Hi,
Just to confirm how a tax charge relating to exceeding the above would work.......
If I had a Lifetime Allowance of £1,000,000 and £900,000 was transferred into drawdown with 25% or £225,000 immediately taken as TFC, I assume that the remaining £675,000 would be allowed to grow to £775,000 (i.e. The £1 million limit less the TFC) before any further increase would take me through the Lifetime Allowance limit . By grow I mean income generated within the SIPP plus or minus capital profits/losses minus the income that I would take. I'm assuming no further pension transfers are made and that nothing else happens other than investing the fund and taking a pension income. Thanks
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Understanding Lifetime Allowance
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Re: Understanding Lifetime Allowance
That is not correct have a look at it again and one line at a time explain what the factors are in increasing and decreasing the fund.
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Re: Understanding Lifetime Allowance
Each time you take money out of a pension, either as a lump sum or moving it to a drawdown pot, that crystallisation event counts against your allowance. How the drawdown fund grows afterwards is irrelevant.
So if your pot is £1.2m, and the LTA is £1m when you crystallise £900k, you use up 90% of your LTA, but no tax is payable
If 10 years later your remaining £300k had grown to £500k, but the LTA had increased by inflation to £1.2m, when you took it out you'd be assessed for £500k-£120k, the £380k excess being taxed.
So the LTA gets split between investment streams each time a bit is crystallised
https://www.aegon.co.uk/support/faq/pen ... vent3.html has examples of this
So if your pot is £1.2m, and the LTA is £1m when you crystallise £900k, you use up 90% of your LTA, but no tax is payable
If 10 years later your remaining £300k had grown to £500k, but the LTA had increased by inflation to £1.2m, when you took it out you'd be assessed for £500k-£120k, the £380k excess being taxed.
So the LTA gets split between investment streams each time a bit is crystallised
https://www.aegon.co.uk/support/faq/pen ... vent3.html has examples of this
Re: Understanding Lifetime Allowance
Thanks to JohnB and the link but just to be clear....
Based on my example, if all the historic pensions have culminated in three tranches being transferred into drawdown with the cumulative percentage usage of the Lifetime Allowance being 90%, there is no risk of a future tax charge from exceeding the LIfetime Allowance even if the value of the SIPP increases dramatically in value. This obviously assumes no adverse changes in legislation and no action is taken in the SIPP other than managing the assets and taking a pension income. I had obviously assumed that an increase in the value of the SIPP could push it over the limit and result in a tax charge .Thanks
Based on my example, if all the historic pensions have culminated in three tranches being transferred into drawdown with the cumulative percentage usage of the Lifetime Allowance being 90%, there is no risk of a future tax charge from exceeding the LIfetime Allowance even if the value of the SIPP increases dramatically in value. This obviously assumes no adverse changes in legislation and no action is taken in the SIPP other than managing the assets and taking a pension income. I had obviously assumed that an increase in the value of the SIPP could push it over the limit and result in a tax charge .Thanks
Re: Understanding Lifetime Allowance
Note that after quite a few years of reduction the LTA will rise in line with inflation from £1m to £1.03 from April 2018 and thereafter. So if you want to move some or all of your pot into drawdown it may be worth waiting until the new tax year or even staging further crystallization events in subsequent years to benefit for further LTA increases. Especially if you still wish to make further pension contributions.
Last edited by Shinyuk on February 10th, 2018, 10:45 am, edited 2 times in total.
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Re: Understanding Lifetime Allowance
morestout wrote: This obviously assumes no adverse changes in legislation and no action is taken in the SIPP other than managing the assets and taking a pension income.
If someone is over the pension age with a rapidly appreciating SIPP not subject to new contributions, does this imply that they should put the SIPP into drawdown as soon as they approach a lifetime limit? It wouldn't be necessary to drawdown anything, or more than a nominal amount.
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Re: Understanding Lifetime Allowance
Alaric wrote:morestout wrote: This obviously assumes no adverse changes in legislation and no action is taken in the SIPP other than managing the assets and taking a pension income.
If someone is over the pension age with a rapidly appreciating SIPP not subject to new contributions, does this imply that they should put the SIPP into drawdown as soon as they approach a lifetime limit? It wouldn't be necessary to drawdown anything, or more than a nominal amount.
Once you crystallise the SIPP using flexi-access drawdown you don't have to worry about any further LTA tests until you are 75.
At that point though there will be a further LTA test but that only looks at the growth since you crystallised the SIPP which is still in the SIPP.
Hence to avoid an LTA charge at that point you just need to have drawn down that growth at some point before you reach 75.
Note 1. You need to use Flexi-Acess drawdown if you use the newer UFPLS method of drawdown then an LTA test is carried out everytime you take money out of the SIPP.
Note 2. If you leave any part of the SIPP uncrystallised that will also be tested at age 75.
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Re: Understanding Lifetime Allowance
ursaminortaur wrote:Note 1. You need to use Flexi-Acess drawdown if you use the newer UFPLS method of drawdown then an LTA test is carried out everytime you take money out of the SIPP.
Yes, I take regular monthly UFPLS drawdown payments from my AJBell Youinvest SIPP.
Every month they post me my payslip, and separately a 3 page letter telling me what additional fractional percentage of my LTA I have used up. Regulations, apparently.
Scott.
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