When drawing benefits from your pension (‘crystallising’), it is ‘tested’ against the Lifetime Allowance and expressed as a percentage. Crystallising £100,000 for example would use 9.48% of the Lifetime Allowance, with 90.52% remaining.
Once the limit is reached, excess benefits have a charge of 25% if the fund remains invested and is taken as income (subject to Income Tax), or 55% if taken as a lump sum.
At age 75 a further charge of 25% may apply if any remaining uncrystallised portion and growth on any crystallised portion exceeds your remaining allowance.
Determining the Value
For defined contribution plans, the transfer value is used for Lifetime Allowance purposes.
For final salary schemes, the future annual pension income is multiplied by 20 and added to any lump sum entitlements.
Pension investments and final salary income entitlements which increase above inflation risk overtaking the Lifetime Allowance over the long term, particularly if excessive contributions are made.
Available Solutions
As with many financial planning issues, the best solution is down to individual circumstances.
Broadly speaking we would consider the following main options:
- Check if Fixed or Individual Protection could apply. This has many prerequisites but can provide a ‘protected’ Lifetime Allowance above £1,055,000.
- Reduce or halt pension contributions, using alternative investments to save for retirement, some of which can provide similar tax relief.
- Consider crystallising early. This deliberately lowers the value of the pension and limits future growth.
- Do nothing and continue saving. Although future charges may occur, as the charge is on growth above the allowance you may still be better off. Furthermore the pension can be Inheritance Tax free.
If you are concerned about the Lifetime Allowance, our Wealth Managers are happy to speak to you about your situation and the most appropriate actions to take. You can reach Paul Fox on 01223 720348 or paul.fox@nwbrown.co.uk
NW Brown Wealth Management is a trading name of NW Brown & Company Limited. NW Brown & Company Limited is authorised and regulated by the Financial Conduct Authority (191123).