I have a SIPP worth just over £1.5 million. I have previously applied for fixed protection 2014 and understand that this means my tax-free cash allowance is higher than normal.

I am aged 73 and as yet haven’t touched the funds. Furthermore, I am not proposing to take any income in near future, instead I am taking income from my ISAs. 

What is the downside of crystalising a chunk of the SIPP and maybe taking a little tax-free cash now, so that if a future government brings back some form of lifetime allowance my benefits can be brought below the limit prior to any possible changes.

Fred

Rachel Vahey,  AJ Bell Head of Public Policy, says:

The lifetime allowance was abolished from 6 April and has been replaced with two new key allowances. One of these – the lump sum allowance – measures the amount of tax-free lump sums a pension saver can take in their life. This allowance is set at £268,275 for most people but could be higher if the person had previously applied for lifetime allowance protection.

The pensions lifetime allowance was originally introduced in 2006 as £1.5 million and then rose gradually to £1.8 million in 2010. However, in 2012 it was cut to £1.5 million, then £1.25 million in 2014, and then £1 million in 2016. Every time it was cut, pension savers who had built up substantial pension pots could apply to protect that higher level, to mitigate how much they would be affected by the lower allowance.

Fixed protection was one such protection option. In 2014, anyone could apply for the protection and boost their personal lifetime allowance back up to £1.5 million, as long as, broadly, they didn’t pay more contributions into their pension pot after 5 April 2014. Their tax-free cash was also protected at £375,000.

LIFETIME ALLOWANCE PROTECTIONS CARRIED OVER TO NEW REGIME

Lifetime allowance protections have been carried over into the new regime. So, someone with fixed protection 2014 would now have a protected lump sum allowance worth £375,000. (Although now they can contribute to their pension plan and keep the protected lump sum allowance.)

When a pension saver accesses their pension pot three quarters of any money taken out can be moved into drawdown and can continue to benefit from investment growth. However, up to a quarter of it can be paid out tax-free. That could leave a big amount of money in the person’s bank account which they may want to invest.

Some of it could be paid into ISAs, depending on how much allowance they have left (including the ISA allowance of any partner). There are other tax-efficient investments they could also consider, such as EISs (enterprise investment scheme) or VCTs (venture capital trusts), although these are higher risk. Or they could gift the money to others, within inheritance tax allowances.

If the lifetime allowance was then reinstated this might not affect the drawdown money still invested, but we do not know this with any certainty, and it would depend upon the new rules.

Alternatively, a pension saver may want to leave pension funds untouched, especially if they didn’t need any income or cash. The current rules mean pension funds can be passed on very tax efficiently to loved ones, especially if people die before age 75. They also no longer face a lifetime allowance test at age 75. However, if they died after age 75 without ever taking their tax-free cash this feature would be lost – those that inherit pension money have to pay income tax on all withdrawals or lump sums.

A TRICKY DECISION

Deciding what money to take from a pension pot, and when, can be a tricky decision. Especially in times of political uncertainty. Although the lifetime allowance has been abolished, Labour has previously said they would reinstate this. But for now we don’t know if they will carry this out.

Furthermore, we simply don’t know what it would mean for pension savers if the lifetime allowance was reinstated. It could affect them, or they could be offered some form of protection.

Second guessing politicians is difficult. Instead, it may be easier for pension savers to make decisions based on their current situation and their income and cash needs now.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.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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