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Kirk Rice Blog

Lifetime Allowance Tax Liability At 75 Years OldWritten on January 25, 2021 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. I thought I had paid all the tax I need to, and I have unused Lifetime Allowance too. What is going on? How can I reduce the tax due?

Kirk Rice LLP answers:

When pension simplification was introduced in April 2006 a new set of rules ensued. Some 14 years later, I would say it’s more a case of how simplified became complicated. Tax-free cash was renamed pension commencement lump sum (PCLS) which makes us all think it will become taxable at some time in the future, but no change yet. Money in pensions is considered either crystallised or uncrystallised funds.

In 2011 your pension was worth £1.7m, and you took all your tax-free cash (the Lifetime Allowance was £1.8m) and have not withdrawn any money since.  You were issued with a benefit crystallisation letter that confirmed you used 94.44% of the Lifetime Allowance. The balance of the money remaining in your pension (£1,250,000) is known as crystallised funds. Whenever you take any of this money, you will pay income tax on it, deducted by your pension provider through the PAYE system.

You could apply the remaining Lifetime Allowance (5.56%) against any uncrystallised funds. Have you paid any more money into another pension or have you any other scheme benefit?

You have a business and rental income which fortunately means you have no need for any income from your pension. Your current aim is to leave all money in the pension to be distributed free of inheritance tax after your death.

In 2015 Flexi Access Drawdown was introduced, and further rules about death benefits added:

If you die before your 75th birthday the value up to the lifetime allowance is passed tax-free to your nominated beneficiary(ies).

On later death, when most people die, each beneficiary will pay income tax when they withdraw the money from the pension.

Now back to your question, at age 75, in March 2021, your pension must be tested against the available Lifetime Allowance to determine any tax charge at 25% The calculation is straightforward in your case:

Value of your pension at age 75 shortly, say £1,908,000.

£2,508,000 – £1,275,000 = £633,000 growth. Here your unused Lifetime Allowance (5.56%) can be deducted. This is 5.56% of the current Lifetime Allowance (£1,073,100) equal to £59,664.

Therefore, the value to be taxed at 25% is £573,336. The scheme will deduct £143,334 from your fund and pay it to HMRC.

The SIPP will have a default approach to selecting assets to sell, which you should check you are happy with or provide alternative instructions. You need to ensure there will be sufficient money in your pension fund at age 75 to pay the expected charge.

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I can think of 2 ways to reduce the tax liability:

  1. Make withdrawals of income from the pension fund. This will incur income tax at your marginal rate but could be especially useful if you can defer any company income (salary or dividends) or perhaps due to the current pandemic, these are reduced. Withdrawals before your 75th birthday will reduce the value and lower the amount exposed to the 25% tax charge.

If you withdraw £100,000, you will save £25,000 of lifetime allowance excess tax. However, your income tax may be increased by losing your personal Allowance, which adds £5,000 to your tax liability.  If the tax year’s total income exceeds £150,000, you will also pay tax on some income at 45% instead of 40%. At worst this would be another £5,000 tax cost on £100,000. Overall a tax saving of £15,000.

However, unless you spend this money or gift it this money is within your estate and exposed to inheritance tax too.

  1. 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 would secure this as your personal allowance value. If your pension was worth 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.

Taken together, these two steps could save you over £21,000 in tax.

Had you taken advice in 2011/12 we could have saved you even more.

We would have advised you to apply for Fixed Protection 2012, which would have secured the full £1.8m Lifetime Allowance for your lifetime. This would have secured £100,080 to set against your growth at age 75, reducing the tax liability by further £7,645 (£30,580 * 25%).

This is a simple case study showing the value of taking advice. The rules have changed since 2006 and savings can be made by acting at the right time.

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?

If your SIPP holds commercial property and very little cash, how will you meet the tax charge at age 75?

If you have a Lifetime Allowance or pension taxation issue to resolve, we will quote a fee basis for the work before we start. Email info@kirkrice.co.uk or call 01344 875 000 to book an appointment with one of our Financial Planners.

 

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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 not regulate tax planning.

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