- How likely is the member to live to age 75? Reaching age 75 is a key date in pension planning terms – a second drawdown BCE arises and income tax is due on beneficiary’s benefits. Most people celebrate their 75th birthday – only a third of the half a million people who die in England each year are younger than 75. But if they do expect to die early, they may want to crystallise immediately as there will not be a further BCE on death, and their beneficiaries can enjoy the full value of any investment growth on the fund between crystallisation and death.
- Tax rate on withdrawals – how much tax would someone pay if they took benefits out of the pension plan, possibly to avoid a lifetime allowance charge?
- Gifting money – if the member took money out of the pension plan would it sit within their estate or are they able to gift the money to others, bearing in mind the current inheritance tax (IHT) rules and allowances?
- Potential beneficiaries – if the member has no need for the pension fund money then they may want to leave it within the pension plan for the next generation. In that case who are the nominated beneficiaries and what rate of income tax will they pay? Do they need the money now or can they wait until the member dies until they receive the benefits?
- Other sources of income – what other investment or earned income is the member receiving? And how does this affect the level of tax they pay and the income they may need – or not need – from the pension plan?
Case study – Emily
Emily is 60. She is stopping work and has built up a Sipp fund of £1,273,100. She has no lifetime allowance protection. She also has other sources of income. But she wants to access her pension to realise the pension commencement lump sum (PCLS) to gift to her children to help them buy a house.
Emily decides to designate up to her lifetime allowance - £1,073,100 – into drawdown and take the maximum PCLS of £268,275. The remaining drawdown fund is £804,825. Her lifetime allowance is now fully used up. However, she still has £200,000 uncrystallised.
Should she leave this fund uncrystallised, or designate it to drawdown now and draw down an income to reduce any lifetime allowance charges at age 75?
Option 1 – fully crystallise
Emily decides to fully crystallise her whole pension fund.
She pays a lifetime allowance charge of £50,000 on her excess funds of £200,000, leaving her a drawdown fund of £954,825 (£804,825 + £150,000).
