LSA calculation query pre 2006
Wildparaplanner
Member
Hi all,
We have a client who drew benefits pre-april 2006 (tax-free cash and then into capped drawdown, but never took any income)
They have an uncrystallised pension plan which was tested in 2019 when they turned age 75. As the drawdown fund was taken pre-2006, my understanding is this would not have been tested.
They are looking to access the tax-free cash from the uncrystallised plan. However, I am not sure how the calculation goes here. As the pre-2006 drawdown plan wasn't tested at age 75, but the uncrystallised plan was, was there a deemed BCE at this point or not for the drawdown bit?
How do I work out the clients LSA, given the uncrystallised age 75 test is disregarded, and we have a capped drawdown plan with no income being taken?
Thanks
Wild
Comments
To put some figures to it, I think there are only one of two outcomes here:
Scenario 1 - pre-2006 drawdown plan was tested in February 2019 at age 75 as a result of the age 75 test (a relevant BCE 5B at the time) being done on the uncrystallised plan:
Max GAD at the time = £24,868.76
25x = £621,719
80% = £497,375.20
LTA = £1,030,000
LTA used = 48.28%
Scenario 2 - pre-2006 drawdown plan was NOT tested in February 2019 at age 75 and first relevant BCE is today:
Max GAD now = £56,366.47
25x = £1,409,161.75
80% = £1,127,329.40
25% = £281,832.35
LSA used = £281,832.35
LSA remaining = £0
As you can see, the above is quite a difference in outcome depending on whether it is tested or not. Does anyone have any recollection of how this was dealt with when the age 75 test was conducted?
Hi,
Any pre-2006 pensions in payment, including capped DD, were tested at the first BCE that took place after A-Day.
That uncrystallised fund that got tested at age 75 (2019) will have triggered a BCE on the drawdown fund under the rules in force on that date, so I would go for scenario 1, and the disregard should apply.
BUT
I don't know if, because it was a pre-A-Day pension, it now gets tested as a RBCE in the new regime due to effectively never having been subject to an LTA test.
You can't apply for a TTFAC if there wasn't a BCE between 6/4/2006 and 5/4/2024. In this case, there was, but there also wasn't! You should ask the technical team at the scheme you're looking to take tax-free cash from, as they're ultimately going to sign it off. But then you'd think they would already know this, as they should have done the BCE at age 75 and be aware of the capped DD plan from that time.
Mr Fabi is correct in what he says.
For the purposes of LSA as there was no post 75 lump sums then the age 75 BCEs get ignored.
Your LSa will be £268,275 less 25% of the current value of the pre a day income
Hi Les,
Thanks, I understand the BCE 5B gets ignored, but what I am not sure about is whether the capped drawdown plan, which would have been tested as a result in 2019, has an associated LTA % used as at 2019 or not, for the purposes of reporting it now if taking PCLS.
As you can see from my two scenarios, the implications of getting it wrong could be quite detrimental from a tax point of view.
I think both your scenarios are right but there's a step between them that deleted the first one on 6/4/2024. i.e. today you're left with an LSA of £0.
And, as I have commonly seen - a hard query with someone about why a small crystallisation wasn't carried out in 2011/12 to capture the pre-A-Day value when the LTA was £1.8m
I think scenario 1 is correct. You should ask the scheme paying the benefits how much LSA they think the person has.
I think I found an example online which almost mirrors what I have going on. I also spoke to someone in a well known tech team, who corroborates the same:
https://professionalparaplanner.co.uk/technicalzone/transitional-calculations-for-pre-commencement-pensions/
There is also an interesting quirk which I wasn't aware of (and which affects my calculation) where the disregard is not calculated as you would expect. It is the amount that is disregarded, not the BCE 5/5A/5B that is disregarded. The below article explains:
https://www.linkedin.com/pulse/lump-sum-allowance-age-75-bces-disregard-dave-king-qusee/?trackingId=7FD1ZJ9GcKwZgLd/9RHUUw==
So in essence, it is scenario 1 for my example, but have altered the calculation to illustrate fully incorporating the quirk on the disregard:
Rewind to 2019:
LTA = £1,030,000
Uncrystallised fund tested at age 75 = £123,645
LTA used by BCE5B = 12.00%
Crystallised Capped Drawdown fund:
Max GAD at the time = £24,868.76
25x = £621,719
80% = £497,375.20
Deemed LTA used = 48.28%
Total LTA = 60.28% = no LTA charge
Fast forward to now (no lump sums taken between 75th birthday and 5th April 2024):
LSA=£268,275
Uncrystallised fund = £164,739.10
Standard Calculation:
Equivalent amount = £1,073,100 * 25% * (100-60.28%) = £106,558.83
Add back in the disregard = £123,645 * 25% = £30,911.25
LSA remaining = £137,470.08
TTFAC Calculation:
£268,275 - (25% * £497,375.20) = £143,931.20
In my example, there would be no benefit applying for a TTFAC as unlikely to ever exceed the remaining LSA on the standard calculation, but could in other cases.
@Wildparaplanner thanks for following up this is very useful!
Note - the quirky age 75 bit is subject to change when we get the latest LTA regs in Q1 2026