BCE 5A tests the investment growth on the drawdown fund. This is £1,449,000 - £804,825 = £644,175. The lifetime allowance charge is 25 per cent of £644,175 = £161,044. This leaves a drawdown fund of £1,449,000 - £161,044 = £1,287,956.
BCE 5B tests the uncrystallised funds at age 75. The lifetime allowance charge is £90,000 (25 per cent of £360,000). Once deducted, this leaves an uncrystallised fund of £270,000.
Her total pension funds are £1,287,956 + £270,000 = £1,557,956.
Which option should she choose?
Both options give broadly similar answers. However, I have used a simplified case study. For example, I have not made any deductions for income tax, which may lower the value of option 1, if Emily is a higher rate tax payer but wants to maximise the funds to pass onto her children or grandchildren who are basic rate or non-tax payers.
Taking income may also create IHT problems if the money sits within her estate, and Emily may want to shield the money within the pension.
I am assuming she is in good health, but if she is likely to die before 75 then that may change her approach to crystallising the whole fund. Instead she may want to designate it all to drawdown and enjoy the full investment growth on the drawdown fund without any further lifetime allowance charge.
And I have only briefly explored two options – there are others available to Emily. She could decide not to crystallise any funds at all or to phase her crystallised benefits over the 15 year period.
These are complicated decisions. Each of your client’s circumstances will be different and personal to them. As will be their objectives and wishes.
There are many factors to consider, and not necessarily a right or wrong answer.
Many clients want to take every action possible to avoid paying a lifetime allowance charge, but in the end that may be a necessary fallout from building up pension funds, and therefore not the worse outcome.
Rachel Vahey is senior technical consultant at AJ Bell