You recently mentioned holding off crystallising a pension until after 5 April if it would otherwise use up your lifetime allowance. Can you crystallise a pension by taking a small portion under drawdown and taking out no cash? If so, would this mean the pension is not subject to any future lifetime allowance test if it were to be reintroduced?

Nick

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

For the 2023/24 tax year, the lifetime allowance tax charge has been abolished, with the maximum tax-free cash someone can take held at £268,275.

The term ‘crystallising’ usually refers to choosing a retirement income route for your pension pot. The most common actions that lead to a ‘benefit crystallisation event’ include taking your tax-free cash, entering drawdown, taking an ad-hoc lump sum direct from your pension, and buying an annuity from an insurance company. ‘Crystallising’ means committing your fund to drawdown – there is no obligation to actually take an income.

When one of these benefit crystallisation events takes place before 6 April 2024, the amount of lifetime allowance you use at that point will be tested by your scheme administrator and reported to HMRC. Prior to 6 April 2023, if you exceeded your lifetime allowance, you would have been subject to a lifetime allowance tax charge. However, in the 2023/24 tax year this tax charge is removed.

There is also a lifetime allowance test at age 75 designed to capture any pensions that had not yet been crystallised and any growth on funds remaining in pensions in drawdown. Where someone dies before age 75, a lifetime allowance test will be carried out on any uncrystallised funds.

The abolition of the lifetime allowance charge means that in 2023/24 these tests will be less of an issue. However, you still need to provide information on lifetime allowance usage and any lifetime allowance ‘protection’ you have to your provider when you access your pension. If the lifetime allowance is exceeded and you choose to take the excess as a lump sum (rather than to provide an income), then although the excess will not be subject to a lifetime allowance charge, it will be subject to income tax.

I cannot tell you how any future lifetime allowance test might work. It is possible that a Labour government would attempt to reintroduce the lifetime allowance framework that existed before 6 April 2023, but it could feasibly make changes to capture any actions it feels were designed to dodge its policy intention in the interim.

It is sensible to deal with the tax rules as you see them, rather than trying to make decisions today to avoid some possible future tax system of which we have no detailed knowledge.

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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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