I have seen a few comments on forums and websites, especially overseas expats and their advisers, that do not understand how the Lifetime Allowance at 75 applied to UK pensions. I think it is worth looking at this in more detail.
If investors and advisers do not understand this correctly it may lead to Income Tax that cannot be reclaimed, and it damages their retirement, or it leads to poor advice like transferring to QROPS unnecessarily.
Are you interested in avoiding tax legitimately?
Lifetime Allowance at 75- What happens?
When benefits are taken from a UK pension, this is termed a Benefit Crystallisation Event. If the amount crystallised is over the Lifetime Allowance at that point then the Lifetime Allowance charge is payable .
However, that is not the end of it!
The pension fund will be tested again against the Lifetime Allowance at 75 as well. This is termed BCE 5, which comprises of 5 rules (BDE 5,5A,5B,5C and 5D). We will focus on just BCE 5A and BCE 5B.
I have seen many assumptions that if the fund is over the Lifetime Allowance at 75 then the amount over that is liable to either a 25% or 55% Lifetime Allowance Charge. This is not strictly correct.
BCE 5A- Lifetime Allowance at 75, having started drawdown
The amount that is tested is the difference between the value of the fund at age 75 less the amount originally crystallised.
Income taken from the drawdown fund would result in a lower level of growth or no growth at all. Of course, the withdrawals themselves will be liable for income tax. Note that any PCLS (link) must be deducted before calculating this.
BCE 5B- Lifetime Allowance at 75, where none or not all funds crystallised
This is the part of the fund that has not yet been accessed (crystallised). The uncrystallised fund is then tested against the remaining lifetime allowance available.
While, at face value, a money purchase pension that is valued over the Lifetime Allowance at 75 may attract the Lifetime Allowance Charge, this may or may not be the case and it can be avoided with proper advance planning. While the examples provided by HMRC (in the links) explain this, it is better to take advice to ensure that you understand the implications of the Lifetime Allowance at 75.
At the risk of repeating a theme within these blogs, ask your adviser about their UK pension qualifications AND ask if the advice is from a regulated firm in your territory, or a firm that holds a UK regulatory licence.
A little knowledge is a dangerous thing and, if mis-used, can make someone a lot of money- unfortunately, not you!
Article Date 28th October 2020
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
- QROPS and the Lifetime Allowance
- Lifetime Allowance Charge at 75
- Pension lifetime allowance
- Lifetime Allowance 2015
- Lifetime Allowance 5 Key Facts
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