I am 71 and have a SIPP which may exceed my £1.25 million lifetime allowance by the time I reach 75.

I am considering shortly making a gift of £100,000 to my child from this pension pot. Would this: (a) reduce my tax liability at age 75 by reducing the amount of my pension pot? (b) be tax-free?

David

Tom Selby, AJ Bell Senior Analyst says:

As you have a lifetime allowance above £1,073,100 (this is the lifetime allowance for the 2020/21 tax year) I assume you have individual or fixed lifetime allowance ‘protection’.

For those who aren’t familiar with pension tax rules, each time the Government has cut the lifetime allowance – which caps the amount someone can build up in pension savings over their lifetime – it has introduced new forms of protection designed to ensure those who had already built up funds worth more than the new, lower limit were not adversely affected.

This article explains more about how these protections work and the lifetime allowance in general.

To make a gift from your SIPP you would first need to access the money, creating an immediate income tax charge unless you only withdraw tax-free cash.

The income tax would apply to the entire withdrawal if you had already ‘crystallised’ your fund prior to accessing the money on this occasion. Crystallising just means choosing a retirement income route such as drawdown and usually taking your 25% tax-free cash.

If you were crystallising the funds now, depending on how much lifetime allowance you have left you may be able to take the entire £100,000 as tax-free cash. Alternatively, you could take a lump sum where up to 25% of the withdrawal would be available tax-free, with the rest subject to income tax.

The gift could also eventually be subject to inheritance tax upon your death. Money left in a pension, on the other hand, would be IHT-free and could be passed on to your nominated beneficiaries tax-free if you die before age 75.

If you die after age 75 it would be passed on at your recipient’s marginal rate of income tax – although they would only pay this when they made a withdrawal.

I am assuming the purpose of depleting your fund by £100,000 – other than to gift the money to your child – would be to reduce your tax liability when HMRC ‘tests’ how much lifetime allowance you have used on your 75th birthday.

One of the lifetime-allowance tests HMRC makes is on the growth of your drawdown pot, so taking payments from your drawdown pot before you reach 75 can reduce or eliminate any lifetime allowance charges. Money taken out of your drawdown pot is subject to income tax.

From a tax perspective whether you access some of your pension before age 75 (and pay income tax) or leave the money in the SIPP (and pay a lifetime allowance charge of 25%) should make little difference.

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