View more on these topics

Neil MacGillivray: Don’t be afraid of the lifetime allowance charge

I was recently reading an article on the “downsides of a £1m pension” and my first thought was… if only.

The total tax take for HM Revenue and Customs from the lifetime allowance charge has increased exponentially from £7m in 2008/09 to £110m in 2016/17. But I find people’s reaction to deeming themselves possible “victims” of this somewhat extreme, in that many stop funding their pension or alternatively adopt a low-return portfolio to minimise any excess. My natural reaction to this has always been it is better to get at least 45 per cent of something than 100 per cent of nothing and individuals who find themselves with this potential dilemma should seek financial advice.

Neil MacGillivray: Identifying the lifetime allowance headroom

In the situation where the individual had fully utilised their LTA but still had uncrystallised funds, if they were to crystallise those funds before they reached 75 they would have two possible choices. The first is to retain the excess within their pension, known as a retained amount, and on which there is a tax charge at a rate of 25 per cent. For example, if the individual with a money purchase arrangement crystallised £100,000 over their LTA and designated it to drawdown, the drawdown fund would be netted down to £75,000. Any income taken thereafter from the drawdown fund would be subject to tax at their marginal rate of income tax.

The other option available, subject to the scheme allowing it, is to take the excess over the LTA as a lifetime allowance excess lump sum, where the tax charge is at a rate of 55 per cent. Again, using the £100,000 chargeable amount example from a money purchase arrangement, the individual would have a net payment of £45,000 made to their bank account. For this type of lump sum to be paid, the individual must be between the normal minimum pension age of 55 and age 75. 

Neil MacGillivray: Death benefit disparity

However, it can be paid earlier where the ill health condition is met or the individual has a protected pension age. The opportunity to take a lifetime allowance excess lump sum ceases at age 75 as all the individual’s benefits, whether crystallised or not, will be tested through a benefit crystallisation event 5 and/or BCE 5B, with any excess having to be retained within the pension arrangement. Any resulting tax charge is therefore levied at a rate of 25 per cent.

The original premise (when the standard LTA reached £1.8m) was that someone with an LTA issue was very likely to be at least a higher-rate taxpayer and so either option was effectively financially neutral. 

However, with the standard LTA now £1.03m, a number of individuals who find themselves with an LTA issue are possibly just basic-rate taxpayers or at least can manipulate their income to remain so. 

The following example highlights the implication of this for the LTA charge.

Case study

Rio, 70, is retired and has fully utilised his LTA. He has £200,000 in uncrystallised funds in his SIPP. He is a basic-rate taxpayer with taxable income of £30,000 in the current year and so has headroom of £16,350 before being subject to higher-rate tax. Rio needs to realise around £10,000 to carry out work in his home and is considering taking capital from his uncrystallised funds.

Option one: Lifetime allowance excess lump sum

  • Amount crystallised – £22,222, LTA charge at 55 per cent
  • Net amount – £9,999.90

Option two: Retained amount

  • Amount crystallised – £16,666, LTA 
         charge at 25 per cent
  • Drawdown payment with income
           tax at 20 per cent – £12,499.50
  • Net amount – £9,999.60
  • Effective rate of tax of 40 per cent

If Rio paid higher-rate tax, then under option two he would have had to crystallise £22,222 as his LTA charge would be £5,555.50, with income tax of £6,666.60, leaving him with a net amount of £9.999.90. 

In this type of scenario, from firstly a tax perspective, option two appears the better choice for basic-rate taxpayers. 

Secondly, from a future returns perspective there is £5,556 extra in his pension, albeit uncrystallised, that can attract potential future growth.

Even in scenarios where the individual paid higher-rate tax, the second option may still be prudent for the simple reason that once the money is removed from the tax advantageous pension wrapper it potentially becomes subject to inheritance tax – which is sometimes omitted in articles on this subject. 

In a future article, I hope to cover this final point in more detail, along with some of the other implications of the two options.

Neil MacGillivray is head of technical support at James Hay



Quilter Investors chief: ‘We are not here to sell funds based on performance’

Quilter Investors chief executive on designing funds advisers want rather than giving the hard sell Anyone who thinks rebranding is marketing speak for simply changing a company’s name, think again. As Quilter Investors chief executive Paul Simpson will testify, there is much more to it. Not only does it entail strategic and marketing decisions – […]


Lifetime allowance 2018/19 increase confirmed but pensions absent

The Government has confirmed that the lifetime allowance 2018/19 will rise in line with inflation, but savers have been offered little else in the Autumn Budget. The lifetime allowance will increase from £1m to £1,030,000 to match CPI from 2018/19.  Though the maximum amount the can be saved each year into a Junior Isa or […]


Almary Green confirms merger with Norwich IFA Smith & Pinching

Almary Green, the advice firm led by Carl Lamb, has confirmed a merger with Smith and Pinching Financial Services, Money Marketing can reveal. In September Money Marketing reported Almary Green staff visited the Smith and Pinching offices, and there were discussions around a merged firm being floated on AIM. At that time the Norwich-based firms confirmed […]

Platform costs

How low can platform costs go?

Will technology drive fees below 10 basis points? Downward pressure on fees and charges has been affecting all corners of the retail investment market, with experts now questioning exactly how low pricing can go when it comes to adviser platforms. However, finding efficiencies must be balanced with the ability to run a viable business, as […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm