DB & Money Purchase Schemes - LTA

Good afternoon all,

I'm currently working on a case with a client who's currently aged 58 with pensions benefits in excess of the LTA - he does not qualify/hold any protection. He has two money purchase pension schemes valued at £1,058,670 (fully uncrystallised) and two DB pension schemes, with NRA of 60 and 65 respectively. The value of these DB benefits for LTA purposes are £33,010 and £123,960.

If the client opts to fully crystallise his money purchase pensions now using 98.7% of his LTA, what happens when his DB pensions commence at the scheme's NRA as he will go over his LTA? How will the tax be paid and in this scenario, does he still have the option of either paying the LTA tax charge of 25% or 55? not sure how this would play out in practice?

Also wondering how it would work at the second LTA test at age 75? So if the client fully crystallised his money purchase pensions now and the opening FAD value was £794,002.50 (after the payment of 25% TFC), would the same principle apply whereby if stripped out all the growth (still valued at £794,002.50) at age 75 then there wouldn't be any further LTA tax to pay?

Really appreciate any help on this.

Kind regards



  • Hi,

    Scheme is jointly responsible for the payment of LTA tax and in practical terms will always pay it on behalf of the member. In a DB scheme, the member will have to commute scheme pension to pay for the LTA charge, which will be 25% of the excess monetary value. Depending on the commutation factor, this could be costly.


    • LTA excess is £45,000 (which is a scheme pension of £2,250 multiplied by 20).
    • Scheme commutes pension for cash at the rate of 1:15. Member has to commute (loses) £3,000 of scheme pension to pay the LTA tax charge.
    • Scheme commutes pension for cash at the rate of 1:30. Member has to commute (loses) £1,500 of scheme pension to pay the LTA tax charge.

    It's therefore almost always a better idea to crystallise only as much of the DC so there is a margin for the DB to be within the LTA when they're tested. Waiting until you know what's going to happen with the DB and what the client's situation is at the time (i.e. what is their known need for secure income at that point) is better for planning. Unless you have a client who absolutely needs £250k of PCLS now and has no other options?

    The BCE 5a test looks at the growth and tests it against the remaining LTA, with the excess taxed at 25% (if retaining in FAD) or 55% (if drawing a lump sum). If you strip out growth as taxable income (and can keep this to basic rate, and it will be spent, rather than accumulated in an asset attracting IHT) then you can avoid a further LTA charge at 75.

    There would need to be very specific requirements for a large amount of cash that couldn't be had elsewhere for me to recommend leaving those two DB schemes in no man's land from an LTA perspective.

    Benjamin Fabi 
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