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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

AJ Bell pension expert Tom Selby examines the case of a reader who has already paid some lifetime allowance tax charges
Thursday 27 May 2021 Author: Tom Selby

I am age 60 and retired. I have a self-invested personal pension which I crystallised fully in 2017. The pension was valued at £2.2 million, and I had a lifetime allowance of £1.8 million. I paid a lifetime allowance charge of around £100,000 and took a £450,000 tax-free lump sum, which left around £1.65 million in the SIPP in drawdown funds.

This is now worth £1.7 million, and I have taken £50,000 in income from it. What will be the lifetime allowance charge at age 75?

I also have another SIPP worth £850,000 which I haven’t touched. What will be the lifetime allowance impact at age 75 for this part of my retirement savings? Are the two SIPP values independent or amalgamated?


Tom Selby, AJ Bell Senior Analyst says:

While the pensions lifetime allowance is currently set at £1,073,100 – and will remain at this level for the next few years at least – it was previously as high as £1.8 million.

Anyone who had already saved into a pension under the previous higher allowances were able to lock in the higher allowance by applying for ‘protection’, which I suspect is what you have done. More details on protection can be found here

These events include taking your 25% tax-free cash, turning your pension into a retirement income (e.g. by entering drawdown or buying an annuity) and reaching your 75th birthday. If you use up all your lifetime allowance, the excess over the lifetime allowance will be subject to a charge of either 55% (if it is taken as a lump sum) or 25% (if it is left in the pension).

When you reach age 75, there will be a test against your drawdown funds, and another test against your uncrystallised SIPP pension – the pension you have not touched.

For the drawdown pension the scheme will simply compare the value at your 75th birthday to the value when you entered drawdown.

If the value has increased since you crystallised it – as it appears is the case with your fund – the excess will be subject to a lifetime allowance charge of 25%. It is possible to take withdrawals before your 75th birthday to reduce or eliminate the impact of this charge, although these withdrawals will be subject to income tax at your marginal rate.

As mentioned above, your uncrystallised funds pension will also be subject to a lifetime allowance test at age 75.

Given you have already used your entire £1.8 million lifetime allowance, the full £850,000 held within the untouched SIPP will be subject to a lifetime allowance charge of 25%.

Both the pension scheme member and the scheme administrator are responsible for ensuring any lifetime allowance charges due are paid to HMRC. Each pension provider will independently carry out the test at age 75 on the funds they administer.

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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