Lifetime Allowance Strategies
There are several strategies that can limit the lifetime allowance that you may need to pay in the future. As with all financial planning, the personal circumstances of each person will dictate the best solution. Below you will find a few strategies that might work in your circumstances:
Crystallise the pension before you breach the lifetime allowance
If the pension is not needed, you may not think crystallising the pension is a good idea. However, the change in classification from uncrystallised to crystallised will mean that the investment growth moving forwards will be treated as crystallised growth rather than uncrystallised growth.
This is an advantage as crystallised growth can be withdrawn as income and subsequently income tax paid. This gives the taxman his cut and the amount you withdraw is then not counted towards any lifetime allowance calculation in the future. As income tax can be paid at either 20%, 40% or 45%, it is always cheaper than withdrawing the funds as excess lifetime allowance and paying the higher charge of 55%.
As long as the value of the pension at age 75 is the same as at the time you crystallised the fund, there will be no lifetime allowance charge to pay. If the fund has grown in excess of the lifetime allowance and you have not withdrawn the excess as income, it will be classed as uncrystallised and tested against the lifetime allowance. Tax at the higher 55% rate may still be due.
Take the tax-free cash
Taking the tax-free cash from your pension, even if you don’t need the cash, can help slow down its growth. The tax-free cash can be invested outside the pension instead. A good use for this could be a cash investment into the stock market with the aim of generating some capital gains returns and making use of the £12,000 annual CGT allowance (19/20 tax year). The cash could also be used to fund annual ISAs, which will in turn yield tax free income and investment growth.
Delay the lifetime allowance into the future
This option is not one I recommend but is still a strategy. It is possible to part-crystallise your pension pot. That means if you have a pot of £1.2 million you can opt to only crystallise £1,055,000 (19/20 LTA Limit) and leave the excess funds uncrystallised and untested.
This delays the tax charge until age 75 when a final lifetime allowance test takes place. The fund would have benefited from tax-free growth over that time, the tax could then be paid, and the excess lump sum withdrawn.
Our research has shown that paying the tax early and then withdrawing the income each year is the preferred model. However, it will depend on other income and the income tax band you are in as to how effective this strategy is.
As you will see above, there are ways to manage the lifetime allowance. None of them can avoid paying tax on the pension in one form or another. But when we pay it, and at what rate, can be controlled.
For more information call a member of our lifetime allowance team.
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