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LTA and BCE

piccadilly
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LTA and BCE

#45880

Postby piccadilly » April 14th, 2017, 9:48 am

I don't quite understand how the Benefit Crystallisation Events (BCE) works.

As an example:-

1) if an individual draws their final salary pension of say £20,000 with a tax free lump sum of £130,000 then this triggers a BCE (20 x £20,000)+£130,000 = £530,000 i.e.53% of the Lifetime Allowance of £1,000,000.

2) They also have a pension pot in a SIPP of £600,000, but actually draw only (say) £60,000, whether through flexible drawdown or UFPLS.Is the BCE triggered £600,000, or the amount drawn only i.e.£60,000 - so the lifetime allowance used is 60% or 6%.

If it is the £600,000 that is triggered - then this would take the total £130,000 above the lifetime allowance of £1,000,000 and the 55% tax rate would be charged.

Advice/comments appreciated.

Thank You.

swill453
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Re: LTA and BCE

#45884

Postby swill453 » April 14th, 2017, 10:10 am

piccadilly wrote:2) They also have a pension pot in a SIPP of £600,000, but actually draw only (say) £60,000, whether through flexible drawdown or UFPLS.Is the BCE triggered £600,000, or the amount drawn only i.e.£60,000 - so the lifetime allowance used is 60% or 6%.

It's how much you crystallize.

So if you make a UFPLS withdrawal, then that's what you've crystallized.

If not, you can only take drawdown from a crystallized pot, so the BCE happened when you took the earlier decision to crystallize it. It's not related to how much you drawdown.

Scott.

piccadilly
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Re: LTA and BCE

#45892

Postby piccadilly » April 14th, 2017, 10:53 am

Scott,

Thank you for your prompt reply.

So is it the £600,000, or the £60,000 that is crystallised?

Thanks

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Re: LTA and BCE

#45913

Postby DrBunsenHoneydew » April 14th, 2017, 12:52 pm

piccadilly wrote:Scott,

Thank you for your prompt reply.

So is it the £600,000, or the £60,000 that is crystallised?

Thanks


£60,000 if that's what you draw out and leave £540,000 uncrystallised. However, you can choose to crystallise £470,000 and only draw £60,000 if you wish. As you are implying, there would be a tax hit if you crystallise more than £470,000, but I'm not sure how you intend to avoid that tax. The £1M LTA limit will increase after 2018, but your 'excess' pot will also increase, but maybe not as quickly, so eventually you may get to be in the clear.

swill453
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Re: LTA and BCE

#45918

Postby swill453 » April 14th, 2017, 1:19 pm

piccadilly wrote:Scott,

Thank you for your prompt reply.

So is it the £600,000, or the £60,000 that is crystallised?

Thanks

I'm not sure you're really getting it. You decide how much to crystallize. That's when you take the 25% tax free.

UFPLS bundles this with a drawdown as well, but if you don't do it that way the ball's in your court.

Scott.

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Re: LTA and BCE

#45923

Postby TedSwippet » April 14th, 2017, 1:57 pm

DrBunsenHoneydew wrote:... The £1M LTA limit will increase after 2018, but your 'excess' pot will also increase, but maybe not as quickly, so eventually you may get to be in the clear.

It's probably going to be the other way around.

The LTA is supposed to increase with inflation -- if the government sticks to its promise, and remember that it said in 2006 that the £1.8mm would increase with inflation and look what happened -- but in general most people's investments will grow by somewhat more than inflation. Unless they've deliberately (or foolishly) chosen sub-par investments, that is.

Over time then, the pension pot should pull farther ahead of the LTA, rather than the LTA catching up with and then pulling ahead of the pension pot.

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Re: LTA and BCE

#45931

Postby ursaminortaur » April 14th, 2017, 3:39 pm

The LTA is supposed to increase with inflation -- if the government sticks to its promise, and remember that it said in 2006 that the £1.8mm would increase with inflation and look what happened -- but in general most people's investments will grow by somewhat more than inflation. Unless they've deliberately (or foolishly) chosen sub-par investments, that is.

Over time then, the pension pot should pull farther ahead of the LTA, rather than the LTA catching up with and then pulling ahead of the pension pot.


And you can't just leave some funds uncrystallised for ever so that you never actually breach the LTA. There is an LTA test on all your uncrystallised funds at age 75 to stop that. Though of course if you die before 75 the LTA test which would occur at that point would only be of real interest to your beneficiaries.

Dave

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Re: LTA and BCE

#45935

Postby ursaminortaur » April 14th, 2017, 4:09 pm

As an example:-

1) if an individual draws their final salary pension of say £20,000 with a tax free lump sum of £130,000 then this triggers a BCE (20 x £20,000)+£130,000 = £530,000 i.e.53% of the Lifetime Allowance of £1,000,000.

2) They also have a pension pot in a SIPP of £600,000, but actually draw only (say) £60,000, whether through flexible drawdown or UFPLS.Is the BCE triggered £600,000, or the amount drawn only i.e.£60,000 - so the lifetime allowance used is 60% or 6%.

If it is the £600,000 that is triggered - then this would take the total £130,000 above the lifetime allowance of £1,000,000 and the 55% tax rate would be charged.


If you are already in this position and can't apply for either individual or fixed protection 2016 (because your total pot was below £1 million on 5th April 2016 - for individual protection - or you and your employer have paid into your pensions since 5th april 2016 - for fixed protection) then, because of the age 75 test, unless the Government were to abandon or increase the LTA limit by more than inflation (or you were to deliberately lose money in your SIPP) then it is highly likely you will eventually exceed the LTA.
Note. I haven't checked whether individual protection 2016 is still available.

If you aren't quite in this situation yet ie this is a projection of your future position and your total pot is still under the £1 million then, assuming you are over 55, I'd look at the possibility of crystallising your SIPP and taking the 25% tax free lump sum. You don't need to take out anything else yet if you don't want to however if before age 75 you take out the growth from the SIPP then that will be taxed at your marginal rate but importantly the amount withdrawn won't be counted in the age 75 LTA test.

Dave

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Re: LTA and BCE

#45942

Postby ursaminortaur » April 14th, 2017, 4:25 pm

If you aren't quite in this situation yet ie this is a projection of your future position and your total pot is still under the £1 million then, assuming you are over 55, I'd look at the possibility of crystallising your SIPP and taking the 25% tax free lump sum. You don't need to take out anything else yet if you don't want to however if before age 75 you take out the growth from the SIPP then that will be taxed at your marginal rate but importantly the amount withdrawn won't be counted in the age 75 LTA test.


Note. To do this you need to crystallise your SIPP ie use flexible drawdown rather than UFPLS. With UFPLS there is an LTA test everytime you take out money and hence the growth in your SIPP would be captured in these incremental percentage increases to the amount of LTA you have used up.

Dave

Ps

In the previous post I mistakenly said
if you are already in this position and can't apply for either individual or fixed protection 2016 (because your total pot was below £1 million on 5th April 2016 - for individual protection - or you and your employer have paid into your pensions since 5th april 2016 - for fixed protection)
whereas it obviously should have been

if you are already in this position and can't apply for either individual or fixed protection 2016 (because your total pot was below £1 million on 5th April 2016 - for individual protection - or you or your employer have paid into your pensions since 5th april 2016 - for fixed protection)

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Re: LTA and BCE

#45970

Postby piccadilly » April 14th, 2017, 7:50 pm

swill453 wrote:
piccadilly wrote:Scott,

Thank you for your prompt reply.

So is it the £600,000, or the £60,000 that is crystallised?

Thanks

I'm not sure you're really getting it. You decide how much to crystallize. That's when you take the 25% tax free.

UFPLS bundles this with a drawdown as well, but if you don't do it that way the ball's in your court.

Scott.



So if a UFPLS payment of £60,000 is made this is the amount crystallised.

But if flexible drawdown is chosen - the £600,000 is crystallised.

Can only part of the fund of £600,000 be designated for drawdown? say £300,000 thus only crystallising this amount?

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Re: LTA and BCE

#45972

Postby ursaminortaur » April 14th, 2017, 8:10 pm

So if a UFPLS payment of £60,000 is made this is the amount crystallised.

But if flexible drawdown is chosen - the £600,000 is crystallised.

Can only part of the fund of £600,000 be designated for drawdown? say £300,000 thus only crystallising this amount?


Yes with flexible drawdown you may be able to just crystallise a part of the pension pot just taking 25% of that part as a tax free lump sum.
This is known as phased drawdown. The main SIPP providers will offer this but you would need to check with your provider since not all do.


Dave

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Re: LTA and BCE

#47160

Postby piccadilly » April 20th, 2017, 9:22 am

Another question.

If I draw just the tax free cash as part of flexible drawdown of say £25,000 does this mean that I have crystallised £25,000 plus £75,000 = £100,000 i.e. The £75,000 remains in the fund but is now crystallised?

Also is ther any way if using my wife's lifetime allowance?

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Re: LTA and BCE

#47204

Postby TedSwippet » April 20th, 2017, 11:35 am

piccadilly wrote:If I draw just the tax free cash as part of flexible drawdown of say £25,000 does this mean that I have crystallised £25,000 plus £75,000 = £100,000 i.e. The £75,000 remains in the fund but is now crystallised?

In effect, yes. In practice the only way to get the £25k tax free portion is actually to crystallise the full £100k, at which point you'd put the remaining £75k into deferred drawdown to get the outcome you describe.

piccadilly wrote:Also is there any way of using my wife's lifetime allowance?

Directly? I'm pretty sure not. I suppose you could potentially draw on your own pension and move as much as you can of that into your wife's pension, as and when her own earnings and allowances permit, but that's not going to be the quick relief from the LTA that you want.

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Re: LTA and BCE

#47254

Postby TUK020 » April 20th, 2017, 2:39 pm

piccadilly

You can transfer from your pension to your wife's tax free, but I think you will find it involves either divorce or death.
tuk020


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