Crystalised funds and Lifetime Allowance

arcam_man

I'm approaching my LTO after crystalising my main pension to pay off my mortgage with the 25% tax free allowance. I have a couple of smaller pensions, one of which was crystalised at circa £16,000 a couple of years ago to release the 25% tax free for home improvements. After taking the £4,000 tax free from this drawdown pension, I was left with £12,000 in the pot, which has subsequently grown to £14,000. As I believed the growth in funds of a crystallised pension would be counted towards the LTO, I’m proposing to take just the £12,000 of this pension as taxable income over the next couple of years, which I understand will have no effect on my LTO as it has already been factored in. However, talking to Royal London, the provider for this pension, I was told that, if I took the full £14,000 as taxable income, the additional growth of £2,000 would not count towards my lifetime allowance. This has surprised me, and, if it is true, would make a big difference with my larger pension pot, where the remaining 75% of the crystalised drawdown pension has grown significantly. Can anyone add some advice – is the advisor at Royal London correct in their statement that growth in crystalised funds does not count towards the LTO?

dunstonh

Withdrawals on crystallised funds are not tested.   However, there are later tests where the increase in value will come into play (age 75 and death for example).

 is the advisor at Royal London correct in their statement that growth in crystalised funds does not count towards the LTO?

RL do not employ any advisers.

arcam_man

Thanks for the info dunstonh,

OK - sorry about mistakenly using the term “advisor”. This was not "advice" as such from RL, but simply a statement from its pensions team on how the growth in the crystalised pension impacts on the LTO. There was no financial advice requested and none given..

Albermarle

 However, talking to Royal London, the provider for this pension, I was told that, if I took the full £14,000 as taxable income, the additional growth of £2,000 would not count towards my lifetime allowance

Even if you just took out the £2K +any further subsequent growth later then there would be no more % contribution to the LTA.

zagfles

The test on crystallised funds at 75 tests the difference between the value at 75 and the value at crystallisation. So basically to avoid it you need to drawdown all the growth, so the drawdown pot is the same value or less than at crystallisation.

jamesd

Royal London were correct.

You started with 12k, you now have 14k, you are not yet 75 and are planning to withdraw the whole 14k before you are 75. So long as the withdrawing is done before your 75th birthday the extra 2k will not face the age 75 lifetime allowance calculation. You can do it over two tax years to reduce the income tax cost, provided you don't become 75 in between.

There's nothing special involved here, it's just the routine case of withdrawing the growth before you reach 75, so there's no growth in the account balance - now zero, from 12k start - when 75 rolls around.