The HMRC Lifetime Allowance at age 75 - what happens at re-test time?01 December 2022
Since the introduction of the HMRC Lifetime Allowance (LTA) test and tax charge system in 2006, much has varied over the years. However, the principle of HMRC seeking to tax the pensions of those affected has not.
With most personal tax allowances being frozen for the years ahead, including the HMRC Lifetime Allowance limit of £1,073,100 (unless you have protection), many more people with personal / money purchase style pensions will find any excess pension funds taxed, whether this is at the time of drawing, on death before the age of 75, or on re-test at age 75. The test at age 75 is the final test, based on current legislation.
Those with defined benefit (final salary) type plans are largely unaffected by the age 75 LTA test rule unless these pensions remain undrawn at that age.
Any tax charge applicable at age 75 is charged to the pension at a level of 25%, noting that any withdrawals thereafter will be subject to income tax at the individual's highest marginal rate. Therefore, the effective tax charge might be closer to the 55% often noted for the purposes of calculating any LTA charge. This may have the effect of potentially reducing any future tax-free cash available.
Please remember also that on death of the pension holder after the age of 75, the benefits available to any beneficiary will also be charged at their own individual income tax rate.
What does HMRC look for in their pension LTA retest at age 75? They will check:
- The increase in value of any funds in drawdown from when the funds were first placed into drawdown. The value of funds at age 75 is compared with the original amount that was crystallised (after the payment of any tax-free cash). Drawdown funds created before 06 April 2006 are not subject to this test
- Any undrawn pension benefits
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Many pension plans will allow any undrawn tax-free cash to be drawn after the age of 75, but please do check your individual arrangements in good time, because this is not always the case.
If you are close to the LTA limit, it is important to consider your individual position a stage further and where possible plan to draw value from the funds to control any tax take HMRC may apply when you reach age 75.
No advice is provided during the course of this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
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