% = £300,000

I was assuming (hoping) that if I had £1,000,000 in 2020 and took the £250K, then provided the remainder grew sufficiently then I would be able to take another £50K tax free in 2025.

However, it seems that the government is not that generous, and because the seed for the growth had already been crystalised there is no more tax free lump to be had from that.

Oh well...….

Nice try though!

[chip*]

There is also the small pot rule where you can withdraw say 3 X £10,000 without triggering BCE and affecting the LTA (generally on non occupational scheme but check first). You get your 25% TFC (3 X £2,500) , and the rest is taxable as per normal. Timing is critical too as I believe you can only use the small pot rule when you haven't utilised 100% of your LTA.

Retirement drawdown would be so much easier if LTA was abolished ??, but for now, it brings in an extra level of complexity for those in this fortunate position. As stated before, worth investing a few £ on regulated advice as mistake can be an expensive one.

[omniflow]

chip* said:

There is also the small pot rule where you can withdraw say 3 X £10,000 without triggering BCE and affecting the LTA (generally on non occupational scheme but check first). You get your 25% TFC (3 X £2,500) , and the rest is taxable as per normal. Timing is critical too as I believe you can only use the small pot rule when you haven't utilised 100% of your LTA.

Retirement drawdown would be so much easier if LTA was abolished ??, but for now, it brings in an extra level of complexity for those in this fortunate position. As stated before, worth investing a few £ on regulated advice as mistake can be an expensive one.

Yup - I do have an adviser - but I like to have my own ideas before I talk to him. I did have a couple of small pots, unfortunately (or probably fortunately) they weren't small enough to fall under that rule.

[Macron]

omniflow said:

Thanks both.

Yes, I was connecting the 25% tax free lump with the lifetime allowance - and it looks like I have that wrong.

Probably a simpler illustration is:

2020 - LTA = £1,000,000 and 25% = £250,000
2025 - LTA = £1,200,000 and 25% = £300,000

I was assuming (hoping) that if I had £1,000,000 in 2020 and took the £250K, then provided the remainder grew sufficiently then I would be able to take another £50K tax free in 2025.

However, it seems that the government is not that generous, and because the seed for the growth had already been crystalised there is no more tax free lump to be had from that.

Oh well...….

What if you took out your 25% initially, and the LTA falls as it's tied to CPI (at the moment/ Labour Gov etc).

Would you be happy paying back later?