Limit your Lifetime Allowance Tax Charge
When approaching the lifetime allowance limit, one option is to crystallise the pension completely so that it is tested against the pension lifetime allowance before it exceeds it.
The advantage here is that as your pension has not yet exceeded the LTA, there would be no tax to pay. It would also mean that your pension would be reclassified from, uncrystallised to crystallised.
This then results in any further investment growth from that day on being classed as “crystallised growth”. It provides some more tax-efficient options than leaving the fund as uncrystallised pension that is exceeding the LTA.
Crystallised growth that builds up can be withdrawn from the pension as income and would be subject to income tax at one of the 20%, 40% or 45% rates. This would still be much cheaper than the 55% LTA tax that would have otherwise been due on the LTA excess in the future.
Another advantage is that you can control the flow of income according to other income in the same tax year. You may decide not to take any income for several years and then start to take some in the future. The choice would be yours.
As long as when you reach age 75, the value of the pension is the same as the value that you originally crystallised, there will be no lifetime allowance excess to pay in the future.
If you have not withdrawn the crystallised growth before age 75 it will be reclassified as ‘uncrystallised’. It will be taxed as excess lifetime allowance and the charge of 55% may apply.
The legislation in regard to this is very complex and hard to understand, even for most IFAs. If you have more questions on this topic feel free to call a member of our lifetime allowance team who will be happy to help.
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