Because of this, the rules provide us with a different methodology. This involves taking the maximum income from the pre-A-Day benefits and multiplying it by a factor of 25. This produces a monetary value that we can use for the purpose of this one-off LTA assessment.
The full calculations look like this:
Max income x 25 = monetary value.
(Monetary value)/(standard LTA) x 100 = deemed reduction.
But note that for income drawdown the first part of the calculation looks like this:
(Max income x 25) x 80 per cent = monetary value.
Case study 3
Charlotte has a Sipp from which she first took benefits in 2005. She took PCLS of £110,000 and designated £330,000 into drawdown.
She has just turned 75. Her fund split as at her 75th birthday is as follows:
- Uncrystallised arrangement: £278,000.
- Capped drawdown arrangement: £350,000.
The maximum income from her capped drawdown arrangement is £37,080.
The capped arrangement is pre-A-Day so is not tested, however, as this is the first BCE since A-Day the deemed reduction calculation takes place.
Deemed LTA reduction:
£37,080 x 25 x 80 per cent = £741,600.
£741,600 ÷ £1,073,100 x 100 = 69.10 per cent LTA reduction.
100.00 per cent – 69.10 per cent = 30.90 per cent LTA remaining.
This means Charlotte has 30.90 per cent LTA available for the age 75 LTA test on her Sipp.
Uncrystallised funds BCE 5B:
£278,000 ÷ £1,073,100 x 100 = 25.90 per cent.
In total, Charlotte has used 95 per cent of her LTA. She will not incur a tax charge.
The final test
Age 75 will be the final LTA test for most. The only BCE that can be triggered after an individual’s 75th birthday is where a scheme pension in payment is increased beyond the permitted margin.
Any defined benefits already in payment before age 75 do not face a second LTA test at the age 75. There is a separate test, BCE 3, if there is a significant increase in benefits outside of the normal annual increases, but no automatic test on reaching age 75.
Planning ahead
There is no getting around the LTA test at age 75, however forward planning could potentially mitigate the charge.
Clients with funds in drawdown pre-75 could reduce their fund value simply by taking income payments. These payments would be subject to income tax but depending on the client’s overall tax position there could be a saving versus the 25 per cent LTA charge at age 75.
For example, a basic rate taxpayer with personal allowance available would make a saving paying income tax at 20 per cent on anything over the personal allowance compared to the 25 per cent charge on the LTA excess. This would of course draw the funds into the client’s estate, losing the IHT benefits of the pension.
Where LTA tests occur on the same day the rules allow for the member to choose the order in which they are applied. So, for a member with multiple schemes at age 75 they can effectively choose which scheme pays any LTA charge resulting from the age 75 test.
