Case study 2
Sam took benefits in 2011. He received a PCLS of £100,000 and he designated £300,000 into income drawdown.
These two BCEs used up 22.22 per cent of his LTA. Sam has just turned 75. His drawdown fund was valued at £400,000.
(£400,000 - £300,000) x 100 / £1,030,000 = 9.70 per cent.
In total, Sam has now used up 31.72 per cent of his LTA. Assuming he does not have any other pension schemes elsewhere, Sam will not have to pay an LTA tax charge as his LTA usage is under 100 per cent.
It is worth noting as well here that there is no adjustment in the calculation for the fact that the initial benefits were tested under a different standard LTA.
When Sam took his benefits in 2011, for example, the standard LTA was £1.8m. It is now £1.03m. Unfortunately, Sam does not retain the £1.8m for future LTA tests in respect of those funds.
Another point to make is that the calculation says amount(s) designated to drawdown. The rules allow you to make multiple designations into the same income drawdown arrangement within a scheme.
If a client has been taking benefits in stages, all of those designations must be aggregated for the purpose of the calculation.
Some pension schemes work differently and create a new drawdown arrangement for each new designation. In this situation, the test is carried out on each individual arrangement.
Unfortunately, if the calculation on one arrangement returns a negative figure, it does not mean the client gets some LTA back.
There is no offsetting across arrangements, and the overall LTA usage could end up being higher in a multiple-arrangement scheme than in a single-arrangement scheme.
Calculating and paying the tax charge
If the LTA usage at age 75 takes a client over 100 per cent LTA usage, they will incur an LTA tax charge on their excess LTA usage over 100 per cent.
The tax charge is calculated as 25 per cent of the excess. There is no option to take the excess as a lump sum and pay a 55 per cent tax charge as you could if you exceeded the LTA taking a PCLS and drawdown pre-75.
If the client holds any of the forms of LTA protection (e.g. enhanced protection, fixed protection), they can use it to mitigate the charge.
In order to work out the charge, we take the percentage LTA usage over 100 per cent and apply it to the standard LTA. We then calculate 25 per cent of this figure.
Case study 3
Janet has already used 85 per cent of her LTA. At the age 75 test, she uses a further 30 per cent.
In total, she has used 115 per cent of her LTA.
