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LTA Calculators?

Including Financial Independence and Retiring Early (FIRE)
moorfield
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LTA Calculators?

#139619

Postby moorfield » May 17th, 2018, 4:30 pm

Can anyone point me to an easy to understand website that gives illustrations/examples on how the LTA is computed under flexible income drawdown over, say, a 25 year retirement period.

I want to look at how LTA over/above income tax would be computed (assuming current rules) and am drawing £X/year from my SIPP/HYP and/or how many years it would take to kick in. Also want to look at various scenarios such as taking lump sum/not taking lump sum. I'm not factoring any of this my spreadsheet projections yet, but something I've been been meaning to get round to looking at for ages.

Thanks vm in advance
M

ursaminortaur
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Re: LTA Calculators?

#139794

Postby ursaminortaur » May 18th, 2018, 11:11 am

moorfield wrote:Can anyone point me to an easy to understand website that gives illustrations/examples on how the LTA is computed under flexible income drawdown over, say, a 25 year retirement period.

I want to look at how LTA over/above income tax would be computed (assuming current rules) and am drawing £X/year from my SIPP/HYP and/or how many years it would take to kick in. Also want to look at various scenarios such as taking lump sum/not taking lump sum. I'm not factoring any of this my spreadsheet projections yet, but something I've been been meaning to get round to looking at for ages.

Thanks vm in advance
M


I'm not aware of any LTA calculators for flexible drawdown. If you are talking about flexible drawdown then you generally only need to be concerned about two times when the LTA test is conducted. One is when you crystallise your pension(s) and the other, assuming you have a DC pension in drawdown, is when you either reach the age of 75 or die before reaching that age. No other LTA tests are carried out.

The calculation for the LTA test when you start taking pensions would be

20 x initial annual pension + any lump sum

For DB pensions

and

For DC pensions it would be

Value of pension pot crystallised

Each pension you crystallise will use up a percentage of the current LTA (or if you have fixed protection a percentage of that protected LTA). If the sum of these percentages totals more than 100% then you obviously breach the LTA.

If you have a DC pension in flexible drawdown then you can take up to 25% of the pot as a tax free lump sum with the rest then available for drawdown. You should keep a record of this "initial drawdown pension amount" ie the figure left in the pot after taking the tax free lump sum. The reason for this is that on death before age 75 or at age 75 another LTA test is performed on such drawdown pots but this just looks at any growth and does this in a very simple manner.

The test simply looks at

Current value of crystallised DC pot - "initial drawdown pension amount" to calculate the growth and then compares this to whatever percentage of the LTA you have left.

To guarantee that you do not breach the LTA because of this test you just need to drawdown this growth at some point before this LTA test is applied (ie before age 75 - or before your death if that is earlier). The amounts drawn out will be subject to tax at your marginal rate but this is less than the 55% rate applied for breaching the LTA.

(With the other type of drawdown UFPLS there is no crystallisation but 25% of eacxh amount drawn down is tax free with the other 75% being taxed at your marginal rate. With this type of drawdown a LTA test is conducted every time you drawdown money from the pension pot and a further percentage of your LTA is used up. At age 75 (or death if before that) any money left in the pot will be tested against your remaining LTA. Note because of this manner of testing every drawdown any growth that occurs in your pot would be tested against the LTA either because it was drawndown or because it was still in the pot when the final test was done at age 75 (or on death if earlier).
This means that anyone who is relatively close to the LTA - which could be as low as say £600,000 or £700,000 according to when they retire and how well their investments do - would be better off using flexible drawdown rather than UFPLS if they wish to avoid breaching the LTA).

moorfield
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Re: LTA Calculators?

#139803

Postby moorfield » May 18th, 2018, 11:58 am

Thanks vm ursaminortaur, I will digest that over the weekend!

If I've understood what I've read on BCE's correctly, the ones of import before I hit 75 are BCE1 (income) and BCE6 (lump sum), which can be flexibly mixed/matched between ages 55-75. The current plan during that period is to have the HYP inside my SIPP throwing off roughly a basic rate income (ie. £12-45k ish) in dividends each year (BCE1), with any surplus reinvested, and the ability to chip off capital lumps as/when needed (BCE6).

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Re: LTA Calculators?

#139825

Postby ursaminortaur » May 18th, 2018, 1:35 pm

moorfield wrote:Thanks vm ursaminortaur, I will digest that over the weekend!

If I've understood what I've read on BCE's correctly, the ones of import before I hit 75 are BCE1 (income) and BCE6 (lump sum), which can be flexibly mixed/matched between ages 55-75. The current plan during that period is to have the HYP inside my SIPP throwing off roughly a basic rate income (ie. £12-45k ish) in dividends each year (BCE1), with any surplus reinvested, and the ability to chip off capital lumps as/when needed (BCE6).


BCE1 is the crystallisation of the pension for drawdown - this is generally a one-off event rather than something happening each year.
(You could have a large pot and crystallise just part of the pot and then crystallise another part next year etc but that would be an unusual way to do things.*) BCE1 and BCE6 although separate BCE's happen pretty much simultaneously with flexible drawdown. Although it might be theoretically possible to take the lump sum and crystallise at slightly different times , I'm not sure about that, I don't think any provider supports that. When you crystallise you have to decide whether you want to take the full 25% tax free lump sum or a lesser percentage and if you took a lower percentage you can't then go back later and get more tax-free lump sum to take you upto 25%. For DC pensions it is generally recommended to take the full 25% tax-free lump sum (for DB pensions it is often better not to take the 25% tax free lump sum since that often involves reducing the annual pension in a process known a commutation and the rates at which this is does are often poor value for money.)

* As mentioned if you have a large pot you could crystallise just part of it known as partial drawdown - in that case the maximum tax free lump sum would be 25% of that crystallised part. You would then be able to crystallise further parts and take a 25% tax free lump sum for each part as it is crystallised. Not all providers support partial drawdown. I think this was more widely used before the introduction of UFPLS drawdown.

With flexible drawdown after the crystallisation and taking of the tax-free lump sum you can then start drawing down money from the crystallised pension pot. This will be taxed at your marginal rate but won't be a BCE and hence there won't be any LTA test when you withdraw that money. Most providers allow you to draw money out on a regular schedule eg once a month or annually and some will allow you to drawdown at adhoc intervals.


With the alternative UFPLS drawdown there is no crystallisation and no initial 25% tax free lump sum but every sum of money drawn down consists of a 25% tax-free part and a second 75% part which is taxed at your marginal rate and each of those withdrawals is tested against the LTA at the time it is drawn down.

Just for clarity since you seemed above to be distinguishing between dividends and capital in your pension pot all taxable money withdrawn using drawdown is considered to be income and taxed as income at your marginal rate.

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Re: LTA Calculators?

#139842

Postby OLTB » May 18th, 2018, 2:35 pm

moorfield wrote:Thanks vm ursaminortaur, I will digest that over the weekend!

If I've understood what I've read on BCE's correctly, the ones of import before I hit 75 are BCE1 (income) and BCE6 (lump sum), which can be flexibly mixed/matched between ages 55-75. The current plan during that period is to have the HYP inside my SIPP throwing off roughly a basic rate income (ie. £12-45k ish) in dividends each year (BCE1), with any surplus reinvested, and the ability to chip off capital lumps as/when needed (BCE6).


An example may be useful - say your SIPP is valued at £772,500 (75% of the current LTA of £1.03m) and you use the flexible drawdown method. The BCE will use 75% of the LTA when you take tax-free cash from the SIPP (assuming you take it!) and then you will draw down the income from the SIPP at what ever rate you decide. The regular (or irregular) income / capital sums you draw from within the SIPP are not further BCEs so will not need reporting - this income is only subject to income tax.

If you had a second, separate pension pot, you still have 25% of your LTA allowance to use if needed.

Cheers, OLTB.

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Re: LTA Calculators?

#139848

Postby moorfield » May 18th, 2018, 3:21 pm

ursaminortaur wrote:
BCE1 is the crystallisation of the pension for drawdown - this is generally a one-off event rather than something happening each year.


Yes is this what I am unsure of. Some of the examples I have started to read imply otherwise and start waffling about ratios used up, eg:
http://www.retirementadvantage.com/down ... events.pdf

I've had head-in-sand re the LTA but feel I need to start getting to grips with all the mechanics of drawdown now ... Of course it may all change again, and it's a nice problem to have, so in that respect I feel very lucky.

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Re: LTA Calculators?

#139874

Postby TedSwippet » May 18th, 2018, 5:14 pm

moorfield wrote:Of course it may all change again, and it's a nice problem to have, so in that respect I feel very lucky.

Is it? You do?

I feel annoyed. I have paid a lot of attention to saving for a pension -- not to mention going without several nice-to-have's that my peers all enjoyed -- over a career spanning thirty years, only to have an idiot chancellor move the goalposts from in front of me to behind me on the closing straight (to mix at least two sporting metaphors!). Honestly, the LTA is bonkers, and unworthy of a first-world country.

Now, with the rant done... I found poring carefully through the following papers helped me to get to grips with the best way to manage an LTA that begins to loom (one of which I see you have already found for yourself):

http://www.scottishwidows.co.uk/extrane ... doc/FP0462
https://www.intelligentpensions.com/med ... sheet1.pdf
https://www.intelligentpensions.com/med ... owance.pdf
https://www.aegon.co.uk/support/faq/pen ... vent3.html
http://www.retirementadvantage.com/down ... events.pdf

Some are a bit dated so you will have to mentally account for slightly different LTA limits and so on, but the gist of all of them is accurate. It's a heap of reading, but once you have grasped it you should be able to see how to fit it to your own situation.

My own plan is to wait until my pension grows exactly to my (protected) LTA, crystallise the entire thing, reinvest the 25% PCLS into the same stuff as it was in inside the pension, and then continue to wait until I need to actually draw on it, making sure that I have drawn all the growth on the crystallised element by age 75 while at the same time trying to stay below the 40% tax bracket.

At the point you hit the LTA a pension turns from a tax benefit into a tax millstone. Because here, instead of you getting the 25% PCLS, the government instead takes all of that for itself as LTA penalty. All the advice so far upthread is excellent.

Pension simplification, my a$$.

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Re: LTA Calculators?

#140448

Postby hiriskpaul » May 21st, 2018, 10:29 pm

TedSwippet wrote:My own plan is to wait until my pension grows exactly to my (protected) LTA, crystallise the entire thing, reinvest the 25% PCLS into the same stuff as it was in inside the pension, and then continue to wait until I need to actually draw on it, making sure that I have drawn all the growth on the crystallised element by age 75 while at the same time trying to stay below the 40% tax bracket.

At the point you hit the LTA a pension turns from a tax benefit into a tax millstone. Because here, instead of you getting the 25% PCLS, the government instead takes all of that for itself as LTA penalty. All the advice so far upthread is excellent.

Pension simplification, my a$$.

Completely agree that the LTA is a nonsense, but in your case it should not be catastrophic if you exceed it, assuming you got 40% tax relief on the way in. Just as an example, assume you are £10k over when you crystallise. In that case you will pay the LTA charge of 25%, reducing the amount over to £7.5k. You then drawdown, paying 20% income tax, resulting in a net £6k from the £10k you were over the LTA. Provided you got 40% tax relief when you paid in, this means you are no worse off than if you had invested in an ISA. If you only received 20% tax relief on contributions, or end up paying more than 20% in drawdown, then you will be worse off.

If you fully crystallise at or below the LTA, but then get hit on growth at age 75, again the LTA charge is not as bad as it may at first appear. For example, if you you were £100k over at the age 75 LTA test, this will be reduced to £75k after paying the charge. You (or a beneficiary) subsequently draws down the £75k, paying 20% tax would reduce the amount to £60k. Which means you would be no worse off than if had drawn the excess £100k before age 75 and paid 40% income tax.

Any amount in a SIPP is sheltered from IHT, which for some people might provide a good reason to exceed the LTA.

In so far as it goes, I think pension simplification is a very good thing. Would you really want to be restricted to drawing down according to GAD tables? Or be forced to buy an annuity? I would like to see the system made even simpler, e.g. by abolishing the LTA completely and introducing a "Lifetime Tax Relief" limit instead.

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Re: LTA Calculators?

#140454

Postby TedSwippet » May 21st, 2018, 11:15 pm

hiriskpaul wrote:If you only received 20% tax relief on contributions, or end up paying more than 20% in drawdown, then you will be worse off.

For me, that one. In fact, both of these to a degree. Quite a lot of my pension contributions back before 'pension simplification' were within the sub-40% tax brackets that existed at the time.

hiriskpaul wrote:If you fully crystallise at or below the LTA, but then get hit on growth at age 75, ... paying 20% tax would reduce the amount to £60k. Which means you would be no worse off than if had drawn the excess £100k before age 75 and paid 40% income tax.

Same problem as above, though. I am likely to be above the 40% tax breakpoint right through retirement.

hiriskpaul wrote:Any amount in a SIPP is sheltered from IHT, which for some people might provide a good reason to exceed the LTA.

Yes. However, I have no children and so no direct requirement to provide anyone with an inheritance. (My nieces and nephews will be well pleased with anything that drops their way, but if anything does it will be by accident rather than by design!)

hiriskpaul wrote:In so far as it goes, I think pension simplification is a very good thing. Would you really want to be restricted to drawing down according to GAD tables? Or be forced to buy an annuity? I would like to see the system made even simpler, e.g. by abolishing the LTA completely and introducing a "Lifetime Tax Relief" limit instead.

The 'pension simplfication' of 2006 is what gave us the LTA, and at the time it was perhaps set at a reasonable level, but successive chancellors -- and one in particular -- have turned it from reasonable to unreasonable. The GAD tables thing was silly and it is good that this has now gone, but that didn't go with 'pension simplification' of 2006 but rather in a vote-buying measure much later on. And even before this, as long as you had a healthy pension balance there was never any compulsion to buy an annuity (this is what the whole GAD thing was the alternative for).

I agree that the whole thing could be made a lot simpler still though, and a Lifetime Tax Relief wouldn't be a bad way to start (although perhaps impractical due to insufficient historical records!). Unfortunately, neither you nor I can do anything except react to the whims of whatever chancellor is in number 11 come budget time. In my case, 'react' meant giving up work and retiring some four or five years earlier than originally planned, as the only sensible way to avoid losses of around 25% of income (no company pension contributions) after taking out FP2016. The current system has within it some truly perverse incentives, unfortunately.

Thank you for taking the time to spell out the way the numbers work, anyway. Quite a few folk focus on the headline 55% rate without considering that it may not be that high for people who can keep all their affairs to below the 40% tax bracket in retirement.


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