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PCLS entitlement after the age 75 test, the member is deemed to be entitled to the amount of PCLS they could have withdrawn immediately before the age 75 test took place.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.
At the member’s first BCE after A-Day, a one-off calculation takes place to account for any pre-A-Day benefits. In other words, pre-A-Day benefits go through a one-off assessment for LTA purposes.
This is referred to as a ‘deemed reduction’ of available LTA. It is not a BCE or an LTA test, because it cannot result in a tax charge itself. However, it still reduces LTA available going into any other BCEs.
This is important to be aware of because the LTA test at age 75 could be that first post-A-Day BCE. For example, it is not uncommon to have a client with a DB scheme that they accessed at age 65 and a Sipp they had been building up on the side but had not touched.
The method for calculating the value of pre-A-Day funds is slightly different, the current monetary value is not used as this is not particularly indicative of the benefits the member has actually received, as they could have been taking income for a number of years.
