At age 75, tax legislation under benefit crystallisation event 5 (BCE 5 for DB and BCE 5B for DC) imposes an LTA test on uncrystallised entitlements, whether or not the pension scheme and lump sum entitlements come into payment at that time.
And for those already in drawdown, BCE 5A tests the increase in their drawdown pot size against any LTA left unused when drawdown commenced. So, this could mean that clients face a 25 per cent tax charge on any savings over the LTA at this point – not a great birthday present.
It may be wise therefore to ensure that your clients are not right on the LTA threshold as they approach age 75. In view of this, it is worth encouraging clients to reduce the size of their overall pots in the run up to it. As a minimum they should take all income from investment gains.
This may run contrary to some advisers’ thinking on keeping as much income invested for as long as possible, but it makes sense in view of the fact that more and more of us will be living to a ripe old age.
Finally, remember the ‘even-year rule’ to further mitigate nasty tax bills for spouses, children and other people inheriting what is left of your wealth. If there is inheritance tax to pay on death, it is charged at 40 per cent on gifts given in the three years before you die.
Gifts made three-to-seven years before your death are taxed on a sliding scale known as ‘taper relief’ until you reach seven years when there is no tax on gifts.
So, encourage clients to start a regime of gifting (to those set to inherit anyway) as early as practicable. If they give to charity, they may wish to increase or regularise gifts to their favourite charities from their early 80s.
• Annual allowance, MPAA and LTA are set low enough to catch more and more in-retirement boomers each year.
Key Points
- Changes in the tax landscape mean that decumulating clients have to be careful about not triggering any tax charges
- Capped arrangements must be reviewed every three years
- Annuities are an increasingly attractive option
The reality is that the three pensions tax allowance thresholds now controlling what benefits are subject to tax when in decumulation are all set low enough to catch more and more in-retirement baby boomers each year.
