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LTA test at 75 with more than one drawdown plan

Gustavo_FringGustavo_Fring Member
in Technical stuff

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

Hello, I'm reading this article as we have a client in this situation and it states:

If someone has more than one drawdown plan at age 75, each plan is tested separately. The charge is based on the total of any increases in drawdown values, ignoring any plans that have decreased in value. There is no opportunity to mitigate any charge by offsetting a ‘loss’ on one drawdown plan with a ‘gain’ on another.

I'm struggling with the significance of testing each plan separately. What difference does it make when assessing a potential LTA charge for a client in this situation vs aggregating it?

Thanks!

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Comments

  • SA96SA96 Member
    edited April 2021

    Could it be that you could have a scenario where a client has two plans, one has risen by £40,000, but the other has fallen by £50,000. According to that article, he still has to pay the LTA charge on the plan that has grown by £40,000.

    Whereas if everything was under one plan, his sole plan would have actually decreased by £10,000. Thus not creating an LTA charge?

    Never come across this point about each plans being tested separately, good thread. Wonder if anyone can shed some light?

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  • Gustavo_FringGustavo_Fring Member

    I think you may be correct.

    In our client's scenario, he has used 99.94% of his LTA. He has a small pension pot (£40Kish - all crystallised) in cash, which he is drawing down upon and depleting until it runs out. He also has a large SIPP, invested with a DFM, which is valued at £1.4M - all crystallised. Growth on the SIPP means this will all be tested against the LTA at 75 and there will be a charge.

    For him there appears to be no significance between testing the pensions separately or aggregating them??

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  • Gustavo_FringGustavo_Fring Member
    edited May 2021

    Hi, as a follow up, this is the summary, after some help from the superb Techlink.

    You have Individual Protection 2014 and an LTA of £1.5M.

    Standard Life

    • The fund value was £212,000 when £53,000 PCLS was taken at end of 2018.
    • This left £159,000 as a crystallised fund.
    • 2 x £65,000 income payments have been taken since.
    • The fund value is now circa £29,000 and is held in cash.

    James Hay

    • The fund value was £1,558,000 when £322,000 PCLS was taken at end of 2018.
    • This left £966,000 crystallised and £270,000 uncrystallised = £1,236,000.
    • No income drawn since.
    • The fund value is now £1,136,816 (crystallised) and £284,204 (uncrystallised), invested with Vestra.

    LTA treatment

    The plans will be treated separately for the LTA test at 75. The following shows how treating the plans separately does make a difference. For ease of illustration, I have assumed zero growth between now and age 75.

    • As the value of the Standard Life pension is below the amount designated into drawdown, there is no growth to test against the LTA at age 75.
    • James Hay – the crystallised fund has increased by £170,816 (£1,136,816 - £966,000) and so that is the amount tested at age 75.
    • In addition, the uncrystallised funds will also be tested i.e., £284,204. Therefore, the total tested is £455,020.
    • If you had taken more income from James Hay, rather than Standard Life, then the LTA charge could have been reduced at age 75.
    • If the pensions were consolidated pre-crystallisation, then the figures would be aggregated, and the amount tested would be the total value of the crystallised plans £1,165,816 – £1,125,000 = £40,816 + £284,204 = £325,020.

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  • SA96SA96 Member

    Thank you for that, you learn something new every day!

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  • richallumrichallum Administrator

    This is a very good thread.

    Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern. 

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  • Gustavo_FringGustavo_Fring Member

    I'm glad people are finding it useful. It was nearly an embarrassing situation where the client appeared to know more about the LTA testing minutiae than us - I think we've got away with it though!

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  • Sam_TSam_T Member

    Morning

    I thought I would resurrect this thread in the hope someone could apply their knowledge to another age 75 LTA test case.

    I have a client with £1.8 million protected LTA - he has used 63% to date. He has already passed his 75th birthday. He doesn't need any more income or PCLS and he has no spouse or beneficiaries (it all goes to charity on his death).

    He has crystallised funds, which using BCE5A to test the growth, will use a further 8% of his LTA.

    My problem is with his uncrystallised funds which exceed his remaining LTA on the BCE5B test, so there will be a 25% LTA tax charge.....the issue is these funds are split over 4 different plans.

    • Plan 1 is no issue as it is a SIPP and allows drawdown and can be held beyond 75.
    • Plans 2-4 are old school PPs and RACs (some With Profits with decent g'teed bonus rates) - these do not allow drawdown.

    I am in contact with the providers of plans 2-4, but they are scratching their heads too (helpful) - my question to them is what happens to the funds net of the LTA tax charge? Can they be retained within the existing plans even though they do not allow drawdown, as the funds will be 'designated as drawdown' by HMRC post the LTA test (we don't really want to transfer out as the client will lose the g'teed bonus rates).

    Has anyone any experience of this, or any ideas as to what happens next!

    Thanks

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