Exceeding the lifetime allowance

[Snowbadger]

Hi All,
having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids, I didn't expect the Raging Bull to charge through the lifetime limit. So, I accept that there is no way of avoiding the extra tax charges, but would it be better to take the lump sum out each year pay 55% tax and put it in an Isa. Also, is it possible to request payments from the lifetime excess?


As always thanks in advance,

SB

[Chrysalis]

what is your aim for these funds? If you are wanting to maximise the amount left to children, I think it would be better to leave the funds inside the pension and the LTA excess tax will be paid on your death. That way the amount left in is still sheltered from IHT, which it won’t be if you put it inside an ISA.
It might be worth getting expert tax advice, since I assume we’re talking large sums here.

[Snowbadger]

Cheers Jab,
and yes I understand the complexities, but over the years I've learnt so much from kicking around a question both here and another place before engaging in paid advice However since the best IFA I have met by a country mile passed away last year ( Ian Coley-Fish, may be Marmite to some of you but in real life he was an excellent IFA ). So , while I realise I could pop my clogs tomorrow I could also be on this website for another 25 yrs plus. One possibility of course would be Aim Funds, the question is would 25yrs beat an early 55% hit.

Also to be honest, my kids are pretty frugal with no desire for fast cars or designer goods. The main reason I posed the question after being in bed for a week with a virus and needing something to take my mind off the cricket.

Once again thanks for the reply,


SB

[ursaminortaur]

Hi All,
having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids, I didn't expect the Raging Bull to charge through the lifetime limit. So, I accept that there is no way of avoiding the extra tax charges, but would it be better to take the lump sum out each year pay 55% tax and put it in an Isa. Also, is it possible to request payments from the lifetime excess?


As always thanks in advance,

SB

I'm not quite sure of the situation here. What do you mean by " having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids" ?

If you mean that you put the pension into drawdown using flexi-access by crystallising the pension pot and taking the 25% tax free lump sum then it doesn't matter whether what you have left in the crystallised pot has grown to be more than lifetime limit as it will only be tested again either on death or at age 75. That test will only look at what is in the pot at that time compared to what was left in the pot after taking out the 25% to determine the growth. Hence to avoid the lifetime excess charge all you need do is drawdown enough from the pot to avoid exceeding the lifetime limit, ie some or all of the growth which has occurred, before death or reaching age 75. That drawdown will be taxed at your marginal rate but that will be less than than the lifetime limit excess charge of 55%. There is no LTA test carried out when you drawdown funds from an already crystallised pension pot so there would be no 55% excess charged on those withdrawals even if the pot exceeded the lifetime allowance at that point all you will have to pay is your marginal tax rate on the withdrawals. (This is different from the situation with an uncrystallised pot where you use UFPLS to drawdown funds from the pot where an LTA test is peformed on every UFPLS drawdown.)

[Snowbadger]

Can't thank you enough for that explanation Ursa, I really did not get it! As Coleyfish used to say, he always explains things so that a five year old would understand. . Well definitely back to the drawing board.

Have a great bank holiday,


Snowbadger

[hiriskpaul]

Hi All,
having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids, I didn't expect the Raging Bull to charge through the lifetime limit. So, I accept that there is no way of avoiding the extra tax charges, but would it be better to take the lump sum out each year pay 55% tax and put it in an Isa. Also, is it possible to request payments from the lifetime excess?


As always thanks in advance,

SB

I'm not quite sure of the situation here. What do you mean by " having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids" ?

If you mean that you put the pension into drawdown using flexi-access by crystallising the pension pot and taking the 25% tax free lump sum then it doesn't matter whether what you have left in the crystallised pot has grown to be more than lifetime limit as it will only be tested again either on death or at age 75. That test will only look at what is in the pot at that time compared to what was left in the pot after taking out the 25% to determine the growth. Hence to avoid the lifetime excess charge all you need do is drawdown enough from the pot to avoid exceeding the lifetime limit, ie some or all of the growth which has occurred, before death or reaching age 75. That drawdown will be taxed at your marginal rate but that will be less than than the lifetime limit excess charge of 55%. There is no LTA test carried out when you drawdown funds from an already crystallised pension pot so there would be no 55% excess charged on those withdrawals even if the pot exceeded the lifetime allowance at that point all you will have to pay is your marginal tax rate on the withdrawals. (This is different from the situation with an uncrystallised pot where you use UFPLS to drawdown funds from the pot where an LTA test is peformed on every UFPLS drawdown.)

There will be no LTA test on death, either before or after 75. There will be an LTA test at 75 on the growth of the fund since crystallisation.

If the age 75 LTA test results in a charge, there is a choice between taking the excess as a lump sum after paying a 55% charge, or paying a 25% charge and leaving the rest of the excess in the SIPP. For many people and probably the OP, the best course of action is likely to be the latter. That way the excess is still protected from inheritance tax and can be drawn at the marginal rate. If the marginal rate is 20%, the total of the 25% charge and 20% income tax works out at an equivalent rate of tax of 40%. ie much better than paying the 55% charge.

[ursaminortaur]

Hi All,
having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids, I didn't expect the Raging Bull to charge through the lifetime limit. So, I accept that there is no way of avoiding the extra tax charges, but would it be better to take the lump sum out each year pay 55% tax and put it in an Isa. Also, is it possible to request payments from the lifetime excess?


As always thanks in advance,

SB

I'm not quite sure of the situation here. What do you mean by " having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids" ?

If you mean that you put the pension into drawdown using flexi-access by crystallising the pension pot and taking the 25% tax free lump sum then it doesn't matter whether what you have left in the crystallised pot has grown to be more than lifetime limit as it will only be tested again either on death or at age 75. That test will only look at what is in the pot at that time compared to what was left in the pot after taking out the 25% to determine the growth. Hence to avoid the lifetime excess charge all you need do is drawdown enough from the pot to avoid exceeding the lifetime limit, ie some or all of the growth which has occurred, before death or reaching age 75. That drawdown will be taxed at your marginal rate but that will be less than than the lifetime limit excess charge of 55%. There is no LTA test carried out when you drawdown funds from an already crystallised pension pot so there would be no 55% excess charged on those withdrawals even if the pot exceeded the lifetime allowance at that point all you will have to pay is your marginal tax rate on the withdrawals. (This is different from the situation with an uncrystallised pot where you use UFPLS to drawdown funds from the pot where an LTA test is peformed on every UFPLS drawdown.)

There will be no LTA test on death, either before or after 75. There will be an LTA test at 75 on the growth of the fund since crystallisation.

Yes sorry I assumed that since HMRC tested growth in a crystallised pot at age 75 they would also do so at death before age 75.
But surprisingly they seem not to do so.

https://www.retirement-planner.co.uk/231685/bernadette-lewis-drawdown-second-lifetime-allowance-test

If someone dies under age 75, any uncrystallised benefits paid as a lump sum or beneficiary drawdown are subject to an LTA test – then paid tax-free to beneficiaries. There is, however, no second LTA test on death for funds already in drawdown. In addition, there is no further test on death for any funds remaining in drawdown after age 75.

If the age 75 LTA test results in a charge, there is a choice between taking the excess as a lump sum after paying a 55% charge, or paying a 25% charge and leaving the rest of the excess in the SIPP. For many people and probably the OP, the best course of action is likely to be the latter. That way the excess is still protected from inheritance tax and can be drawn at the marginal rate. If the marginal rate is 20%, the total of the 25% charge and 20% income tax works out at an equivalent rate of tax of 40%. ie much better than paying the 55% charge.

If you are going to be taking it out and paying 20% tax then surely it is far better to do so before the charge is applied because of the age 75 test so that you really do pay just 20% rather than the equivalent of 40%.

[ursaminortaur]

I'm not quite sure of the situation here. What do you mean by " having retired six years ago and taken the advice of removing the lump sum and leaving the rest for the kids" ?

If you mean that you put the pension into drawdown using flexi-access by crystallising the pension pot and taking the 25% tax free lump sum then it doesn't matter whether what you have left in the crystallised pot has grown to be more than lifetime limit as it will only be tested again either on death or at age 75. That test will only look at what is in the pot at that time compared to what was left in the pot after taking out the 25% to determine the growth. Hence to avoid the lifetime excess charge all you need do is drawdown enough from the pot to avoid exceeding the lifetime limit, ie some or all of the growth which has occurred, before death or reaching age 75. That drawdown will be taxed at your marginal rate but that will be less than than the lifetime limit excess charge of 55%. There is no LTA test carried out when you drawdown funds from an already crystallised pension pot so there would be no 55% excess charged on those withdrawals even if the pot exceeded the lifetime allowance at that point all you will have to pay is your marginal tax rate on the withdrawals. (This is different from the situation with an uncrystallised pot where you use UFPLS to drawdown funds from the pot where an LTA test is peformed on every UFPLS drawdown.)

There will be no LTA test on death, either before or after 75. There will be an LTA test at 75 on the growth of the fund since crystallisation.

Yes sorry I assumed that since HMRC tested growth in a crystallised pot at age 75 they would also do so at death before age 75.
But surprisingly they seem not to do so.

https://www.retirement-planner.co.uk/231685/bernadette-lewis-drawdown-second-lifetime-allowance-test

If someone dies under age 75, any uncrystallised benefits paid as a lump sum or beneficiary drawdown are subject to an LTA test – then paid tax-free to beneficiaries. There is, however, no second LTA test on death for funds already in drawdown. In addition, there is no further test on death for any funds remaining in drawdown after age 75.

If the age 75 LTA test results in a charge, there is a choice between taking the excess as a lump sum after paying a 55% charge, or paying a 25% charge and leaving the rest of the excess in the SIPP. For many people and probably the OP, the best course of action is likely to be the latter. That way the excess is still protected from inheritance tax and can be drawn at the marginal rate. If the marginal rate is 20%, the total of the 25% charge and 20% income tax works out at an equivalent rate of tax of 40%. ie much better than paying the 55% charge.

If you are going to be taking it out and paying 20% tax then surely it is far better to do so before the charge is applied because of the age 75 test so that you really do pay just 20% rather than the equivalent of 40%.

These drawdown payments are income so if the OP is concerned about avoiding inheritence tax then this excess income can then be gifted on a regular basis to avoid inheritence tax using the exemption for gifts of surplus income

https://www.thisismoney.co.uk/money/pensions/article-5753831/How-avoid-inheritance-tax-giving-away-money-surplus-income.html

[Bouleversee]

Since when has one been able to leave pension funds to children without IHT being imposed? My late husband and I were not aware of it when he converted his Equitable Life drawdown into an annuity after the debacle and or (so far as I am aware) my self employed children when they put money into the state additional pension scheme rather than SIPPs. It would make me feel better (i.e. less stupid) if it hadn't come into force at that point.

[DrBunsenHoneydew]

Since when has one been able to leave pension funds to children without IHT being imposed? My late husband and I were not aware of it when he converted his Equitable Life drawdown into an annuity after the debacle and or (so far as I am aware) my self employed children when they put money into the state additional pension scheme rather than SIPPs. It would make me feel better (i.e. less stupid) if it hadn't come into force at that point.

Major changes to the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6 April 2015.

It is the age of person who dies at their date of death that affects the tax treatment of the benefits; there is no difference for crystallised and uncrystallised funds. However, a lifetime allowance check applies to uncrystallised benefits.

Drawdown pensions
On death before age 75 the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies.
On death after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary’s marginal rate.
On death after age 75 the benefits can be paid as a lump sum to a trust with a 45% tax charge.

Lifetime annuities
On death before age 75 any beneficiary can receive the payments tax-free.
On death after age 75 any beneficiary can receive the payments taxed at their marginal rate.

[Bouleversee]

Since when has one been able to leave pension funds to children without IHT being imposed? My late husband and I were not aware of it when he converted his Equitable Life drawdown into an annuity after the debacle and or (so far as I am aware) my self employed children when they put money into the state additional pension scheme rather than SIPPs. It would make me feel better (i.e. less stupid) if it hadn't come into force at that point.

Major changes to the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6 April 2015.

It is the age of person who dies at their date of death that affects the tax treatment of the benefits; there is no difference for crystallised and uncrystallised funds. However, a lifetime allowance check applies to uncrystallised benefits.

Drawdown pensions
On death before age 75 the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies.
On death after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary’s marginal rate.
On death after age 75 the benefits can be paid as a lump sum to a trust with a 45% tax charge.

Lifetime annuities
On death before age 75 any beneficiary can receive the payments tax-free.
On death after age 75 any beneficiary can receive the payments taxed at their marginal rate.

I am most grateful to you for taking the trouble to answer that question, which has been bothering me for some time. I am aware of the current rules but surprised that we were not alert to them at the relevant time, which might have led to a better choice, but now I know that they weren't in force then, and have no need to reproach myself. In fact it happened at the time when my husband was desperately ill (he died in Nov. 2016), some time after we had had to take the decision re the Equitable Life drawdown which was in 2007, and needless to say my attention was fully engaged otherwise at the time the change was announced and introduced.

At first glance, those details may look fair enough, though I wonder what is meant by any beneficiary in the context of an annuity. I am not aware (please correct me if I am wrong) that anyone other than a spouse can inherit an annuity and even then it is usually at a reduced percentage (2/3 in my case) unless the annuitant was prepared to reduce the initial income to get 100% spouse's benefit, and it dies with the spouse. In drawdown, the beneficiaries get the whole fund or its income and can then presumably leave it to their heirs in due course.

There is in my view a serious omission in this scenario: ISAs. Despite the fact that, pension fund contributions (leading to annuities in some cases) benefit from tax relief on the way in, whereas ISAs (which were at one time the best alternative to those who had no opportunity to join a pension scheme to save for retirement, which include myself) do not and are made from taxed income, there is absolutely no relief from IHT when it comes to leaving them to heirs, other than one's spouse, too late in my/most cases. What is the justification for this? I have asked my MP more than once but answer came there none.

I might also add another omission while I'm about it, another bad choice if only one had known. All those people who elected not to contract out of SERPS in favour of contributing to a SIPP must be feeling pretty sick. While they are alive, the benefit is barely increased, is subject to tax and after their death, nobody, not even the spouse, can inherit it, which wasn't the case when they made their election. What would the regulators say if that was a private company. Who did that simplification benefit?

TBH I really can't see why pension funds should not be subject to the same IHT rules as ISAs.

Who exactly are the OTS?

[DrBunsenHoneydew]

Major changes to the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6 April 2015.

It is the age of person who dies at their date of death that affects the tax treatment of the benefits; there is no difference for crystallised and uncrystallised funds. However, a lifetime allowance check applies to uncrystallised benefits.

Drawdown pensions
On death before age 75 the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies.
On death after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary’s marginal rate.
On death after age 75 the benefits can be paid as a lump sum to a trust with a 45% tax charge.

Lifetime annuities
On death before age 75 any beneficiary can receive the payments tax-free.
On death after age 75 any beneficiary can receive the payments taxed at their marginal rate.

... I wonder what is meant by any beneficiary in the context of an annuity. ...

It's not just a spouse that can get the ongoing benefit of a annuity after the annuitant has died.
They could nominate anyone as a "successor annuitant", though a spouse is commonest of course.
And an annuity can be set up to pay either a guaranteed minimum total amount or for a guaranteed length of time, should the annuitant die "early".
All such Joint life, nominee or successor’s annuities, annuity protection lump sums and ongoing income payments due under a guarantee period are tax-free income if the original annuitant was under 75 when they died, and taxable at margin if above 75. There is a special rule under which payments under a guarantee period may be subject to inheritance tax, which is another twist in these matters.

[Bouleversee]

Major changes to the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6 April 2015.

It is the age of person who dies at their date of death that affects the tax treatment of the benefits; there is no difference for crystallised and uncrystallised funds. However, a lifetime allowance check applies to uncrystallised benefits.

Drawdown pensions
On death before age 75 the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies.
On death after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary’s marginal rate.
On death after age 75 the benefits can be paid as a lump sum to a trust with a 45% tax charge.

Lifetime annuities
On death before age 75 any beneficiary can receive the payments tax-free.
On death after age 75 any beneficiary can receive the payments taxed at their marginal rate.

... I wonder what is meant by any beneficiary in the context of an annuity. ...

It's not just a spouse that can get the ongoing benefit of a annuity after the annuitant has died.
They could nominate anyone as a "successor annuitant", though a spouse is commonest of course.
And an annuity can be set up to pay either a guaranteed minimum total amount or for a guaranteed length of time, should the annuitant die "early".
All such Joint life, nominee or successor’s annuities, annuity protection lump sums and ongoing income payments due under a guarantee period are tax-free income if the original annuitant was under 75 when they died, and taxable at margin if above 75. There is a special rule under which payments under a guarantee period may be subject to inheritance tax, which is another twist in these matters.

Thanks again. I find it difficult to get my brain round that in that formerly the annuity rate was calculated on the basis of the age etc. of both the annuitant and the nominated surviving beneficiary I have no idea what happened if the latter died first. Are you saying that now, if the original nominated beneficiary dies another beneficiary can be substituted? Expensive for the insurance companies if a much younger person is substituted so unlikely to be that. In any case, the annuity presumably dies with that beneficiary whereas a pension (SIPP or drawdown) could pass down the line forever, so far as I can understand.