INVESTMENTS
MINIMISING THE EXCESS LIFETIME ALLOWANCE CHARGE
Since the pension Lifetime Allowance ( LTA ) was introduced in 2006 , it has created its own set of challenges . Not only did it place a tax limit on the future value of a pension fund , but the allowance has also fluctuated widely since it was launched , making it difficult to plan for . In 2010 and 2011 , it was £ 1.8 million , falling to £ 1 million in 2016 . Today , it is fixed at £ 1,073,100 until April 2026 .
Kevan Ramanauckis Pension Technical Specialist Canada Life
Here we use a case study to illustrate a strategy that could help minimise the impact of the LTA on clients who need to take a regular income from their pension savings in retirement . We explore three different retirement income strategies , all of which ensure the client ’ s income needs are met and maintain their invested funds :
Case study In 2012 , Anne retired at age 65 with a pension fund of £ 1.5 million , which was at the LTA threshold of £ 1.5 million at that time . She took a tax-free lump sum of £ 375,000 and wanted an income of £ 20,000 a year . As Anne approaches age 75 , let ’ s examine what the outcome might be using three different approaches . N . B . This case study assumes :
• Canada Life annuity rates are as at summer 2021 . To secure £ 20,000 p . a . for a 65-year-old with a 30-year guarantee period , the annuity purchase price would be £ 490,436
• investment returns are 4 % net
• the LTA increases by 2 % after April 2026
• current HMRC guidance and legislation .
Option 1 – Full SIPP Drawdown This is the default retirement strategy where the client remains fully invested to maintain flexibility . However , because we don ’ t know in advance what the fund value will be at age 75 , we don ’ t know how much excess tax charge will be due on the investment . At the same time , we don ’ t know what the future LTA will be as this is subject to change . Anne invested £ 1,125,000 into her SIPP Drawdown in 2012 and has withdrawn £ 20,000 a year ( paying income tax ). Assuming 4 % net investment returns , she has seen the value of her SIPP Drawdown pension grow to £ 1,415,548 by age 75 . The growth that is tested via BCE 5a is £ 290,548 . The age 75 tax charge is 25 % on the excess growth , resulting in Anne ’ s pension administrator paying HMRC £ 72,627 in tax ( see table on page 16 ). The question is , was Anne expecting this tax charge and , if not , would she have made diff erent decisions along the way ? While her SIPP Drawdown has a value of £ 1,342,911 , which she can pass down the generations free of inheritance tax , she may have preferred to enjoy more of her pension fund rather than let the government get their hands on it , albeit she would have had income tax considerations on any withdrawals .
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