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Where Taxpayers and Advisers Meet

Does an LTA Excess Lump Sum count as Income?

RichardS-UK
Posts:3
Joined:Tue Apr 14, 2020 1:07 pm
Does an LTA Excess Lump Sum count as Income?

Postby RichardS-UK » Tue Apr 14, 2020 2:11 pm

I suspect that the answer to this question is "no" but I cannot find a clear answer online.

In brief, for the last few months I have drawn down a regular monthly payment from my LTA-exceeded DC fund. The provider deducts LTA tax at 25% and I pay income tax at 40% upon receipt. However, if I continue to do this during this new tax year, I will start to lose my Personal Allowance as I will exceed £100k adjusted net income. This will push my effective marginal tax rate up to 70%.

I am hoping that if I take an equivalent sum to the 12 monthly payments out as an LTA Excess Lump Sum, then I will just pay 55% tax and my Personal Allowance will be preserved.

If I am correct, I'm surprised that the many websites covering the pros and cons of LTA-exceeded monthly draw down versus lump sum don't seem to mention this issue?

Richard

ben_power
Posts:81
Joined:Tue Feb 27, 2018 8:34 pm

Re: Does an LTA Excess Lump Sum count as Income?

Postby ben_power » Mon Jul 06, 2020 10:49 pm

As you correctly state, you have 2 choices, draw the excess above the LTA as 'income' which is attractive to a non-taxpayer or basic rate taxpayer as the LTA charge of 25% + your marginal rate of either 0% (up to £12,500 personal allowance) or 20% (£12,500-£50,000) means a maximum tax charge of 45%. The other choice is to take the 'whole' amount above the LTA as a lump sum and pay 55%. You can't draw 'annual lump sums' as this is clearly income paid annually. Nice idea though.

RichardS-UK
Posts:3
Joined:Tue Apr 14, 2020 1:07 pm

Re: Does an LTA Excess Lump Sum count as Income?

Postby RichardS-UK » Mon Oct 26, 2020 9:47 am

Thank you for your response.

Please could you link to any articles which state that the entire fund which is above the LTA must be taken as one lump sum all at the same time?

My pension fund provider appears to be prepared to allow me to draw-down a lump sum which is less than my entire excess-LTA fund. I have not actually actioned my lump-sum draw-down request yet, so perhaps they are yet to realise that it is not permitted.

Richard

ben_power
Posts:81
Joined:Tue Feb 27, 2018 8:34 pm

Re: Does an LTA Excess Lump Sum count as Income?

Postby ben_power » Mon Oct 26, 2020 2:19 pm

Sorry, my previous reply wasn’t particularly helpful. In reality it’s not going to make a difference.

By way of example:

If you took income of £10,000 from the SIPP (in excess of the LTA) you would pay (at source) 25% tax leaving you with £7,500 of which as a higher rate taxpayer you would pay 40% tax on (£3,000). The total tax would therefore be £5,500 or 55%.

Information from the ‘Prudential Advisor Zone’

Lifetime Allowance excess

Q. My client has no Lifetime Allowance (LTA) available. Can they take the excess funds above the LTA as a lump sum from their uncrystallised arrangement or drawdown arrangement?

A. This is possible from uncrystallised funds. This type of lump sum is called is called a Lifetime Allowance Excess Lump Sum. It can be paid as long as the member is under age 75 and the scheme allow it (NB a scheme is not obliged to pay a Lifetime Allowance Excess Lump Sum where their scheme rules do not allow this).

It is not possible to pay a Lifetime Allowance Excess Lump Sum if the member is 75 or above, nor can it be paid from a drawdown arrangement. The member can only draw income from their drawdown arrangement and the income taken will be taxed at their marginal rate.

A Lifetime Allowance Excess Lump Sum is a Benefit Crystallisation Event (BCE6) and this type of lump sum is subject to a 55% LTA tax charge on the LTA excess which the scheme will deduct before paying the lump sum (except where legislation does not permit this, eg from GMP funds).

For example, if the member has no LTA available, an uncrystallised money purchase pot of £100,000, and requests this to be paid as a Lifetime Allowance Excess Lump Sum, the scheme will deduct an LTA charge of 55% (i.e. £55,000) and pay the remaining £45,000 to the member. The Pensions Tax Manual provides full details of the conditions for a Lifetime Allowance Excess Lump Sum, as well as an example of how this can be paid in relation to a Defined Benefit scheme.

RichardS-UK
Posts:3
Joined:Tue Apr 14, 2020 1:07 pm

Re: Does an LTA Excess Lump Sum count as Income?

Postby RichardS-UK » Mon Oct 26, 2020 6:05 pm

Thank you.

But I'm still not clear that just because I have no LTA and an uncrystallised pot, that I have no option but to crystallise the entire pot in one go.

In the second Prudential example you quote, what if the fund holder had asked only for £50k of the £100k to be paid as an LTA ELS and wished for the other £50k to remain invested?

Part-crystallisation is certainly permitted under the rules as my provider has already done that with part of my pot, which they paid to me over a period of 12 months, as I requested. The only part of my pot that was crystallised was the part they transferred into a separate draw-down pot from which the monthly payments were made. 25% was deducted by the provider upon transfer to the draw-down pot and I paid 40% each month as the payments were made to me.

The remainder of my pot was not in the draw-down arrangement so I would not be taking the lump sum from a draw-down arrangement, as referred to in the first Prudential example.

I could avoid taking a regular LTA ELS as that would, indeed, look like income, as you say. But if I took a lump sum in 2021/22 and then another in 2024/25, it could hardly be described as "income" in the conventional sense, but would be separate lump sums.

Richard


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