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Kirk Rice Blog

Lifetime Allowance Tax Liability At 75 Years OldWritten on December 2, 2019 by Kirk Rice LLP

Lifetime Allowance Tax Liability At 75 Years Old
Financial Services Questions

The Question:

I am 74 and manage my investments inside my SIPP (self-invested personal pension) and have a letter referring to tax I need to pay at age 75. What is going on?

Kirk Rice LLP answers:

How Simplified Became Complicated – If you self-manage your own pension how do you keep up to date with the changes and ensure you do not pay too much tax? Lifetime Allowance changes are key.

You took tax-free cash in 2011 and in Capped Drawdown since. The pension fund was worth £1.7m which provided a pension commencement lump sum (PCLS) of £425,000 leaving a fund of £1,275,000 for income drawdown. However, you do not take much income out as you have a trading business, which usually provides enough income for your needs. The Lifetime Allowance was £1.8m at that time, and the pension administrator sent you notices about protecting the lifetime allowance, but you never did.The pension owns a commercial property which is valued at £1.4m today (was worth £1.1m in 2011). You have a good tenant and have recently settled a new 5 year lease.

In 2015 when the new flexi access drawdown rules started, you decided it better to reduce your potential loss to inheritance tax (IHT) on your death by keeping as much money inside your pensions, as they are not included in the IHT liability.

The total value of your pension today is £1.8m.

At age 75, which you will be in April 2020, all pensions must be tested against the available lifetime allowance to determine any tax charge.

The charge will be on the growth since 2011, i.e. £1.8 – £1.275m = £525,000. Your available lifetime allowance is 5.56% of the current lifetime allowance (£1,055,000) which is £58,658. The balance £466,342 (£525,000 less £58,658) is subject to tax at 55% at age 75. A tax bill of £256,488.

For those of you that wonder why so little allowance, here is the calculation: Value crystallised in 2011 / Lifetime Allowance x 100% = 94.44% was used.

However, I can think of 2 ways to reduce the tax liability.

  1. Make withdrawals of income from the pension fund, assuming you have liquid investment funds.  This will incur income tax at your highest rate, which may be 40 or 45%. Withdrawals before your 75th birthday will reduce the value and lower the 55% tax charge. If you withdraw £100,000 and pay 40% income tax you will save £15,000 of lifetime allowance excess tax. You need to calculate that there will be sufficient money in your pension fund at age 75 to pay the expected charge.
  2. Apply for Individual Protection 2016 at (click here to read the government guidance on protecting your Lifetime Allowance. You will need to know the value of your pension fund on 5th April 2016 and your scheme administrator will be able to help you find this. If your pension value was at least £1.25m on 5th April 2016, you will secure this as your personal allowance value. If your pension was worth less, but at least more than £1,030,000 then this protection will save you money.

The effect of a £1.25m lifetime allowance is that 5.56% is worth £69,500 which is more than previously (£58,658) and therefore reduces your excess tax liability by £6,727. The tax charge can be paid out of the pension fund, if there is cash available.

Back in April 2012, the Lifetime Allowance reduced to £1.5m and you should have applied for Fixed Protection 2012, which would have secured £1.8m for your lifetime. This would have avoided any tax charge at age 75.

Pension Simplification was the big pension news in 2006 when the Lifetime Allowance was introduced, and many previously confusing rules were abolished. Within months and in the intervening years new rules were added to pensions legislation, and in 2015 the latest flexi access drawdown was unleashed with it’s own series of rules. If you self-manage your own pension, how do you keep up to date with the changes and ensure you do not pay too much tax?

Any reader interested in SIPP’s further can telephone Peter Sharratt on 01344 875 000 in our or email info@kirkrice.co.uk.

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases or, and reliefs from taxation, are subject to change. The Financial Conduct Authority does now regulate tax planning.

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