I have just turned 72 (my wife is 73) and have a good sized self invested personal pension (Sipp) of nearly £4.4mn, on which a significant lifetime allowance charge (LAC) is due at age 75. I currently estimate that it is over £700,000 – ouch! And although I have started drawing down my Sipp, I expect the fund will continue to grow. So the LAC could eventually be over £1mn. Are there any legitimate ‘technical’ steps to mitigate the LAC?
Conventional wisdom suggests drawing down individual savings accounts (Isas) (ours are worth over £800,000) before Sipps, given the favourable inheritance tax (IHT) treatment Sipps receive (at least for now). But if we do that, wouldn’t it increase the LAC because the Sipp ends up bigger than it otherwise would be? What’s the best trade off here?
We have set up but not yet funded a discretionary trust mainly for the benefit of disabled relatives. Should we transfer cash out of the Sipp (taking the income tax hit) before the LAC is due, to fund the trust?
Should we have different investment strategies (maybe higher risk versus lower risk) before and after age 75, when the LAC is payable? More broadly, how do plans to mitigate any LAC fit in with plans to mitigate IHT on our eventual deaths.
Robet Pullen, partner at tax and advisory firm Blick Rothenberg, says:
Age 75 is a lifetime allowance 'event', acting as a form of sweeping-up exercise to make sure that any previously untouched pension funds are tested against the lifetime allowance (LTA). Pension funds in drawdown are included in the at-75 test, but only to the extent that the drawdown fund has not been tested against the LTA before. For example, if tax-free cash of £250,000 is taken from a pension fund of £1mn at age 60, £750,000 being designated to flexible access drawdown, and the value of the drawdown fund at age 75 has grown to £1.3mn, the amount subject to the at-75 LTA test is £550,000.