I have three questions in relation to the lifetime allowance. What happens if you have an excess at age 75, but essentially do nothing: neither take income or a lump sum? I guess you are sent a tax bill by HMRC on the excess at 55%. Is that correct? Can you pay this out of funds external to the SIPP? I understand that the SIPP beneficiaries can receive their share of the deceased’s SIPP as a pension. Can they receive it as a SIPP? If so, what do they need to do to make it happen?

Anonymous

Tom Selby, AJ Bell Head of Retirement Policy, says:

The lifetime allowance is currently set at just over £1 million (£1,073,100 to be exact) and applies to all your UK registered pension schemes (this doesn’t include the state pension). If you exceed the lifetime allowance, you will pay a lifetime allowance charge on the excess. The level of this charge will depend on how the excess is dealt with:

- If taken as a lump sum, the charge will be 55% with no income tax to pay;

- If retained in the pension to provide an income (whether immediately or at a later date), the charge will be 25% with income tax to pay on top.

HMRC (HM Revenue & Customs) will test how much lifetime allowance you have used when certain ‘benefit crystallisation events’ occur.

These events include (but are not limited to) buying an annuity, taking your tax-free cash, entering drawdown, starting a scheme pension, death (if you die before age 75) or reaching your 75th birthday. After the age 75 test, you will not usually be subject to any further lifetime allowance tests.

If the objective is to pass funds on within a pension and you don’t access it before age 75, the lifetime allowance charge on any excess will be 25%. This charge will be taken from your pension automatically by your pension provider and paid to HMRC.

The 55% tax charge only applies if you withdraw the excess amount from your pension as a lump sum before age 75. Again, this would be taken from you pension automatically and you would be paid the balance of 45%.

Pensions offer a tax-efficient route to pass money on to loved ones after you die. If you die before age 75, your pension pot can be inherited free of income tax. If you have not accessed your pension in your lifetime then your funds would be tested against the lifetime allowance on your death.  

If a lifetime allowance charge arises, whoever receives your pension benefits would be personally liable to pay the charge to HMRC. If you die after age 75 there is no further lifetime allowance test (as your pension will have been tested on your 75th birthday) but it will be taxed as income when your beneficiary or beneficiaries access the money.

To ensure your beneficiary or beneficiaries have the option of keeping the funds in a pension, you need to provide your pension administrator with details of who you would like to receive your pension on your death. They should then have the option of taking the money as a lump sum or transferring it to a pension in their own name with a provider of their choice.

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