With the abolition of the lifetime allowance this year by Jeremy Hunt, will a crystallisation event take place when I decide to draw my pension early next year, post-April?

If the pot is crystallised, will it be exempt from an assessment should a different party be elected and reinstate the lifetime allowance? I am considering crystallising my pot to insure against what may or may happen at the next general election and see crystallising as key to making my decision.

It is not my intention to start drawing on my pension, merely just to crystallise it by commencing drawdown. I guess the question is: can a retrospective lifetime allowance assessment be made after a pension is in drawdown?

David in Doncaster

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

Chancellor Jeremy Hunt, in his March Budget, announced plans to abolish the lifetime allowance in April 2024. The lifetime allowance remains in place for the 2023/24 tax year and is set at £1,073,100, although some people holding lifetime allowance ‘protection’ may have been entitled to more than this amount.

However, while the lifetime allowance remains in place in 2023/24, the lifetime allowance charge has been removed. This is a sticking plaster until the government figures out what the limits on pension benefits will look like from April 2024.

Providers are still required to record ‘benefit crystallisation events’ behind the scenes. These events include taking your tax-free cash, entering drawdown and buying an annuity.

Your maximum tax free cash lump entitlement is capped at 25% of however much lifetime allowance you’ve got left. For example, if you haven’t used any lifetime allowance, your maximum lump sum will be £268,275 (i.e. 25% of £1,073,100).

In terms of how the rules will function in 2024 and beyond, we’re waiting on a consultation later on in the year to find out more.

Governments do not generally make retrospective changes to pensions. However, the decision to scrap the lifetime allowance, combined with Labour’s pledge to reverse the decision to scrap it is without precedent.

It is possible 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.

There are also consequences to crystallising your pot. If, for example, you have a fund worth less than £1,073,100 and crystallise the entire pot, any growth on the fund will not generate extra tax-free cash entitlement. If left uncrystallised, your tax-free cash entitlement could continue growing up to the £268,275 maximum.

Decisions involving the lifetime allowance are complicated, so consider financial advice.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

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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