The LTA charge that applies at the point of the age 75 tests is always 25 per cent on the excess above the LTA.
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.
In nearly all cases the provider will deduct the tax charge from the pension, pass this to HM Revenue & Customs and adjust the benefits accordingly.
Cast study 2
Luke reaches age 75 on May 6 2022. He has an uncrystallised fund valued at £1,500,000. He has no transitional or scheme-specific protection and has had no previous BCEs, meaning he has not used up any of his LTA yet.
Age 75 test:
Uncrystallised funds BCE 5B.
£1,500,000 ÷ £1,073,100 x 100 = 139.78 per cent.
In total at age 75 Luke has used 139.78 per cent of his LTA.
139.78 per cent – 100 per cent = 39.78 per cent (the percentage excess).
39.78 per cent x £1,073,100 = £426,879.18 (the monetary excess).
£426,879.18 x 25 per cent = £106,719.80.
Luke therefore incurs a tax charge of £106,719.80 that the scheme administrator will deduct from the funds and pay to HMRC.
One further point to consider for Luke is his remaining PCLS entitlement, as the different rules slightly overlap here. PCLS entitlement is defined in relation to a person’s remaining LTA. Specifically, PCLS entitlement is a quarter of their remaining LTA.
Pre-75 the member will be using up both their LTA and PCLS entitlement and will run out of both at the same time. But at age 75, they will have used up LTA entitlement without taking PCLS. If you carried on defining their PCLS entitlement as a quarter of their remaining LTA, they would lose PCLS entitlement at 75.
When taking benefits after age 75, the rules have to work differently to make sure the PCLS entitlement is maintained. Although taking benefits after turning 75 is not an official BCE, you still have to work out a ‘deemed’ amount of remaining LTA to work out the PCLS entitlement.
When calculating the remaining PCLS entitlement after the age 75 test, the member is deemed to be entitled to the amount of PCLS they could have withdrawn immediately before the age 75 test took place.
The maximum PCLS from uncrystallised funds is still calculated as 25 per cent of available LTA. However, it ignores any LTA used at 75.
So, for Luke, he would still have his full PCLS entitlement of £268,275 post-75 (25 per cent of £1,073,100) even though he has no available LTA.
Before A-Day
Before 2006, the LTA did not exist. However, pension benefits in the form of lifetime annuities and final salary scheme pensions had existed for decades – even income drawdown has been around since 1995.
Therefore, there were hundreds of thousands of pension scheme members who had taken benefits from their pensions but who had never had their benefits assessed against the new LTA.
From a technical perspective, pre A-Day benefits are largely ignored for LTA purposes. However, those members who started taking benefits do not get away with it.