AJ Bell pensions expert Tom Selby explains how the system works
Thursday 19 Dec 2019 Author: Tom Selby

My SIPP is currently worth £900,000. If I crystallise the fund into drawdown today, will that mean I avoid a lifetime allowance charge if it subsequently grows in value above £1,055,000?


Tom Selby AJ Bell Senior Analyst says:

There are a number of ‘benefit crystallisation events’ which HMRC uses to test how much of your available lifetime tax-free pension savings allowance you have used up.

If you exceed the lifetime allowance, a charge of 55% will be levied on lump sum withdrawals, or 25% where you allocate the excess to provide an income, which is then taxable when taken.

If we take your example of crystallising a £900,000 pot in the 2019/20 tax year, a quarter of this (£225,000) will be available tax-free, with the remaining £675,000 going into drawdown.

Once in drawdown, this money can be left invested, drawn as an income or taken as a single lump sum. Note any withdrawals above your tax-free lump sum will be taxed as income.

In this example, putting the entire fund into drawdown will use up 85.3% of the £1,055,000 lifetime allowance (£900,000/£1,055,000), meaning 14.7% of your lifetime allowance remains intact.

This might not be the end of the story, however, as a second lifetime allowance test will be applied at age 75. This test will take account of any fund growth you have enjoyed in the intervening years, less any income taken.

Let’s assume the £675,000 fund designated to drawdown enjoys strong growth and is valued at £875,000 by age 75. If the lifetime allowance has increased in line with CPI inflation to £1,200,000 at that point, then the second test will apply to the difference between your fund value when it was initially crystallised and your fund value at age 75.

In this case, that means an extra £200,000 (£875,000 - £675,000) needs to be tested against the new, higher lifetime allowance of £1,200,000, meaning you would have used up 16.66% of your allowance. As you would only have had 14.7% of your lifetime allowance left from the first benefit crystallisation event, a lifetime allowance charge would be applied to the excess.

Note that where a lifetime allowance charge is applied at age 75, HMRC rules stipulate   the funds must be used to provide a taxable income and therefore the lifetime allowance charge of 25% applies (rather than 55% if taken as a lump sum before age 75).

One final caveat: if you have successfully applied for one of the seven forms of transitional protection created since ‘A Day’ in April 2006, you might be entitled to a higher lifetime allowance. You can read more about these protections here


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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