Turning 75 has always been a significant point for anyone with pension savings, and even though compulsory purchase of an annuity by the age of 75 was abolished in April 2011, 75-years-old remains an important point in pensions.
After age 75 members are no longer eligible for tax relief, death benefits become taxable, and for most it will be the last event where there is a test against the lifetime allowance, and if there is any excess, a tax charge deducted.
It is the mechanics of the LTA test that I am going to focus on in this article, particularly with regard to defined contribution pensions. I will also mention a couple of planning points to bear in mind for clients approaching 75-years-old.
What is tested?
For any uncrystallised funds it is simply the value of those funds at age 75 that is tested against the LTA at that point.
Pensions in payment through a lifetime annuity or a defined benefits scheme pension are not tested or revisited at age 75. However for drawdown funds that came into payment on or after April 6 2006 a further test on these funds takes place at 75, although only the growth since the initial designation is tested.
Case study 1
Suzanne has just turned 75. She has a self-invested personal pension with an uncrystallised arrangement and a post-A-Day flexi-access drawdown arrangement.
The fund split on her 75th birthday is as follows:
- Uncrystallised arrangement = £227,184.
- Flexi-access drawdown arrangement = £700,000 .
And the previous benefit crystallisation events have occurred:
- 2008-09: pension commencement lump sum £100,000/drawdown £300,000 (24.24 per cent LTA used).
- 2012-13: PCLS £120,000/drawdown £360,000 (32.00 per cent LTA used).
Age 75 test:
- Uncrystallised funds BCE 5B – here, we are simply testing the full value of the uncrystallised funds.
£227,184 ÷ £1,073,100 x 100 = 21.17 per cent.
- Drawdown funds BCE 5A – as the funds have already been tested against the LTA when the BCEs originally happened in essence, we are testing the fund growth since the fund was initially designated into drawdown.
£700,000 – (£300,000 + £360,000) = £40,000 ÷ £1,073,100 x 100 = 3.72 per cent.
Total LTA used at age 75 = 21.17 per cent + 3.72 per cent = 24.89 per cent.
Total LTA used by all BCEs = 24.24 per cent + 32.00 per cent + 24.89 per cent = 81.13 per cent.
Suzanne’s total LTA usage is within the LTA. Assuming she does not have any other pension schemes elsewhere, she will not have to pay an LTA tax charge.
Tax charge at age 75
If at age 75 the total usage exceeds 100 per cent of the member's LTA, a tax charge will apply.
The LTA charge that applies at the point of the age 75 tests is always 25 per cent on the excess above the LTA.
There is no option to take the excess as a lump sum and pay a 55 per cent tax charge as you could if you exceeded the LTA taking a PCLS and drawdown pre-75.
In nearly all cases the provider will deduct the tax charge from the pension, pass this to HM Revenue & Customs and adjust the benefits accordingly.
Cast study 2
Luke reaches age 75 on May 6 2022. He has an uncrystallised fund valued at £1,500,000. He has no transitional or scheme-specific protection and has had no previous BCEs, meaning he has not used up any of his LTA yet.
Age 75 test:
Uncrystallised funds BCE 5B.
£1,500,000 ÷ £1,073,100 x 100 = 139.78 per cent.
In total at age 75 Luke has used 139.78 per cent of his LTA.
139.78 per cent – 100 per cent = 39.78 per cent (the percentage excess).
39.78 per cent x £1,073,100 = £426,879.18 (the monetary excess).
£426,879.18 x 25 per cent = £106,719.80.
Luke therefore incurs a tax charge of £106,719.80 that the scheme administrator will deduct from the funds and pay to HMRC.
