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Our resident pensions expert Tom Selby explains the rules
Thursday 28 May 2020 Author: Tom Selby

Can you please explain how the lifetime allowance test at age 75 works? My fund is in drawdown and has been hit hard by the pandemic, so I’m tempted to withdraw some or all of it now. If I do this will the money I take out be tested?


Tom Selby,AJ Bell Senior Analyst says:

The amount you can save in a defined contribution (DC) pension such as a SIPP is controlled by two allowances – the annual allowance, which caps the amount you can contribute each year, and the lifetime allowance, which limits the amount you can take out.

The lifetime allowance is set at £1,073,100 for 2020/21 and rises each year in line with CPI inflation.

When you choose a retirement income route for some or all of your pension pot – such as entering drawdown, taking an ad-hoc lump sum or buying an annuity – you will use up some of your lifetime allowance. In pension rules the check on how much lifetime allowance you have used up is referred to as a lifetime allowance ‘test’.

There are 13 ‘benefit crystallisation events’ (crystallisation just means choosing a retirement income option such as drawdown) which can trigger a lifetime allowance test. Each test uses up a percentage of your available lifetime allowance.

For example, take someone with a £400,000 pension fund in 2020/21 who takes their 25% tax-free cash (£100,000) and puts the remaining £300,000 into drawdown. This would trigger two lifetime allowance tests.

The first test would be on the £100,000 tax-free cash. This would have used up 9.31% of their available £1,073,100 lifetime allowance (£100,000/£1,073,100).

The second test would be on the £300,000 put into drawdown. This would have used up 27.95% of their available lifetime allowance (£300,000/£1,073,100).

Note that the percentage of lifetime allowance used up is always to two decimal places and always rounded down.

Age 75 test

An additional lifetime allowance test will be carried out when you reach age 75, covering all funds you hold within your DC pensions. This test will be applied regardless of whether the funds have been crystallised or not.

With regards to any money invested via drawdown, the test simply compares the value of your total fund at age 75 with the value of your fund when you entered drawdown.

In the previous example, if the value of the drawdown fund increased from £300,000 to £350,000 by the time the person reached age 75, then the extra £50,000 would be subject to a lifetime allowance test.

If you exceed the lifetime allowance in a SIPP then you have two options: leave the excess in the SIPP and pay a charge of 25% on the funds, or take it out and pay a charge of 55%.

If tested at age 75, the lifetime allowance tax charge will always be 25%. In addition you’ll pay income tax on your money when you do come to withdraw it post-75.


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Please note, we only provide information 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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