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A few lifetime allowance tips
Pensions are either classified as uncrystallised or crystallised. The former is usually when you are paying into the pension and before you take any benefits. When you take either the tax-free cash or a drawdown from the pension, the status changes to crystallised.
This is beneficial to pensions that already exceed or may exceed the pension lifetime allowance in the future as, from the date of crystallisation, the investment growth the pension achieves can be withdrawn in a more tax efficient way.
For example, a pension that exceeds the lifetime allowance will attract a lifetime allowance charge of 55% on the funds that exceed the lifetime allowance when the pension is tested.
Alternatively, if the same pension was crystallised prior to exceeding the lifetime allowance, the funds that would go on to exceed the pension lifetime allowance can be withdrawn as income and taxed at your highest marginal rate. This could result in withdrawals being taxed at just 20% rather than the 55% lifetime allowance tax.
Taking tax free cash when it is not needed might sound strange. However, as well as crystallising the funds which attracts the benefits of tip number one, the reduction in value can help slow the growth of the pension.
If the cash is then invested again, with the aim of generating capital gains and dividend income, it can create a tax-free income of £12,300 plus £2,000 dividend each tax year providing good diversification from the pension.
Please note that further estate planning may be needed as the funds would no longer be in the inheritance tax free wrapper of the pension.
The lifetime allowance is a complicated topic and the purpose of these tips is to highlight the importance of using a qualified adviser to help with the challenge. It’s always advisable to use these tips in conjunction with a detailed lifetime allowance plan as they may also have implications that need to be considered elsewhere in your overall planning.
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