115 per cent - 100 per cent = 15 per cent (i.e. the percentage excess)
15 per cent x £1,030,000 = £154,500 (i.e. the monetary excess)
£154,500 x 25 per cent = £38,625
Janet therefore incurs a tax charge of £38,625.
Technically speaking, the client and scheme administrator are jointly liable for the charge. However, HM Revenue & Customs makes it clear in its guidance that it expects the funds to come from the scheme.
Ordinarily, therefore, the charge is paid by the administrator of the scheme in which the test (and excess) occurs. They will deduct it, report it and pay it to HMRC.
Planning points
If a client is member of more than one scheme, they will have more than one age 75 test.
The rules allow the member to decide the order of LTA tests occurring on the same day, which means they can effectively choose which scheme pays the charge.
This creates a bit of flexibility around paying the charge, and could be a useful planning point, particularly where one of the schemes is a DB scheme – the benefits from which are potentially more valuable than a DC scheme.
In terms of mitigating the charge, there is some scope with post-2006 drawdown funds to reduce the value of the funds that are tested at age 75.
A client could do this simply by drawing income payments.
The income payments will be subject to income tax, but if the client is a basic rate taxpayer, for example, then paying tax at 20 per cent (plus benefit of the personal allowance) might look more favourable than an LTA tax charge of 25 per cent.
Deemed LTA reduction by pre-2006 benefits
While pre-2006 benefits are not tested against the LTA at age 75, they can still have an impact, but only if the client has not taken any benefits since 2006.
In other words, where they have a pre-2006 pension in payment as well as some uncrystallised funds.
When a client in this situation comes to take benefits from the uncrystallised funds, it will trigger a one-off LTA reduction calculation. It is important to note that this is not an LTA test, and no tax charge can arise, but it will reduce the client’s available LTA for the new crystallisation.
This calculation can take place at any time, so it is not specifically an age 75 issue. If the client does not take benefits until age 75 though, the reduction calculation will take place immediately before the age 75 test.
It is important to be aware of this, as it is easily overlooked.
The calculation is based on the current maximum income available from the pre-2006 benefits. It works as follows:
(Maximum income x 25) x 100 / standard LTA = deemed reduction
If the pre-2006 pension is income drawdown, there is a slight variation in the calculation:
