PART 3 - WHAT HAPPENS IF YOU DON’T EXPECT TO TAKE YOUR PENSION BENEFITS ALL AT THE SAME TIME? AND WHAT ARE THE IMPLICATIONS OF MOVING FUNDS INTO DRAWDOWN?
So far in this four-part series about the pension Lifetime Allowance, Richard Wadsworth, Director, Glasgow, has reviewed the basics of the LTA – what it is, how you measure your funds against it, and when might be a good time to do so.
We’ve also looked at the different rates of tax applicable to funds
falling within the LTA and outwith it.
Now, in Part Three, we consider two more important scenarios: what happens if you don’t take your pension benefits all at the same time? And what happens if you move funds into drawdown?
PENSION LIFETIME ALLOWANCE (LTA)
What if I don’t expect to take my pension benefits all at the same time? How does the LTA work in that case?
Every time funds are tested against the LTA (known as a ‘crystallisation’), a percentage of the LTA is used, leaving any remaining balance available for further crystallisations. It is important that good records are kept to be able to keep on top of this.
So, let’s take the example (for simplicity’s sake) of the LTA being £1m and your pension funds being worth £1.2m. If you were to take benefits from £600,000 of funds, you would use up £600,000/£1m of the LTA – 60% – leaving 40% of the LTA for further crystallisations.
That 40% would then be applied to whatever the value of the LTA is at the point of further crystallisations, which may be more or less than the remaining £400,000 at the time of the first crystallisation. To give an example: if the LTA had increased from £1m to £1.5m, your remaining LTA would be 40% of that, equalling £600,000 and your remaining funds would be measured against that figure (not the £400,000 figure as it was at the time of the first crystallisation).
What if I move funds into drawdown? What are the LTA implications of that?
When funds are moved into drawdown, by which we mean a tax-free lump sum is taken and the remaining funds are put into a pot which allows you to withdraw a taxable income, that is a ‘crystallisation event’ to the value of the amount moved into drawdown.
Let’s say you are 60 and want a lump sum of £250,000 to buy a Lamborghini (that was the example mentioned at the time the pension rules last changed in 2015) and help your children move home.
A downloadable PDF of this article is available, here.
It can be a challenging subject at first glance, but hopefully, if you’ve been following this four-part series you will be starting to notice that a few simple questions can help steer you in the right direction with regards to assessing your own particular circumstances. In our fourth concluding part, we recap some of the main points and answer a final important question: what can you do now?
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