How to avoid paying a fortune in tax on your pension withdrawals

Dear Kate,

I have four pension schemes, which when added together are likely to be above the current lifetime allowance. I’m confused about how and when they will be tested against the lifetime allowance.

I started taking my “defined benefit” pension in January 2013 when I reached my 60th birthday, initially of around £30,000 a year plus a tax-free lump sum of £200,000 (which I had to commute some of my pension for). I also have 3 self-invested personal pensions – Sipps. In January 2016 I moved one into a drawdown when it was worth approximately £350,000.

I haven’t started taking the other two Sipps, one is currently worth around £250,000 and the other Isa really small pension pot of less than £8,000. I’m thinking of accessing them over the next couple of years before I reach age 75. How does this work and will I face a tax charge?

Anonymous, via email

Kate says:

Each time you take some of your pension fund as a cash sum or as income before age 75, you trigger a test against your remaining lifetime allowance. These tests are known as benefit crystallisation events – or BCEs – and there are 13 of these set by HM Revenue & Customs.

BCEs include moving “defined contribution” pensions into drawdown or buying an annuity, taking benefits from a defined benefit pension scheme, and payment of certain lump sums. Some of the BCEs also cover the situation where an individual has reached age 75 and still has unused funds.

The lifetime allowance is a limit on the value of benefits that can be paid to an individual from registered pension schemes, as a lump sum or income, without triggering a tax charge. The current standard lifetime allowance is £1,073,100 and is frozen until April 2026.

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Benefits which haven’t been touched are known as “uncrystallised” pensions and won’t be tested against your available lifetime allowance until you start taking them or reach age 75, if sooner.

Managing multiple pensions

Where someone has been a member of only one registered pension scheme, or has consolidated their pensions into one scheme, and all benefits are paid at the same time the comparison against the lifetime allowance will be fairly straightforward, as it is one calculation.

Increasingly many people, like yourself, have multiple pensions built up over their working lives, and may choose to take them at different times. This is where it gets a bit more complicated. Each time you crystallize new benefits you will use up more of your available lifetime allowance, leaving less against which any remaining benefits can be tested. This means that multiple calculations will need to be carried out.

You don’t have to do these calculations yourself; your scheme or pension provider will do these for you and give you a certificate showing the amount you’ve used up. However, you will need to keep track of this and share your certificates with each scheme at the point of the next crystallization as your other schemes and providers won’t have details of all your pension benefits.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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