Worried about the Pension Lifetime Allowance?

Posted by: Duncan Orr ">Duncan Orr, on November 23, 2017.

What is The Lifetime Allowance?

Since its peak of £1.8m in the 2011/12 tax year and three subsequent reductions since then to its current £1m level, the Pension Lifetime Allowance (The Lifetime Allowance (LTA) is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.) is becoming more of a challenge and issue for an increasing number of members.

Further exacerbated by increased transfer values from Defined Benefit (Final Salary) schemes owing to economic conditions, and more members taking these transfers to access freedoms via a SIPP.

The tax charges for any monies exceeding the LTA, remembering that you can usually take up to 25% of the LTA as Pension Commencement Lump Sum (PCLS) with the rest giving an entitlement to income, are relatively simple. You pay a 55% LTA charge in a lump sum, or 25% (In addition to your marginal rate of income tax) if you elect to take this as income.

So, for a nil rate tax payer on extraction (which may not be likely given there is a LTA excess) they would get 75% of any excess that is designated for paying income. Basic, higher and additional rate taxpayers would get 60%, 45% and 41.25% respectively. The lump sum being a one-off payment means that irrespective of marginal tax rates the member gets 45% of the excess.

What can you do?

In most circumstances, the pension funds are going to face a LTA test at some point. If you have funds above the LTA (£1M) you can defer any charges by drawing up to 100% of the LTA and leaving the remaining funds untouched. But at age 75 there will be a test on undrawn funds.

Two possible planning options:

1. If you use 100% of the LTA (£1M), take £250k of Tax-Free cash and place £750k into income drawdown there’s no immediate LTA charge. If the drawdown pot has grown to £1m at age 75 then £250k will be over the LTA (£1m less £750k). As the fund is already designated to provide an income, the 25% LTA charge applied and £62,500 is payable. But at age 75 it’s only the growth of a pension drawdown pot that is tested against the LTA.

What does that mean?

The crucial thing with this test is that if you take income from the drawdown pension, it’s not added back into the LTA calculation. It’s simply the value of what’s in the plan that matters. So, if you take the growth out as income then you can avoid the LTA charge. However, the income that has been taken will be taxable on the client, and if they have an IHT issue and this money stays in the estate then the beneficiaries may be worse off.

2. Another quirk that can work is that crystallised funds (taking the maximum possible tax-free cash) aren’t tested again against the LTA if death is before 75. So, if you have a shorter life expectancy (death pre-75) you may want to pay the excess LTA charge sooner rather than later and leave the fund to grow. If you die before 75 then the remaining drawdown pot will usually pass on tax free to your beneficiaries.

What’s your strategy?

If you have any questions around planning for the Lifetime Allowance please do get in touch. You can call us on 01825 76 33 66 or complete a contact form.


Enter your email

Get free investment, pensions and wealth management news and advice.

* indicates required

*We will never share your details with any third party.


Client Stories

Book a consultation

Your Name (required)

Email (required)

Phone Number


Employment Status


What you would like to talk about?


Enter exactly what you see above

Enter your email to receive free relevant news and updates.

* indicates required

*We will never share your details with any third party.

Latest… View all

Putting the current stock market decline in context

There’s no doubt hyperbolic headlines depicting the recent falls on the world’s financial markets are potentially anxiety-inducing. With the FTSE 100 Index falling to its lowest level since April 2017, the effect of the headlines is to promote a sense of uneasiness; we’re here to remind you that this shouldn’t be the case. Instead of […]

Read more →

Inheritance Tax is an avoidable tax

It is often said that Inheritance Tax is an avoidable tax, but many of us somehow fail to avoid it. Why is this? In our experience, clients’ failure to plan effectively is a result of the following perceived problems: Speed – How often will the thought of having to survive 7 years from the date […]

Read more →

What went wrong with the forecasts?

Reading the tea leaves Investors at year-end are inclined to reflect on the 12 months gone and muse on what the coming year might bring. Aware of this appetite for speculation, themedia tends to feed it with forecasts. These articles can be fun to read, but are even more so a year later. In January […]

Read more →

What should investors make of bitcoin mania?

Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios. Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and […]

Read more →