(Maximum income x 25) x 80 per cent x 100 / standard LTA = deemed reduction
Note also that if it is capped drawdown, the calculation uses the maximum capped income limit rather than the actual rate of income.
If it is flexi-access drawdown, it uses the maximum income in the drawdown year the fund was converted to flexi-access.
Case study 4
Pamela is a retired doctor with an NHS pension who has just turned 75. This currently pays her £32,000 each year.
She also has an uncrystallised self-invested personal pension (Sipp) valued at £200,000.
(£32,000 x 25) x 100 / standard LTA = LTA reduction of 77.66 per cent
This means Pamela has 22.34 per cent LTA available for the age 75 LTA test on her Sipp.
£200,000 x 100 / £1,030,000 = 19.41 per cent
In total, Pamela has used 97.07 per cent of her LTA. She will not incur a tax charge.
The type of situation where this is most likely to cause issues is where you have a client with a generous DB scheme, like Pamela, who has also built up a separate personal pension alongside that.
The standard LTA is set to increase each year by CPI.
If the scheme pension increases each year by more than CPI, or if the LTA moves back to a flat rate, it may be advisable to crystallise a small amount of the DC funds ahead of the age 75 test in order to ‘force’ the reduction early while the scheme pension income is lower.
Martin Jones is technical resources team leader at AJ Bell
